ETS about to enter drive mode

​The Emissions Trading Scheme (ETS) has had limited effect on changing behaviours because its engine has been sitting in neutral during the transition phase - but the Government is about to shift it into drive mode.

The Ministry for the Environment (MfE) has put out a discussion document on detailed reform options (Discussion Document). Submissions close on 21 September 2018.

Most of the big mode-changing decisions have already been made. The Government has committed to:

  • capping the number of units supplied into the ETS
  • introducing an auctioning facility
  • replacing the $25 fixed price option with a cost containment reserve mechanism, and
  • restricting the use of international units by volume and through integrity of origin standards.

Feedback is sought on how best to implement these changes. The Government is also seeking further comment on the future of free allocation to emissions-intensive, trade-exposed businesses.

The treatment of agriculture in the ETS remains out of scope. This issue will be investigated by the Climate Change Commission to be created under the Zero Carbon Act.

Cap on units

This will be set annually for five years into the future, creating a ‘rolling’ five-year cap. Questions for consultation are: what factors the Government should consider in setting the limit, and what restrictions (if any) should apply to the decision-making process.

Auctioning mechanism

The Government’s current preference is for a single round, sealed bid auction at a uniform price. All bidders would submit simultaneous bids, setting out their price and the number of units sought, and all successful bidders would pay the same price.

Questions for consultation are: whether this is the best format, whether the auctions should be held weekly, monthly, quarterly or annually, whether they should be open to all Emissions Trading Register account holders, and whether the proceeds should be earmarked for a specific purpose.

$25 fixed price option

The Government plans to maintain some form of price ceiling in the ETS after the current $25 fixed price ‘cap’ is lifted in 2020, mainly to address the risk of high prices resulting in ‘knee-jerk’ interventions in the ETS. Suggestions that the Government is also considering increasing the fixed price option above $25 prior to 2020 have triggered rises in the NZU price to all-time highs.

The Government proposes to replace the $25 fixed price option with a “volume limited cost containment reserve” under which a number of NZUs would be set aside for introduction to the market once a trigger price was reached.
This would be set over a five-year horizon, pitched above $25 at the outset and increase over time. The reserve could be sourced from within New Zealand’s emissions budgets, or externally.

The Government is considering how the price ceiling should be managed, what should happen if it is struck, and how special circumstances should be accommodated – for example, if New Zealand links to other carbon markets.
There are no plans to have price floor in the ETS.

International units

If the domestic market is reopened to international units, they will be subject to qualitative and quantitative limits and to eligibility criteria. The specific methodologies to be applied are still being worked through – e.g. whether participants should be able to buy direct or whether only the Government would purchase international units (and supply NZUs to the ETS market).

Industrial allocation

Phase-out options include:

  • an automatic commencement date in 2021
  • a trigger event (for example, when a predetermined number of overseas jurisdictions impose emissions pricing), or
  • a bespoke decision-making process for determining a phase down of allocation rates over time. The rate suggested is between 1 and 3% per annum.

Other issues

The Discussion Document also covers a number of operational and technical amendments to the ETS.

Next steps

If you would like to know more about how the proposed changes to the ETS could affect your business, please feel free to contact us. We would be happy to assist you with preparing a submission.

Our thanks to Brendan Abley for writing this Brief Counsel.

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Related topics: Emissions trading; emissions trading scheme

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