NZ Government releases public consultation on ETS

Friday 17 May 2024

As scheduled, the Ministry for the Environment ("MfE") have released their annual public consultation document on the NZ ETS auction settings. This is in response to advice on ETS Settings from the Climate Change Commission ("CCC") that was submitted to the Minister of Climate Change Simon Watts two months ago. Under legislation, such advice is regularly scheduled and must be considered by the Government, but not necessarily adopted.

Casting back to this time in 2022, we saw the CCC propose significantly higher Cost Containment Reserve ("CCR") trigger prices. The reaction to that 2022 CCC advice was a NZ$10 lift on the day of the announcement.

However, Cabinet's subsequent decision was not to follow the recommendations, and CCR trigger prices were recast to what was essentially 'status quo plus inflation.' That saw NZU prices immediately slump back $10 on the secondary market, and (despite a judicial review leading to an ultimate U-turn by Cabinet, and upwards adjustment of CCR trigger prices), NZU prices have not recovered since.

So What's the Story Now?

Perhaps the most significant recommendation in this year's CCC ETS Settings advice was to halve the volumes scheduled to be auctioned out to 2028, including potential adjustments to 2025 and 2026 volumes. A big question for the market (since publication of the advice) has been whether or not such stark reductions would actually be entertained by the Government.

The MFE consultation document released will refocus the mind back to the price - rather than volume - side of the equation. In particular, the document raises the possibility of lowering the auction price floor (and the trigger price for the CCR). Key aspects to note are in relation to:

Auction Price Control Settings;

The Ministry identifies the following two options:
  1. The first option is to maintain the status quo  with adjustment for inflation from 2027.
  2. The second option is to lower trigger prices  for both the auction price floor and the CCR.
Cost Containment Reserve Volume;

The Ministry notes that the CCR needs to be large enough to prevent auction prices going too high. Previously, the number of units in the reserve was aligned to the surplus – that is, if the trigger was reached, additional units would be sold, up to the level of the surplus. The most recent CCC advice appears to be a departure from that approach and hence the MfE identifies two options on which it seeks feedback:
  1. Maintain the current CCR volume and extend it to 2029, or
  2. Increase the number of units on offer in the CCR. This would mean if the CCR is triggered, more units would be released. 
Unit Limits;

Auction volumes and unit limits are calculated through a series of steps. The MfE seeks feedback on options for each step and in particular are interested in ways to manage the impact of non-NZ ETS policies on the NZ ETS unit limits and how emissions budgets are allocated to NZ ETS and non-NZ ETS sectors.

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