Friday, 17 May 2019

Commentary on Tranche Two Decisions on the New Zealand Emissions Trading Scheme

by Catherine Leining, Policy Fellow, Motu Economic and Public Policy Research. 

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. Check out our “Top Ten” list of alterations to watch for as we outfit the NZ ETS for the important job ahead or read on for comments on yesterday's announcements.


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.

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