Reforms to bring the Emissions Trading Scheme (ETS) in line with the Zero Carbon Bill will also improve transparency and compliance.
The reforms will allow the public to see who is using the ETS from 2021 – including the emissions of individual emitters – making the system more transparent.
Auctions within the ETS are expected to start by late 2020, with the current fixed price ceiling of $25 to be removed by December 2022. The reforms also allow for a price floor to be added in the future if necessary.
The SMC asked experts to comment on the reforms.
Dr Ivan Diaz-Rainey, Associate Professor of Finance, Climate and Energy Finance Group, University of Otago, comments:
“The NZ ETS has been going through a reform process started by the previous National government and picked up by the current administration. The decision related to this reform process was split into two tranches. This latest release provides the second tranche of decisions in this process. A number of things stand out.
“First, once the reform process is complete, the government will have a mechanism for implementing a floor on carbon prices (by being able to put a reserve price on auctions). This is potentially an important development since, if used, it will give green investment greater certainty and should help to release private capital towards decarbonisation. The focus on a price floor is a marked contrast with earlier concerns (by the previous National government) about managing prices if they went too high. The latter has been done through the fixed price $25 option.
“Second, auctioning of units will start in 2020 and it is expected that the Fixed Price Option will disappear at this point or at the latest in 2022. Carbon prices have been hovering around the $25 Fixed Price Option so this announcement should allow them to climb beyond that mark.
“Third, the government is getting tough on compliance by increasing penalties for those who do not play by the rules (do not submit the required number of allowances or give inaccurate returns).
“Fourth, the government intends to increase transparency by publishing emissions and removals data at the level of individual participants – this is really important as it will help the market work more effectively but it will also help shine light as to which participants are responsible for the largest portion of emission – the data should be of interest to campaigners, researchers and investors.
“This is in line with international best practice but sadly this is not due to happen until 2021 and the Minister has given himself some wriggle room should this data prove to be too ‘commercially sensitive’ (I fear the largest emitters who do not want to be embarrassed may try and kick this into the long grass).
“As a researcher, I would like to see the data made available now and for as long as the scheme has been in existence. It is hard to see how the commercially sensitive argument can be used for historical data. This said, and, all-in-all, this reform tranche is taking NZ ETS in the right direction.”
No conflict of interest.
Catherine Leining, Policy Fellow, Motu Economic and Public Policy Research, comments:
“Reforming New Zealand’s climate change legislation is a complex tango. Where the Zero Carbon Amendment Bill leads, NZ ETS amendments must follow. The government’s latest NZ ETS policy decisions will help ensure future emission prices rise in step with our targets.
“Two sets of decisions address price safeguards for the NZ ETS.
“As previewed in December 2018, the $25 fixed-price option will be removed as soon as auctioning is operational – but no later than December 2022 – and regulations will enable its replacement by a cost containment reserve. Given the urgent need for mitigation action, it’s alarming to imagine a scenario where our emission price would still be locked at $25 per tonne in 3-1/2 years. Delaying this change imposes significant target and fiscal risks to the government and disadvantages low-emission innovators trying to compete. There is a compelling case to launch auctioning with a cost containment reserve as soon as possible.
“Importantly, the government will enable regulations for a price floor in the form of an auction reserve price – but has not committed to actually use it. Although both the cost containment reserve and auction reserve price would be optional under regulations, Cabinet has provided notably less assurance about the latter. An auction reserve price would signal the direction of travel for minimum emission prices and build confidence for low-emission investors and innovators. It would also provide greater assurance to government about the minimum level of auction revenue to expect. Markets need policy certainty to thrive, and the NZ ETS would benefit from clear cross-party commitment to safeguard against extreme emission prices in both directions.”
“Three sets of decisions will help secure the integrity of the NZ ETS, while a new work programme will address broader market governance issues.
“The first addresses compliance. The financial penalty for failing to surrender units will be strengthened from $30 per unit to three times the market price. Changing from a fixed to an indexed penalty for surrenders will better deter non-compliance under rising emission prices. A new series of penalty bands for reporting failures will align the consequences with the infringements. Participants will still need to ‘make good’ any unit shortfall, as currently required. Individual cases of non-compliance will be published as a further deterrent. The Ministry of Justice advocated for separation of the regulator, enforcer, and adjudicator, but this recommendation was not adopted. The chosen approach is modelled on New Zealand’s tax system.
“The second addresses transparency. The government will begin reporting emissions and removals data for individual NZ ETS participants, not just in aggregate. There are obvious trade-offs between increasing market information about unit supply and demand, and withholding commercially sensitive information. The government’s choice to prioritise transparency will likely attract attention in participants’ submissions to the Select Committee.
“The third addresses auctioning. An independent auction monitor will be appointed to oversee the new unit auctioning mechanism scheduled to begin in late 2020. We will need to wait for further details about the auction mechanism – including the critical issue of what will happen with the auction revenue.
“These and forthcoming decisions will be integrated into amendments for consideration by Parliament later this year.”
No conflict of interest.