Overview of the New Zealand Emissions Trading Scheme reforms

The Government has reformed the New Zealand Emissions Trading Scheme (NZ ETS). It has done this through the Climate Change Response (Emissions Trading Reform) Amendment Act and related regulations.

The Climate Change Response (Emissions Trading Reform) Amendment Act 2020 has been passed into law.

Purpose of the reforms

The reforms help New Zealand reach its greenhouse gas emissions reduction targets. The changes will provide more certainty for businesses, make the scheme more accessible and improve its administration.

Regulations are expected to be published by the end of this year.

The Climate Change Response (Emissions Trading Reform) Amendment Act 2020 (the Act) [New Zealand Legislation website] provides the legislative framework for the reforms and enables regulations to be made which contain the operational detail and settings for the scheme. The Government has made policy decisions on auctioning and unit supply settings. The regulations confirming these decisions are expected to be published later this year.

Overview of the specific reforms

Support emissions reduction targets and emissions budgets  

The Act is amended so its purpose includes supporting: 

  • New Zealand’s reporting and emissions reduction targets under the Paris Agreement
  • New Zealand’s 2050 target and emissions budgets.

For more information read Emissions reduction targets and emissions budgets in the New Zealand Emissions Trading Scheme.

Set a cap in the NZ ETS guided by a provisional emissions budget

  • The Act enables a cap to be set on emissions covered by the scheme. It will decline over time as our emissions budgets reduce in line with our targets.
  • The cap requires an emissions budget to be in place. The Climate Change Commission will advise on emission budgets later in 2021. The Government has set a provisional emissions budget to guide the cap in the interim. 
  • The Government has chosen a provisional emissions budget and cap for 2021-2025 in line with our 2050 target.

For more information read Emissions reduction targets and emissions budgets in the New Zealand Emissions Trading Scheme.

Introduce auctions

  • Auctioning will allow the government to sell New Zealand emission units from within the cap.
  • The Government has announced rules for selling units by auction. 

For more information read Auctioning in the New Zealand Emissions Trading Scheme.

Establish price controls

  • The Government has announced new price controls designed to prevent unacceptably low or high prices in the market, which could then be passed on to businesses and households.
  • The cost containment reserve will replace the fixed price option price ceiling. The fixed price option will increase to $35 and be available for participants to use from the start of 2020, and overlap with the start of auctioning.
  • The Government has announced that in 2021 the cost containment reserve will be triggered if the unit price reaches $50. This would release more New Zealand units into an auction to ease demand.
  • The Act has enabled a price floor to be implemented through an auction reserve price. The Government has announced that this will be set at $20 in 2021.

For more information read Price controls in the New Zealand Emissions Trading Scheme.

Phasing out industrial allocation from 2021

  • The phase out of industrial allocation at a rate of 1 per cent each year will start from 2021 and continue until 2030.  The annual phase-out rate will increase to 2 per cent from 2031-2040 and to 3 per cent from 2041-2050.
  • The Act will set up a legislative mechanism which could apply further phase-out rates to activities at low risk of emissions leakage. This is when a company loses market share, or moves production to a country with less rigorous climate policy or carbon pricing.
  • The Climate Change Commission will be able to recommend that increases to the minimum phase-out rate are paused beyond 2031 if there is still a risk of emissions leakage. 
  • The Commission’s advice will also inform the level of any rates of phase-out for activities at low risk of emissions leakage.

For more information read Industrial allocation in the New Zealand Emissions Trading Scheme.

Improve the NZ ETS for forestry

This will be done by:

  • introducing average accounting for some post-1989 forests 
  • creating a new permanent forestry activity in the NZ ETS
  • exempting post-1989 forests from the requirement to surrender units to cover emissions from temporary adverse events (such as fire or wind throw)
  • allowing some types of post-1989 forestry participants to offset their deforestation liability by planting a forest elsewhere
  • improving the pre-1990 forest land offsetting
  • delaying some forestry changes.

For more information read Summary of forestry changes in the New Zealand Emissions Trading Scheme.

Agriculture

  • The Government is working in partnership with primary industry organisations, along with iwi and Māori, to achieve legislated milestones for farm planning and on-farm emissions reporting, and to develop recommendations for a farm-level pricing mechanism to come into effect by 2025.
  • This partnership (He Waka Eke Noa) is already making progress on their work programme. It will be reviewed by the Climate Change Commission in 2022.
  • Should progress toward the legislated milestones be insufficient, provisions are in place to bring the agricultural sector into the NZ ETS at processor level from 2022.

For changes relating to agriculture see Action on agricultural emissions

Compliance

  • The Act has created a new penalties regime to improve compliance in the NZ ETS.
  • New infringement offences will be introduced in regulations for low-level offending.
  • Serious non-compliance will be publicly notified.

For more information read Compliance and infringements in the New Zealand Emissions Trading Scheme.

Transparency

  • Emissions and removals data will be published at the level of individual participants in the NZ ETS, following 10 days notice. Removals are greenhouse gas emissions that are removed from the atmosphere (eg, carbon stored in trees).

Operational and technical improvements 

  • The Act makes a number of operational and technical improvements. These include changes that will remove redundant references to the Kyoto Protocol, allow easier correction of errors and resolve a number of minor administrative issues.
  • The Act also provides for legacy Kyoto Protocol emission units in private accounts to be cancelled.

The government is continuing to work on further areas

Improving market governance

A separate market governance work programme has been established as the Government has decided that further work is required on this area. 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.

Earlier decisions to prohibit insider trading, 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 as necessary.

Some forestry changes delayed

The key forestry changes in the Act were originally supposed to take effect at the beginning of 2022. However, the COVID-19 pandemic has impacted Government’s ability to deliver forestry regulations by then, given the regulations’ complex and technical nature. As a result, a supplementary order paper defers implementation until January 2023.

Agriculture decisions

For changes relating to agriculture see Action on agricultural emissions

Find out more 

Climate Change Response (Emissions Trading Reform) Amendment Bill [New Zealand Legislation website]

  1. Version of Climate Change Response Act showing amendments proposed by Climate Change Response (Emissions Trading Reform) Amendment Bill (PDF, 2.4 MB) [Parliamentary Counsel Office website]
  2. Final report (Climate Change Response (Emissions Trading Reform) Amendment Bill) (PDF, 2.4 MB) [New Zealand Parliament website].

NZ ETS announcement webinar – 2 June 2020

Video recording and slide pack of the webinar highlighting the NZ ETS announcements on 2 June 2020.

Discussions in the webinar cover the progress of the Climate Change Response (Emissions Trading Reform) Amendment Bill (now Act), its associated Supplementary Order Paper (including changes to agriculture and forestry), and various NZ ETS settings and auctioning regulations. 

Related information

Cabinet paper and minute: Regulatory decisions on the rules for auctioning in the New Zealand Emissions Trading Scheme

Cabinet paper and minute: New Zealand Emissions Trading Scheme: Settings regulations

Cabinet paper and minute: Climate Change Response (Emissions Trading Reform) Amendment Bill: Policy approvals

Impact statement. Rules for auctioning in the NZ ETS

NZ ETS unit supply and price control settings regulations regulatory impact assessment

Regulatory impact assessment - Extending access to the fixed-price option to emissions from the start of 2020 at $35

Minister's media release

Emission trading reforms another step to meeting climate targets [Beehive website]

Reviewed:
17/06/20