Proposed improvements to the NZ ETS

The Government is improving the New Zealand Emissions Trading Scheme (NZ ETS). Changes will be part of the Climate Change Response (Emissions Trading Reform) Amendment Bill which was introduced to Parliament in October 2019. This page has information on the decisions that led to the amendment bill. 

For information on options to reduce agricultural emissions see Action on agricultural emissions. See also the current consultation on proposed settings for the NZETS.

About the Climate Change Response (Emissions Trading Reform) Amendment Bill

What the amendment bill will do

The amendment bill will help the NZ ETS to drive emissions reductions. It will make a wide range of changes, including providing the Government with the tools to manage the supply of units into the scheme, and encouraging foresters to participate in the scheme.  This will support New Zealand to reach domestic and international climate change targets.

The changes that the bill will make have all been publicly announced. Most of these changes are the result of decisions reached in principle by the previous Government, public consultation carried out in 2018, and Government decisions made in 2018 and 2019. You can read more about the changes that the amendment bill will make further down this page. For changes relating to agriculture see the Action on agricultural emissions.

Like the Climate Change Response (Zero Carbon) Amendment Bill, this bill will amend the current Climate Change Response Act 2002. A strengthened NZ ETS will assist New Zealand to meet the emission budgets expected to be set under the Climate Change Response (Zero Carbon) Amendment Bill.

Next steps

The Government is currently consulting on proposals for New Zealand Emissions Trading Scheme (NZ ETS) settings, including unit supply and price controls. These will be set through regulations in mid-2020. The intention is to align the NZ ETS with New Zealand’s emissions reduction targets. To review the proposal and submit feedback see Reforming the New Zealand Emissions Trading Scheme: Proposed settings.

The amendment bill is being reviewed by the Environment Select Committee.   

Final decisions on improvements to the NZ ETS were announced on 31 July 2019

These decisions complete tranches one and two of proposed changes to the NZ ETS. 

Phasing-down industrial allocation from 2021

The Government has decided to phase down industrial allocation from 2021.

The phase-down will occur through two complementary proposals:

  • a minimum phase-down rate, applied equally for all industrial activities
  • a legislated process which could set further phase-down rates for particular industrial activities that are at low risk of emission leakage.

The minimum phase-down rate will be an annual reduction of 1 per cent in all levels of assistance from 2021-2030. This is a reduction of 0.01 each year in the levels of allocation set out in the Climate Change Response Act 2002 (CCRA). Levels of assistance are currently 0.9 for highly emission-intensive activities and 0.6 for moderately emission-intensive activities. A reduction of 0.01 means that levels of assistance will reduce from 0.9 to 0.89 and from 0.6 to 0.59 in the first year of a phase-down.

The minimum annual phase-down rate of 1 per cent will apply for the ten years from 2021–30. The rate will increase to 2 per cent for the years 2031-40, and to 3 per cent for 2041-50.

The independent Climate Change Commission, once established, will be able to recommend that reductions are made to the rates of phase-down set for 2031-2040 and 2041-2050 if there is still a risk of emissions leakage. However, the Commission will not be able to recommend a minimum phase-down rate less than 0.01 up to 2040, or less than 0.02 from 2041-2050.

A new legislated process will enable the Minister for Climate Change to apply further phase-downs to industrial activities at low risk of emissions leakage, with advice from the Climate Change Commission. The Minister would have to take into account a number of environmental and economic factors which will be specified in the CCRA. These include the risk of emissions leakage, the availability of low-emission technology and the cost to the taxpayer of providing allocation.

The Government has proposed that the minimum phase-down rate is set at a low level so that cost impacts can be managed prudently. Over time this phase-down will provide a strong incentive to highly emission-intensive firms to  continue reducing their greenhouse gas emissions.

To learn more about industrial allocation in the NZ ETS see Industrial allocation: NZUs for industry.

Cancelling and replacing units from the first commitment period of the Kyoto Protocol

The Government has decided to cancel New Zealand-issued Assigned Amount Units in private accounts and replace them with an equivalent number of New Zealand Units. All other privately held Kyoto units from the first commitment period of the Kyoto Protocol will be cancelled. These units have not been eligible for surrender since June 2015. All of these changes will take place on 30 November 2020.

This decision follows a targeted consultation round which took place in May 2019. The majority of submitters to the consultation supported the Government’s proposals.

The previous Government decided to make this change in 2013 but did not implement it.

Operational and technical decisions

The Government has also decided to:

  • confirm that a new surrender / repayment penalty announced in May 2019 will be a cash penalty set at three times the carbon price; and
  • resolve a technical problem that was preventing some NZ ETS participants with late or amended emissions returns from accessing the fixed price option.

Forestry decisions

A number of decisions have also been taken on forestry in the NZ ETS. For further information on these decisions see Emissions Trading Scheme reviews [Ministry for Primary Industries website].

Further information on final decisions

Media release ETS fixes drive climate action [Beehive website]

Cabinet paper: NZ ETS Tranche two: A phase-down of industrial allocation

Cabinet minute: NZ ETS Tranche two: A phase-down of industrial allocation

Impact summary: NZ ETS Tranche two Impact Statement – A phase-down of industrial allocation

Cabinet paper: NZ ETS Tranche two: Cancellation and Replacement of Kyoto Units in private accounts

Cabinet minute: NZ ETS Tranche two: Cancellation and Replacement of Kyoto Units in private accounts

Cabinet paper: NZ ETS: Confirming in-principle decisions and finalising minor issues

Cabinet minute: NZ ETS: Confirming in-principle decisions and finalising minor issues

Information on previous NZ ETS decisions

The tranche two decisions announced on 16 May 2019 are to:

  • 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 the future
  • improve rates of compliance within the NZ ETS
  • make the scheme more transparent to participants and the public
  • establish a separate market governance work programme.

The tranche one decisions announced on 12 December 2018 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
    • prohibiting insider trading and market manipulation
    • operational and technical improvements.

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

More detailed information about these previous decisions

Aligning with emissions reduction targets

The CCRA will be amended to support the implementation of New Zealand’s reporting and emissions reduction targets under the Paris Agreement. This is as well as any new domestic budgets and targets introduced through the Climate Change Response (Zero Carbon) Amendment Bill once enacted. Our target under the Paris Agreement is to reduce greenhouse gas emissions by 30 per cent from 2005 levels by 2030.

Preparing for robust and transparent NZ ETS auctions

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

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

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

The types of decisions to be made when setting auctioning regulations will also be clarified.

No decision has yet been taken on whether the proceeds generated through NZ ETS auctions should be earmarked for a particular purpose.

Officials held an early engagement workshop on design options for NZ ETS auctioning operational rules with a targeted group of stakeholders on 28 May 2019. This discussion will help refine policy thinking ahead of public consultation on auctioning regulations, 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 current price ceiling, the $25 fixed price option, will be replaced with a cost containment reserve price ceiling. This proposal was supported by most submitters in the August/September 2018 public consultation. Retaining a price ceiling reduces the risk of unacceptably high prices negatively impacting investors and consumers. 

The fixed price option will either be removed when auctioning begins or no later than 31 December 2022. This allows for any unexpected events such as a delay in the commencement of auctioning.

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. The volume of units available and the trigger price at which these units will be released will be set out in regulations. We expect to consult on these regulations later this year.

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.

Enabling a potential price floor in future

The Government has also enabled a price floor to be implemented in the future through an auction reserve price, if desired. 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.

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
    • units available via the cost containment reserve
    • 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.

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 did reopen to international units, a volume limit would be placed on their use.

Improving rates of compliance with the NZ ETS

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. 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.

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

Infringement offences will also 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 but not convictions for offenders. Prosecutions will still be available for the most serious cases of offending. This will improve compliance outcomes while minimising administrative costs.

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 allow for greater understanding of the scheme by the public and participants. This is also in line with international best practice. The Government recognised concerns about the potential risks that 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.

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 tranche one 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 CCRA and other legislation as necessary.

Further information on previous decisions

May 2019 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]

December 2018 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]