Public consultations on the industrial allocation and governance framework for the New Zealand Emissions Trading Scheme (NZ ETS) could lead to regulatory reform that would materially impact NZU trading and associated market governance and dynamics.
There are many businesses and financial entities that will be affected – even at the more liberal end of reform.
As signalled in our 2021 Big Picture Climate Change Report, further regulatory change continues to be proposed, at relative pace, for the NZ ETS.
In July 2021, the Ministry for the Environment (MfE) commenced two public consultations on:
Interested parties have until 5pm on 17 September 2021 to submit their consultation responses.
MfE is consulting on the future-focus for industrial allocation, and addressing over-allocation
This consultation is focused on assessing New Zealand's industrial allocation policy, which seeks to manage the risks of emissions leakage and trade-exposure for emissions-intensive industries, and has long been a feature of the NZ ETS.
The reforms enacted through the Climate Change Response (ETS Reforms) Amendment Act 2020 commenced the phasing out of industrial allocation assistance to emissions-intensive and trade-exposed industries. The industrial allocation mitigates, to a large extent, the impact of the emissions price on such industries. Without such assistance we may see an increasing number of emissions-intensive, trade-exposed industries head off-shore, which simply means the emissions occur offshore – potentially without any mitigation.
The Government has also been considering for some time whether, in the detail of formulas and assumptions, the current mechanisms underpinning industrial allocation mean that under the existing policy there is some over-allocation of NZUs occurring. MfE has explained in the consultation document that “there is evidence that some industries are receiving allocations greater than intended to address leakage". Addressing over-allocation is a particular feature of the review and the consultation document covers issues that are key to over-allocation matters.
MfE has enlisted the help of a technical working group in considering and proposing the potential policy and regulatory reform. For some industries and businesses, a reform of industrial allocation may entail a significant difference in the volume of NZUs received, at a time when the price of NZUs is climbing materially.
If you receive an industrial allocation, or one or more businesses key to your supply chain does, then you should consider the proposals outlined in the consultation document to realign current industrial allocation settings, and the alternative measures proposed to address leakage – which MfE considers to better support New Zealand's climate change commitments.
If you would like assistance considering and providing feedback on the proposed short-term changes to industrial allocation, and longer-term direction of policy, and how they would impact your business, please let us know.
MfE is consulting on potentially far-reaching solutions associated with advising on, trading and overall market governance for, NZUs
This consultation is significant for those involved:
in advising from a technical and/or financial perspective on NZU and carbon forestry-related activities,
in trading NZUs, and
as participants in the NZ ETS.
MfE is seeking feedback on its proposals to improve market governance of the NZ ETS with a range of possible regulatory options. It is also seeking feedback on what the role and functions of one or more market regulators would look like – this includes a spectrum of options from the possible use of multiple existing regulators to a newly established bespoke market regulator. Broadly, MfE's proposals fall within the key themes of governance of advice, governance of trading and governance of market conduct.
This is an important consultation, which to date has not attracted much public discussion. However, if the most conservative proposals were adopted, the regulatory reform could result in:
mandatory licensing, public registration and a code of conduct for NZU advisors (a person or entity that gives NZU financial advice services or guidance in their ordinary course of business),
most or all trades being required to use one or more regulated and licensed exchange, which would be a significant change when there is a material amount of bilateral trading occurring currently,
participant position reporting – users being required to disclose the number of NZUs they are holding (long positions) or borrowing (short positions) is likely to be applauded by many stakeholders, but those who hold or trade NZUs may not be as enthusiastic,
implementation of position limits (the number of NZUs that can be held) and purchase limits (maximum number of NZUs that can be bought at primary NZU auctions),
mandatory price reporting, and full transaction detail disclosure, to the regulator for all NZU trades.
In addition to proposed market governance solution options for the three key governance themes (and associated risks) identified in the consultation paper, MfE is also seeking feedback on options for regulatory oversight of the NZ ETS. There are five different types of regulators proposed; each has defined functions and powers set out in the detail of the consultation document to reflect their proposed role:
Voluntary framework, with self-regulating body to oversee market governance
Gives independent advice to Government – no investigation or enforcement powers
Market monitoring regulator
Investigatory powers to collect information from users and monitor compliance with existing regulatory regimes. No enforcement powers – reports findings to Government.
Market compliance regulator
Investigatory powers to collect information from users, monitor compliance with existing regulatory regimes, and enforce compliance.
Market design regulator
Power to design and administer an industry participation code and ensure the code is updated and amended as necessary to remain fit-for-purpose.
The regulatory reform that may arise from this consultation has the potential to materially impact NZU trading and associated market governance and dynamics. As a result, many businesses and financial entities could be affected.
If you would like assistance considering and providing feedback on the options outlined by MfE in its paper, and how they would impact your business, please get in touch with the contacts listed or your usual Bell Gully advisor.
This publication is necessarily brief and general in nature. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.