The Climate Change Response (Emission Trading Reform) Amendment Act (the Act) has now been passed into law. It makes a number of changes to the New Zealand Emissions Trading Scheme (NZ ETS). Read about changes related to price controls below.
New price controls
The Government has announced new price controls designed to prevent unacceptably high or low auction prices. These prices could be passed on to businesses and households.
- The cost containment reserve will replace the fixed price option. The fixed price option will increase from $25 to $35 and be available for participants to use from the start of 2020 and overlap with the start of auctioning to cover emissions in 2020.
- The Government has announced that the cost containment reserve will be triggered if the unit price were to reach $50 in 2021. This would release more New Zealand units into an auction to ease demand. The trigger price will increase by two per cent for each subsequent year, based on forecast annual inflation.
- The Act will enable a price floor to be implemented through an auction reserve price. The Government has announced that the minimum accepted price to bid at auction will be $20 in 2021 and rise by two per cent for each subsequent year.
Replacing the fixed price option with the new cost containment reserve
The current $25 fixed price option (FPO) acts as a de facto price ceiling for participants because they know they don’t have to pay more than this to meet their obligations.
Under the reformed scheme, the FPO will be replaced with a different mechanism for limiting unacceptably high NZU prices called a cost containment reserve (CCR). The CCR is explained further down this page.
Fixed price option remains during transition to auctioning and increases to $35
The Government has decided to keep the FPO in place during the transition to auctioning while raising the price to $35. The availability of the $35 FPO depends on when auctioning starts.
- If the first auction occurs at any stage during 2021 then the $35 FPO will be available to cover emissions that occur within the 2020 calendar year. Participants could access the $35 FPO all the way until the end of the 31 May 2021 surrender deadline.
- If the first auction occurs at any stage during 2022 then the $35 FPO will be available to cover emissions that occur within both the 2020 and 2021 calendar years. Participants could access the $35 FPO all the way until the end of the 31 May 2022 surrender deadline.
- If the first auction occurs later than 2022 then the same approach applies - participants can access the $35 FPO for emissions within the previous calendar year all the way through until the 31 May surrender deadline.
Allowing the FPO to ‘overlap’ with the start of auctioning gives participants certainty about the maximum compliance costs they face until auctioning is fully established.
Raising the price to $35 balances this certainty with the need to send a reasonable signal about the expected direction of emission prices under the NZ ETS reforms.
Post-1989 forestry participants’ use of the $35 FPO
Post-1989 forestry participants will also be able to use the $35 FPO to meet net liabilities arising from multi-year emission returns. Access to the applicable FPO price level will be determined pro-rata based on the time period covered by the return.
For example, for an emission return filed in 2021 covering 2018–2020: the $25 FPO could be used for 2018–2019 (or 2/3 of net emissions in that return), and the $35 FPO for 2020 (1/3 of net emissions).
Implementing a cost containment reserve
The cost containment reserve (CCR) will replace the fixed price option as the new mechanism for ensuring NZUs do not rise to unacceptably high prices.
The CCR releases a specified volume of additional NZUs into the market if a price trigger level is reached during an auction. By adding additional units to an auction, the CCR can help to meet the demand that is driving NZU prices higher, slowing or reducing the rate of price increase.
The initial CCR price trigger to be set in regulations will be $50 in 2021 and rise by two per cent for each subsequent year, as shown in Table 1.
Table 1. Annual cost containment reserve price trigger settings
|Cost containment reserve trigger price||$50.00||$51.00||$52.02||$53.06||$54.12|
Determining the cost containment reserve volume
The effectiveness of the CCR in dampening emission prices is dependent on the volume of units available to be released.
Units sold from the reserve that exceed the NZ ETS cap will have to be backed by the Government. The process of ‘backing units’ means procuring equivalent emissions reductions (eg, by purchase of international units or funding of other activities or investments that reduce emissions domestically).
The volume of the CCR initially set in regulations will be made up of:
- units that have been withheld from auctioning to help reduce the current NZ ETS stockpile which fall under the NZ ETS cap
- a unit volume equivalent to 5 per cent of the total volume of the NZ ETS, which will fall above the NZ ETS cap, and therefore have to be ‘backed’, shown in Table 2 and Figure 1.
Figure 1. Breakdown of the NZ ETS cap and cost containment reserve volumes
The graph shows a breakdown of NZU volumes made up of free allocation, auction units, stockpile reduction, and a volume equivalent to 5 percent of the total NZ ETS cap.
Table 2. Annual cost containment reserve volumes (NZU millions)
|Stockpile reduction volume||5.4||5.4||5.4||5.4||5.4||27.0|
|5 percent of total NZ ETS cap||1.6||1.6||1.6||1.6||1.5||8.0|
|Total CCR volume||7.0||7.0||7.0||7.0||6.9||35.0|
Enabling a price floor
The Act enables a price floor to be implemented through an auction reserve price. The price floor sets the minimum price that NZUs will be sold for at auction. This gives the government a tool to manage extremely low prices in the NZ ETS, providing long-term confidence for low-emissions investments such as forestry.
The Government has agreed that initial regulations will set the price floor at $20 in 2021 and rise by two per cent for each subsequent year of the provisional emissions budget, based on forecast annual inflation shown in Table 3.
Table 3. Annual auction price floor settings
|Auction price floor||$20.00||$20.40||$20.81||$21.22||$21.65|
Regulations setting the price controls are expected to be published later in 2020.