Traders of NZUs to note MfE consultation on governance framework and industrial allocation

On 8 July 2021, the Ministry for the Environment (MfE) launched two public consultations regarding reforms on two areas of the New Zealand Emissions Trading Scheme (ETS):

Submissions on the consultations are due by 5pm on Friday 17 September 2021.

Who needs to read it?  Why?

Financial market participants who trade or advise on New Zealand emission units (NZUs) should read the consultation materials and consider whether to make submissions, particularly the extent to which their trading activity and business operations in relation to New Zealand’s carbon market may be affected.

Current (and future) participants in the ETS who are entitled to receive an allocation of NZUs will be directly affected by the industrial allocation proposals.  They should read the relevant consultation materials and consider how it will affect them and the cost of their participation in the ETS and make submissions as appropriate.

However, this newsletter is focussed on the financial sector and the consultation on market governance.

What does it cover?

This consultation has been foreshadowed for a few years and is a consequence of the ETS reforms that were enacted through the Climate Change Response (Emissions Trading Reform) Amendment Act 2020.

See the executive summaries of the two consultations for detail.

The governance consultation document identifies that there is no single overarching ETS market governance framework and no regulator overseeing the market.  MfE considers that this makes it difficult to address a variety of market risks which then ultimately undermine New Zealand’s climate goals.

MfE is seeking feedback on proposals to improve market governance of the ETS with a range of regulatory options as well as what the role and functions of a market regulator would look like.  These proposals fall within three key themes: governance of advice, governance of trading and governance of market conduct.

Our view

The consultation on market governance appears to assume that a new bespoke regulatory regime for advice, trading and market-conduct is required for NZUs, and that a new regulator should be established.

The governance consultation notes that different legislations and regulatory systems (e.g. the Financial Markets Conduct Act 2013 (FMCA) and the Anti-Money Laundering and Countering Financing of Terrorism Act 2009 (AML/CFT Act)) do not “provide full coverage of the risks”.  The governance consultation does not propose as an option bringing NZUs fully within those regimes.

In our view, NZUs are in substance financial instruments.  That is the treatment adapted in many other jurisdictions.  There would be significant efficiency benefits in regulating advice, trading and the market under the existing financial services law regime.  A significant part of this regime, i.e. the FMCA and its associated regulations, focusses on advice, trading, and market conduct.  Further, the consultation does not consider allocating responsibility for supervising advice, trading and conduct to the Financial Markets Authority (FMA) as New Zealand’s most experienced regulator of market conduct.

If the requirements of the FMCA, in relation to the initial offer and issuing of NZU, are not thought to be fully appropriate, then those can be tailored via FMA exemptions – as are many other types of products.

Likewise, the AML/CFT Act could easily accommodate trading in NZUs alongside other liquid securities.

What next?

If you have any questions in relation to these consultations, or want assistance in preparing submissions, please contact one of our experts.

Who can help