New tools to help meet climate change targets

Climate Change Minister Paula Bennett is today announcing a package of changes that the Government will make to the Emissions Trading Scheme (ETS) to ensure it puts New Zealand in the best possible position to achieve its ambitious 2030 emissions reduction target.

“In 2015 the Government initiated a review of the ETS to ensure it was fit for purpose going into the 2020s,” says Mrs Bennett.

“Last year, as a result of stage one of the review, we announced the phase out of the one-for-two measure in the ETS. I am now announcing further changes as a result of stage two of the review.”

The proposals announced today will provide businesses with the clarity they need about the direction of the ETS.

Cabinet has made an in-principle decision to implement four proposals and asked officials to work on how they will be developed and implemented in the ETS over the next few years so there will not be immediate changes. The proposals are to:

• introduce auctioning of units, to align the ETS to our climate change targets
• limit participants’ use of international units when the ETS reopens to international carbon markets
• develop a different price ceiling to eventually replace the current $25 fixed price option
• coordinate decisions on the supply settings in the ETS over a rolling five-year period.

The in-principle decisions will:

• give the Government the tools to align the supply of units in the ETS with our target
• set up a more predictable and transparent process for decision-making on ETS supply settings such as unit volumes and the price level of any price ceiling
• allow further engagement and consultation with stakeholders, before the in-principle decisions are implemented
• make the NZ ETS more similar to emission trading schemes in other countries which will mean that it is more compatible for international linking (accessing international units).

There will be further work to determine how to implement these proposals, including further consultation and engagement over the next 12 to 18 months.

“We are also making no changes to free allocation or to the $25 price ceiling at this point,” says Mrs Bennett.

“We are committed to ensuring New Zealand businesses whose emissions are a big part of their costs are not disadvantaged compared to their international competitors. This means there will be no changes to the current level of free allocation at least until the end of 2020, and any changes would be well signalled and take into account what is happening internationally.

“The $25 price ceiling will also remain in place until auctioning or links with international markets are established.”

More work needs to be done in the area of forestry accounting and operational improvements to reduce complexity for forestry participants and increase the efficiency of the ETS. A package of options will be developed next year with input from the Climate Change Forestry Reference Group.

The Productivity Commission Inquiry into a low emissions economy and work to progress policy options for reducing emissions funded through $4 million committed in Budget 2017 will also help inform future implementation decisions about the ETS.

The ETS review is part of the Government’s investment in a wider programme of work to reduce emissions, and help New Zealanders adapt and build resilience to the impacts of climate change.

More information is available at: www.mfe.govt.nz/nzets/2015-16-review-outcomes

Q & A

Why did we review the NZ ETS?

We were one of the first countries in the world to establish an ETS and we needed to review it to ensure it is fit for purpose to help us meet our new 2030 target under the Paris Agreement. We need to make sure it provides the right incentives to reduce emissions while also ensuring it doesn’t put unnecessary costs on businesses that aren’t faced by their overseas competitors.

Why has the review been done now when we don’t have to reach our target until 2030?

Changes to the ETS need to be well signalled so that businesses have as much certainty as possible.

How does the NZ ETS work?

The NZ ETS puts a price on greenhouse gas emissions from all sectors of the New Zealand economy except biological emissions from agriculture. This creates a financial incentive for businesses and households to invest in technologies or products that have lower emissions. It also gives foresters financial recognition of the carbon their trees remove from the atmosphere, which encourages more trees to be planted. Over the last few months, the carbon price has ranged around $16.00 to $18.00.

Why is the NZ ETS important for reducing emissions?

The NZ ETS is New Zealand’s key climate change policy tool to help us meet our emission reduction targets and reduce our net emissions below business as usual. New Zealand has a 2030 target to reduce emissions by 30 per cent on 2005 levels by 2030. The decisions on the NZ ETS will help improve the operation of the NZ ETS in the 2020s so it can best support us to meet the 2030 target and reduce our emissions.

Is agriculture coming into the ETS?

No. Agriculture was out of scope of the NZ ETS review. The Government and the sector are continuing to invest in research and development for practical ways to reduce biological emissions. This includes the establishment of the Biological Emissions Reference Group, which brings together a wide range of industry stakeholders to collaborate with Government and build a solid evidence base about biological emissions. This will ensure we have the best possible information on what can be done now by the sector to reduce biological emissions, and the costs and opportunities of doing so. The group will report its findings in early 2018.

What is an auctioning mechanism and why does the Government want to put one in the ETS?

Auctioning is a way for the Government to sell New Zealand emission units (NZUs) at the market price through a competitive bidding process. Auctions are a common feature of many emissions trading schemes internationally. The purpose of auctioning in the NZ ETS will be to ensure the amount of NZUs available in the NZ ETS reflects the level of effort required by businesses and households to meet our targets. For NZ ETS participants, the introduction of auctioning will improve the information available about the amount of units provided to the market through auctions and free allocation.

Why will there be a limit on international units?

At the moment the ETS is closed to international units but the Government expects to open it back up to high integrity units in the future. A limit on participants’ use of international units provides the Government with a tool to balance the use of international units with the use of New Zealand Units in the NZ ETS. It will also make the NZ ETS more similar to other emissions trading schemes worldwide, which is important if we are to link with international carbon markets.

When will we know what the limit on international units is?

The exact timeframe cannot be confirmed yet. The decision on where to set the limit on international units will be informed by wider climate change work that looks at how New Zealand can meet the 2030 target. The Government has also announced that it will make decisions about NZ ETS settings using a rolling five-year window and so the international limit will be considered annually as part of this process. The limit may also depend on which international carbon markets New Zealand links with, and how New Zealand links to them.

Is the Government talking to any other countries about buying international units from their markets?

An international carbon markets project was established in 2016 to identify linking options, with a view to enabling New Zealand to source high integrity international emission reductions in the 2020s. We are in the early stages of discussions with a number of different countries about potential cooperation opportunities.

What is the current $25 price ceiling?

The NZ ETS has a price ceiling in the form of a $25 fixed price option. The $25 fixed price option was introduced as a transitional measure in 2009, and means that $25 is the maximum NZ ETS participants pay per unit to meet their ETS obligations. International carbon prices may rise above $25 in the 2020s, so the $25 price ceiling could be out of step with international prices. Officials will work to develop a different price ceiling for the NZ ETS, but the Government will keep the current $25 price ceiling in place at least until auctioning or links with international markets are established.

When will we know what the different price ceiling is?

The exact timeframe cannot be confirmed yet. The decision on the most appropriate different price ceiling will be informed by input from interested stakeholders, and by decisions about how to meet the 2030 target, any linking agreements with other emissions trading schemes, and the design of the auctioning mechanism in the NZ ETS. The Government is maintaining the $25 price ceiling at least until auctioning or links with international markets are established.

The development of a different price ceiling will look at:

• the price level, and whether and how it should increase over time
• whether it should operate in a way that is volume-limited
• whether certain processes need to be put in place to manage the price ceiling over time

How will the five year rolling period for decisions on NZ ETS unit supply settings work?

 The Government has agreed in-principle to announce for five years into the future the details of:

• NZU limits that determine the volume of units that can be auctioned each year
• the operation of the price ceiling , for example the price level and/or unit volumes, if applicable
• the level and other details for the limit on participants’ use of international units     

The five-year period will be updated annually to add information on unit volumes and settings for an extra year. We will be doing more work on how this rolling five-year period will operate, including rules or guidelines for how settings may be adjusted and extended.  Business and other groups told us that they want a more predictable scheme and better information about the market. A five-year rolling period gives the market more information about future unit supply, while retaining the flexibility needed for the scheme to work effectively.

What is free allocation?

The Government provides NZUs to firms with activities that are exposed to international competition and whose emissions are a big part of their costs. This is to ensure they are not disadvantaged compared to their international competitors.

Why are there no changes to free allocation?

Free allocation plays an important role in ensuring New Zealand businesses are not put at a disadvantage because of ETS costs compared to their international competitors. Officials will continue to look at whether there should be changes to free allocation after 2020, taking into account competitiveness impacts that any potential reductions may have on New Zealand’s industrial sector, and an assessment of global carbon pricing coverage. This advice is expected in 2018.

Why are there no changes to forestry accounting?

There are no decisions on changes to forestry settings in the NZ ETS at this stage as there needs to be further work, including engagement with the sector and interested groups, before advice is provided on an integrated ‘forestry package’.

This forestry package will include advice on potential changes to the forestry accounting approach for post-1989 forests, and operational improvements to reduce NZ ETS complexity for participants and the Crown. This will include aligning the administration of the Permanent Forestry Sink Initiative with the Climate Change Response Act. Making decisions on any forestry accounting changes in the NZ ETS as part of a broader forestry package that includes operational issues means decisions can be made in a coherent way.

Advice on the forestry package is expected by mid-2018.