Proposed improvements to the NZ ETS

The Government has made decisions to improve the New Zealand Emissions Trading Scheme (NZ ETS). Both tranche one and tranche two decisions have now been made.

Information on tranche two NZ ETS decisions - announced 16 May 2019

This is the second tranche of decisions on improvements to the NZ ETS. Further decisions are expected during 2019 on industrial allocation. Together the tranche one and tranche two decisions will result in a single bill amending the Climate Change Response Act 2002 (CCRA).

In addition, the Government is considering its response to recommendations delivered to it last month by the Interim Climate Change Committee on how surrender obligations could best be arranged if agricultural methane and nitrous oxide emissions enter into the New Zealand Emissions Trading Scheme.

The tranche two decisions are to:

  • improve rates of compliance within the NZ ETS
  • make the scheme more transparent to participants and the public
  • prepare for robust and transparent NZ ETS auctions
  • transition from the fixed price option to the cost containment reserve
  • enable a potential price floor in future
  • establish a separate market governance work programme.

The Government has agreed to establish a separate work programme to advise on options for market governance. Previous decisions to prohibit insider trading and market manipulation and to find an appropriate market regulator will be deferred and included in this work programme. This approach ensures that proposals are fully developed and consulted on and that expected impacts on market participants are well understood.

Improving rates of compliance with the NZ ETS

The 2015/16 review of the NZ ETS found that the compliance regime was not fit-for-purpose. Even though the majority of NZ ETS participants submit returns correctly and on time, enforcement agencies must nevertheless spend significant amounts of time correcting returns for the minority who make errors in their returns. Current penalties will be strengthened and redesigned so as to increase rates of compliance and increase efficiency within the scheme. 

The current mechanisms for failing to surrender or repay units will be restructured into:

  1. An automatic surrender / repayment penalty which will apply where participants have failed to surrender or repay units by the due date. Each overdue unit will incur a penalty of three times the current market price.
  2. A reporting penalty, which will apply where the enforcement agency has needed to make an amendment to an emissions return or an assessment of a person’s emissions. The penalty will be behaviour based, with a 100 per cent market price penalty where the participant has knowingly reported their emissions incorrectly.

These penalties will apply in addition to ‘making good’ on the underlying obligation.

The changes, modelled on New Zealand’s tax system, will address the problems with the current regime and future-proof the regime.

Making the scheme more transparent to participants and the public

Members of the public have consistently asked the Government to make the NZ ETS more transparent. However, at present, NZ ETS emissions and removals data is only published at an aggregated level. 

The Government intends to publish emissions and removals data at the level of individual participants in the NZ ETS. This will make the scheme more transparent and allow for greater understanding by the public and participants, it is also in line with international best practice. The Government recognised that concerns were raised about the potential risks publishing this information could raise in relation to commercially sensitive information. However, on balance this approach was considered to be in the overall public interest.

This increased transparency means that all participants will have access to the same level of data on which to base their decisions. It will also increase the visibility of sources of emissions and removals and allow researchers to track trends in New Zealand’s emissions.

Preparing for robust and transparent NZ ETS auctions

In December 2018, the Government agreed to introduce auctioning of New Zealand Units into the NZ ETS. The aim of auctioning is to align unit supply in the scheme with New Zealand’s emissions reduction targets, including targets under the Paris Agreement and those set under the Zero Carbon Bill.

The Government has decided to enable the appointment of an independent auction monitor via regulations. The monitor would provide independent oversight of NZ ETS auctions and mitigate risks to the integrity of auctions, such as the risk of anti-competitive behaviour. This will promote fair access to auctions and a competitive process of price formation.

We will also provide further clarity on the types of decisions the Government must or may take when creating regulations for auctioning. Regulations will eventually reflect the detail of the auctioning design. Providing clarity about the decision-making process in setting regulations will increase the transparency of information about the NZ ETS.

No decision has yet been taken on whether the proceeds generated through NZ ETS auctions should be earmarked for a particular purpose. Further decisions are expected on this topic.

Following these decisions officials held an early engagement workshop on design options for NZ ETS auctioning operational rules. A targeted group of stakeholders participated in the workshop, held 28 May 2019. The discussions will be used to refine policy thinking ahead of public consultation, expected later this year. 

Key themes from early engagement workshop on design of NZ ETS auctioning operational rules (PDF, 183 KB)

Slide presentation for early engagement workshop (PDF, 654 KB)

Transitioning from the fixed price option to the cost containment reserve

The Government has paved the way for the current $25 fixed price option price ceiling (the FPO) to transition to the new price ceiling; the 'cost containment reserve'.

Auctioning of New Zealand Units is expected to begin late in 2020. The FPO will be removed when auctioning begins or in any event no later than 31 December 2022. This ensures the FPO will be removed while allowing for any unexpected events such as a delay in the commencement of auctioning.

Enabling a potential price floor in future

The Government has also enabled a price floor through an auction reserve price, if desired in the future. This will give the Government a tool to manage extremely low prices in the NZ ETS if necessary, providing long-term confidence for low-emissions investments such as forestry.

In contrast to a price ceiling, a price floor would restrict supply into the market, creating upwards pressure on the price.

Establishing a separate market governance work programme

Although the Government planned to take decisions on market governance this year, it was decided that further work is required before decisions can be made in this area.

We will establish a separate market governance work programme to advise on a suite of options for market governance. This approach will ensure that proposals are fully developed and consulted on and that any impacts on market participants are well-understood before final decisions are taken.

Previous decisions to prohibit insider trading and market manipulation and to find an appropriate regulator for the NZ ETS market will be included in the market governance work programme. A separate bill will be presented to Parliament at a later date to amend the Climate Change Response Act 2002 and other legislation as necessary.

Related information - tranche two decisions

Cabinet papers, Cabinet minutes and regulatory impact summaries

Latest Emissions Trading Scheme reforms target transparency and compliance - Climate Change Minister's media release [Beehive website]

Submissions from the consultation on the proposed improvements to the New Zealand Emissions Trading Scheme

Information on tranche one NZ ETS decisions - announced 12 December 2018

This is the first tranche of decisions on improvements to the NZ ETS.

The decisions are to:

  • align the CCRA with the Paris Agreement and any new emissions reductions targets, by:
    • refining the purpose of the CCRA to ensure it assists with delivery of any new targets
    • supporting implementation of the Paris Agreement
  • enable a cap to be placed on emissions covered by the NZ ETS through:
    • introducing the auctioning of New Zealand Units (NZUs) in a way that aligns the supply of NZUs in the NZ ETS to our emission reduction targets
    • retaining the ability to limit international units if a decision is made to introduce the use of international units
    • replacing the current price ceiling (the $25 fixed price option) with a cost containment reserve through auctioning, and investigating a price floor
    • providing the framework for making unit supply settings in the NZ ETS over a five-year rolling period
  • improve the administration and operation of the NZ ETS through:
    • improvements to the compliance regime
    • strengthening market governance
    • operational and technical improvements.

The Government has also made decisions to improve how forestry is treated in the NZ ETS. Information on these decisions can be found on the Ministry for Primary Industries website.

Specific non-forestry decisions

Aligning with emissions reduction targets

The CCRA amendments will support implementation of New Zealand’s reporting and emissions reduction targets under the Paris Agreement. This includes our target under the Paris Agreement of reducing greenhouse gas emissions by 30 per cent from 2005 levels by 2030, as well as any new targets introduced through domestic legislation.

Introducing auctioning

Auctioning of NZUs will be introduced into the NZ ETS in a way that aligns the supply of units with New Zealand’s emission reduction targets. Auctioning is expected to begin in 2020.

Auctions will be a sealed-bid, single-round and uniformly priced format; a format used in all overseas emissions trading schemes that include auctioning. Auctions will initially be held either monthly or quarterly, and all New Zealand Emissions Trading Register account holders will be able to participate.

Limiting international units

The Government wishes to retain the flexibility to potentially reopen the NZ ETS to high-quality, reputable international units in the future.

International carbon units may be used after 2020 where:

  • the units are genuine and have environmental integrity
  • progress towards a net zero target is maintained
  • it makes economic sense to do so
  • it can be done in a way that maintains incentives for domestic abatement.

If the NZ ETS does reopen to international units, a volume limit would be placed on their use.

Retaining a price ceiling

The current price ceiling, the fixed price option, will be replaced with a cost containment reserve. This proposal was supported by most submitters in the recent public consultation. A price ceiling reduces the risk of unacceptably high prices negatively impacting investors and consumers.

The cost containment reserve will be incorporated into NZ ETS auctions. Units provided through the reserve will be backed by an equivalent tonne of removals. Regulations will set out the volume of units available and the trigger price at which these units will be released.

The Government has also decided that the fixed price option will retain its current level ($25) for surrenders due in 2019 in order to support ongoing regulatory predictability.

Currently, market participants can choose to pay $25 for every tonne of emissions they emit instead of buying units from emissions unit holders.

The Government has agreed that several considerations must be taken into account when setting the future price ceiling level, including international emissions prices and impacts on households.

Investigating a price floor

A number of submitters indicated that there may be value in introducing a price floor into the NZ ETS. The Government is investigating the potential introduction of a price floor, including an option of setting a reserve price in auctions.

Managing unit supply

A coordinated decision-making process will be established to manage unit supply in the NZ ETS. This process will, in future, set an overall cap on units supplied into the NZ ETS. Note: this will not put a limit on NZUs provided for removals including from forestry.

The cap will:

  • set limits on the number of units being auctioned
  • set limits on units available via the cost containment reserve
  • set limits on the use of any future international units
  • set trigger price values for the ceiling and any floor
  • announce how many units are expected to be freely allocated.

Unit supply announcements will be made annually looking forward five years.

Establishing an infringement offence regime

Infringement offences will be introduced to deter low-level non-compliance with the rules of the NZ ETS and the Synthetic Greenhouse Gas levy. These strict liability offences will result in financial sanctions for offenders but not convictions. Prosecutions will still be available for the most serious cases of offending. This will improve compliance outcomes while minimising administrative costs.

Prohibiting market manipulation and insider trading

We are introducing clear rules to govern the NZ ETS market. In this tranche of NZ ETS improvements, market manipulation and insider trading will become prohibited behaviours with associated penalties.

This will ensure that all participants are treated fairly and that smaller participants are protected from misconduct. The Government has decided not to make NZUs a financial product. Treating units as financial products risks imposing significant compliance costs on NZ ETS participants.

Related information - tranche one decisions

Use search filters to access Cabinet papers, Cabinet minutes and regulatory impact summaries

Government announces set of improvements to New Zealand’s Emissions Trading Scheme - Minister media release [Beehive website]

Submissions from the consultation on the proposed improvements to the New Zealand Emissions Trading Scheme

Reviewed:
11/06/19