The cost of emissions is on the rise

The Government has made the first of two high-level announcements of changes to the New Zealand Emissions Trading Scheme (ETS).  The changes are expected to be implemented in the second half of 2019 through amendments to the Climate Change Response Act 2002 (Act).

The current ETS approach is set to change

The Government wants changes to the ETS to incentivise a reduction in New Zealand’s greenhouse gas emissions in line with the emission reduction targets it has promised internationally.  While this will hit a small number of ETS participants, they will pass the costs through to users of energy and resources.  So, the price of electricity and manufacturing costs will rise as a result of these changes.

The changes signalled will include:

  • Introducing an overall cap on New Zealand units (NZU);
  • Enabling the auctioning of NZUs (from 2020) to align the supply of NZUs with New Zealand’s emission reduction targets;
  • Replacing the current price ceiling for NZUs (the $25 fixed price option) with a cost containment reserve, through auctioning, after 2019;
  • Allowing the ETS to reopen for the trade of international units in certain circumstances after 2020;
  • Establishing an infringement offence regime for low-level non-compliance with the ETS rules and the Synthetic Greenhouse Gas levy;
  • Prohibiting market manipulation and insider trading;
  • Making the Act more consistent with the Paris Agreement and any new emissions targets; and
  • Transferring the permanent forest sink regime under the Permanent Forestry Sink Initiative (PFSI) into the ETS.

Further information on the proposed changes is available here (for general changes) and here (for forestry specific changes from Monday 17 December).  The detail of the changes has not yet been disclosed – this will become clear when an amendment bill is introduced in the second half of 2019.

Cap and trade

The most significant change is the switch of the scheme from a flexible model to a truer ‘cap and trade’ model.  This will partly be done by a proposed cap on the supply of NZUs into the ETS.  The Government has signalled the unit cap will set limits on the number of units being auctioned and the number of units available via a cost containment reserve.  The supply of international units and a ceiling (and, potentially, a floor) for the price of units will also impact supply. Significantly, the cap will not put a limit on NZUs provided from removals including from forestry.  This will incentivise further forestry investment in New Zealand.  The cap will be assessed annually, looking forward five years.

Given that the number of mandatory participants in the ETS is small there will be a strong focus on the intent of the market manipulation proposals.  Bilateral trading (which is common in New Zealand) is unlikely to be caught.  Multiparty, direct trading may require more consideration, although price fixing and cartel laws already exist to deter manipulative behaviour.

More changes to come

The Government will make its second announcement of intended changes to the ETS in 2019, which will cover:

  • The use of proceeds from auctions;
  • A potential price floor for NZUs;
  • How decisions to phase down industrial allocation should be made;
  • Further improvements to the compliance and penalties regime;
  • Changes to the management of forestry under the ETS; and
  • The broader market governance framework.

Interestingly, no changes have been signalled in respect of the agricultural sectors involvement in the ETS.

If you would like any further information about the proposed changes, or you have any queries arising from the announcements, please contact a member of our team.

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