Emissions trading scheme – MFE paving the way for significant reform

Introduction to the NZ ETS and industrial allocation

The NZ ETS is a key tool in addressing and mitigating New Zealand’s carbon emissions. The NZ ETS works by essentially placing a price on greenhouse gas emissions by requiring businesses to purchase and surrender “units” for their emissions.

Industrial allocation works within the NZ ETS by enabling businesses which are “Emissions Intensive and Trade Exposed” to receive an industrial allocation of free emissions units.

Industrial allocation was introduced to prevent “emissions leakage,” or relocation of businesses offshore to countries that do not have equivalent climate policies (resulting in increased carbon emissions globally). Industrial allocation has also meant New Zealand businesses can compete globally, as they do not need to consider passing increased production costs on to their end consumers.

The current assistance scheme is being phased out through the Climate Change Response (ETS Reforms) Amendment Act 2020. In light of MFE’s proposal, it is now time critical that you consider the current framework and have your say on the allocation reforms and what improvements could be made to NZ ETS governance (if any).

Changes to industrial allocation

MFE has stated the current industrial allocation levels are unsustainable in light of future emission budgets. MFE also acknowledges there are clear tensions between the industrial allocation policy and New Zealand’s 2050 net zero carbon target. Accordingly, through this proposal, MFE seeks to address over allocation.

MFE has submitted several proposals including:

1. updating allocative baselines using newer (i.e., more relevant) base year data
2. retesting the eligibility of activities (i.e., to qualify for industrial allocation assistance)
3. other improvement options, such as streamlining updating processes, setting limits and imposing reporting obligations

MFE is also seeking feedback on the future of industrial allocation and other possible approaches, including carbon border adjustment mechanisms, direct payments to industry, and/or partial exemptions from the NZ ETS.

Wider governance

MFE is also considering changes to the governance of NZ ETS. Importantly, there is no regulator currently overseeing the market, which MFE notes may create risks such as false or misleading advice, lack of transparency and oversight, insider trading, price manipulation and money laundering.

MFE proposes the following alternative options:

1. self-regulating body: a voluntary framework led by a self-regulating body to oversee market governance
2. advisory regulator: an advisory regulator to give independent advice to the Government, without investigative or enforcement powers
3. market monitoring regulator: a market monitoring regulator with investigatory powers to collect information and monitor compliance and to report findings to the Government. Note: no enforcement powers proposed at this stage
4. market compliance regulator: a market compliance regulator with investigatory powers to collect information and monitor and enforce compliance
5. market design regulator: a market design regulator to create and administer an industry participation code

MFE also suggests a number of other options, including introducing guidelines, setting up an advisor licence scheme and requiring price and transaction reporting.

Next steps

If you would like to discuss these changes or require assistance with making a submission, please get in touch. Get in quick – submissions close today.

This article is part of a series of climate change articles that will be released by K3 in the coming months. Keep an eye out for the next issue in the series!