NZETS update - tranche two decisions announced

Friday 17 May 2019

Authors: Simon Watt and Claire Harmsworth

​​On 16 May 2019, the Government announced a second tranche of decisions about the changes it will be making to the New Zealand Emissions Trading Scheme (NZETS) settings. These changes will be made through a future amendment to the Climate Change Response Act 2002.

The announcement comes hard on the heels of the Government's announcement on the Zero Carbon Bill last week. See our 9 May 2019 update on the Zero Carbon Bill.

What decisions had the Government previously announced?

In our February 2019 report The Big Picture: Climate Change, we provided an overview of the NZETS changes that the Government consulted on last year (see pages 7 to 10 of that report) as well as a summary on the tranche one decisions made by the Government in December 2018. These tranche one announcements confirmed that:

  • An annual process for setting and announcing NZETS unit supply volumes looking forward five years will be introduced.

  • Some flexibility to open the NZETS to high-quality, reputable international units will be retained, but limits will be placed on the use of international units.

  • Auctioning of New Zealand Units (NZUs) will be introduced, to be held either monthly or quarterly, and expected to commence in 2020. A price floor is also being investigated.

  • Strict liability infringement offences will be introduced to deter low-level non-compliance.

  • Clear rules to govern the NZETS market will be introduced. Market manipulation and insider trading will become prohibited behaviour.

  • A number of changes to the forestry settings will be made, including that:

    • A new permanent post-1989 forest land activity will be introduced into the NZETS and the Permanent Forest Sink Initiative (PFSI) will be discontinued.

    • The pre-1990 forest land offsetting rules will be improved to provide more flexibility.

The Government also made a decision in March 2019 to introduce averaging accounting for post-1989 forests in the NZETS.

Tranche two announcements

The Government has now made the following additional decisions:

  • Penalties: Current penalties will be strengthened and redesigned to increase rates of compliance and to increase efficiency. There will be separate penalties for:

    • Failing to surrender or repay units by the due date (a penalty of three times the current market price will apply to each overdue unit).

    • Failing to report or to accurately report (the penalty will be behaviour-based with an up to 100 per cent market price penalty being possible).

  • Transparency: It will make the NZETS more transparent by publishing emissions and removals data at an individual participant level.

  • Auction monitor: An independent auction monitor will be appointed to oversee NZU auctions.

  • Auction regulations: Clarity will be provided on the types of decisions the Government must or may take when creating regulations for auctioning. The auction design will be contained in regulations.

  • Auction timing and removal of fixed price option: Auctioning is expected to commence in late 2020. The fixed price option (currently NZ$25 in lieu of surrendering a unit) will be removed when auctioning begins, and in any event by no later than 31 December 2022.​

  • Future price floor: A price floor will be possible (through allowing an auction reserve price), if the Government thinks this is desirable in the future.

  • Market governance: It will establish a separate market governance work programme to consider market governance in more detail. This programme will include considering the Government's earlier decision to prohibit insider trading and market manipulation and to find an appropriate market regulator.

Further decisions signalled

Industrial allocation

The Government has signalled that further decisions are expected to be made later this year on industrial allocation.

In the Government's consultation materials it consulted on the phasing down of existing industrial allocation levels over time. It noted that options included a test that would trigger a phase-down, establishment of a decision-making process to determine allocation rates, and a set phase-down date from 2021.

Agriculture

The Government has also noted that it is considering its response to recommendations delivered to it last month by the Interim Climate Change Committee on how surrender obligations could best be arranged if agricultural methane and nitrous oxide emissions enter into the NZETS.

Auction proceeds

A decision is still to come on whether the proceeds generated through NZETS auctions should be earmarked for a particular purpose.

Market governance

Further market governance decisions will be made after further work has been undertaken through the market governance work programme.

Forestry - full details on averaging accounting

While the Government announced that averaging accounting will be introduced for all post-1989 forests registered from 1 January 2021 (and optional for forests registered in 2019 and 2020), it indicated that full details on the averaging accounting approach will be announced later in 2019.

If you or your business would like further information or advice in relation to the proposed NZETS changes, please do not hesitate to contact us.​​


Disclaimer

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.

For more information
  • Simon Watt

    Partner Wellington
  • Andrew Beatson

    Partner Wellington
  • Tim Smith

    Partner Wellington
  • Claire Harmsworth

    Senior Associate Wellington
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