A number of key dates mark February as a critical month to engage on new regulations and policy changes aimed at accelerating New Zealand's transition to a net zero carbon economy.
The consultations are in step with the World Economic Forum's 2020 Global Risks Report released last week, which said climate change is striking harder and more rapidly than many had expected. Climate-related issues dominated the top-five most likely long-term risks identified in the report.
Locally, issues currently under consultation include:
The Ministry for the Environment's (MfE) consultation paper Reforming the New Zealand Emissions Trading Scheme: Proposed Settings on the provisional regulatory settings to cap emissions, establish auctioning of NZ ETS units (NZUs) and set price controls in the New Zealand emissions trading scheme (NZ ETS). Consultation meetings on the proposed settings in the MfE paper are being held around the country and online from 3-13 February and submissions close on 28 February 2020.
The Ministry for Business, Innovation and Employment's discussion paper Accelerating renewable energy and energy efficiency outlining a range of options to encourage energy efficiency and accelerate renewable electricity generation and infrastructure. Submissions on the paper close on 28 February 2020.
The proposed regulatory settings in the MfE's consultation paper are dependent on the passing of the Climate Change Response (Emissions Trading Reform) Amendment Bill, which is currently before the Environment Select Committee. If the Bill is passed, the proposed provisional regulatory settings around the cap on emissions and price controls will influence the price of NZUs, which can be expected to rise. This influence is already evident, with the price of NZUs climbing to a high of NZ$29 in anticipation of the newly proposed fixed price option of NZ$35 for the 2021 compliance deadline disclosed in the Paper.
At a time when the government is consulting on a wide range of climate-related matters, it would be easy to miss this consultation paper. The importance of the role of the proposed provisional regulatory settings should not be underestimated – these are the same settings that will be the subject of recommendations expected from the newly created independent Climate Change Commission in 2021.
While the Climate Change Commission gets up and running, and carries out its own analysis to make its recommendations to government on the proposed emissions budget for 2022-2025, and related NZ ETS settings, the regulations arising from consultation on the MfE paper seek to drive carbon abatement activity and allow auctioning to proceed in the meantime.
These settings are considered to be the initial building blocks to ensure the NZ ETS plays its central role in supporting New Zealand's transition to a low-carbon economy. The settings have a primary role in influencing the price which drives investment in carbon absorption and abatement activities, along with the liquidity of the market.
Everyone in New Zealand will be impacted by the emissions budgets and associated emissions caps expected to be set under the proposed regulations, with the impact on the larger non-agricultural emitters likely to be the most significant. Anyone who requires, receives or holds NZUs, as well as those involved in trading NZUs, should also be interested as the settings shape and drive the investments of those participating in the market, will influence the market price for NZUs and, unless the settings are right, the liquidity of that market.
The regulatory settings proposed in the MfE paper include:
The provisional emissions budget of 354 Mt CO2-e for the period 2021-25 (this is set at a level below projected emissions in those years, requiring 13 Mt CO2-e of additional domestic emissions reductions).
The NZU annual auction volumes for the period 2021-25 (which essentially set an emissions cap) being in the order of 80 million NZUs in total in the volumes of 17.6 m, 17.9 m, 16.3 m, 14.7 m, and 13.2 across the respective 2021 to 2025 years. With a reasonable stockpile of NZUs already present in participant accounts in the register, the NZU annual auction volumes have been set at a level lower than needed, with the objective of reducing the stockpile over time.
An auction reserve price floor of $20.
Amendment of the fixed price option in lieu of surrendering a NZU to be $35, a step-change of $10 from the existing fixed price option of $25.
The fixed price option only being available for the compliance deadline in May 2020 (at $25 for surrender obligations in respect of the 2019 calendar year and in May 2021 (at $35 for surrender obligations for 2020), after which it is no longer available as an option.
Introduction of the cost containment reserve to release additional NZUs into the market, if a price trigger is reached at auction. Such trigger price being $50 for 2020-2025.
The annual cost containment reserve volumes that would be released, should the trigger price be met in an auction – being an additional volume of 36.4 million NZUs in total in the volumes of 5.8 m, 6.3 m, 7.2 m, 8.2 m, and 8.9 across the respective 2021 to 2025 years.
Renewable energy consultation
The Ministry for Business, Innovation and Employment's (MBIE) discussion paper Accelerating renewable energy and energy efficiency recognises “the world is going through one of the most significant energy transitions in history", which will “see a complete rewiring of global energy systems in response to the threat of climate change, and the economic and environmental opportunities low emissions energy sources are creating". The discussion paper identifies that to meet the government's climate change goals there will need to be greater energy efficient processes and practices adopted, a transition to renewable fuels in industry and increasing renewable electricity generation.
A range of options to encourage energy efficiency and the uptake of renewable fuels in industry, as well as options to accelerate renewable electricity generation and infrastructure, are outlined in the discussion paper.
MBIE is seeking feedback on the sequencing and optimal package of significant policies the paper outlines. The discussion paper does not present a preferred package of proposals for the energy transition. Rather, the Government is seeking input on how to best enable 'joined-up' thinking and action to realise opportunities and overcome barriers to transitioning the energy sector, in such a way that enables the sector to play its part in meeting the net zero carbon emissions target the Government has set. Policy settings discussed include:
Encouraging energy efficiency and the uptake of renewable fuels in industry
Addressing information failures impacting investment/uptake
Developing markets for bioenergy and direct geothermal use
Innovating and building capacity
Phasing out fossil fuels in process heat
Boosting investment in energy efficiency and renewable energy
Implementing a levy on coal
Accelerating renewable generation and infrastructure
Enabling renewables uptake under the Resource Management Act
Supporting renewable electricity generation investment
Facilitating local and community engagement in renewable energy and energy efficiency
Connecting to the national grid to support the transition at the pace needed
Local network connections and trading arrangement
These policy settings have a range of wider regulatory impacts – and a number of regulatory barriers of which MBIE appreciates it may not yet be aware. MBIE needs feedback from industry to ensure it understands the barriers and opportunities industry needs assistance with, in order to achieve the transition.
3-13 February 2020 - consultation meetings on the proposed settings in Reforming the New Zealand Emissions Trading Scheme: Proposed Settings.
28 February 2020 – submissions close on Reforming the New Zealand Emissions Trading Scheme: Proposed Settings.
28 February 2020 – submissions close on Accelerating renewable energy and energy efficiency.
If you would like to speak to one of our team about the climate change, energy, information, and environmental and resource management issues being consulted on, please get in touch with the contacts listed or your usual Bell Gully adviser.
We can help you understand the implications for your business and give your input into helping to shape these important regulatory and policy settings in a manner that seeks to ensure sustainable growth through the transition to a net zero carbon economy.
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.