NZ ETS Improvements Consultation Aug-Sep 2018 1
Morning 1. New Zealand Government overview Climate Change work programme 2. Unit supply framework (1) 3. Break 4. Unit supply framework (2) 5. Operational issues 2
New Zealand Government Climate Change work programme 3
Zero Carbon Bill Climate Change Commission (CCC) 2050 emissions Plans to achieve reduction target in Emissions budgets budgets legislation National Climate National Adaptation Adaptation Change Risk Plan Reporting Power Assessment 4
Emissions budgets (example) Set in 2020 Set in 2025 Budget 1 Budget 2 Emissions allowed Budget 3 under Budget 4 each budget 2020 2025 2030 2035 2040 5
ZCB consultation questions related to the NZ ETS include: • Which 2050 target is best for New Zealand? • Should biogenic methane have its own target? • Should high integrity international emission reductions be allowed? • Do you agree with the proposal to have three five-year emissions budgets? • Should the CCC have a decision-making or advisory role on the NZ ETS? Note: this list is not exhaustive 6
Fitting it all together (1) How does the importance of target-setting, emissions-budget setting and ETS setting compare against other? The target choice is the most important 1 driver of economic impact and climate change action outcomes. Setting the 2050 target Emissions budgets provide some 2 flexibility on a medium-term basis, but the overall direction of travel is set by the 2050 target. Setting the emissions budgets 3 The ETS settings should mostly reflect the decisions that have already been taken in the earlier decisions about ETS target-setting and emissions budget- settings setting. 7
Fitting it all together (2) 2050 target Emissions budgets The NZ ETS acts as a ‘messenger’ between the 2050 target, emissions budgets and NZ ETS (framework the economy and settings) Climate and economic outcomes 8
NZ ETS improvements consultation • What is being considered in this consultation? ⁃ Managing unit supply into the NZ ETS ⁃ Operational issues • What isn’t being considered in this consultation? ⁃ The level of a limit on international units ⁃ The trigger price for the future price ceiling and the units associated with it ⁃ The proposed number of units to auction 9
Agriculture This consultation does not cover whether Agriculture should have a surrender obligation in the NZ ETS • The Interim Climate Change Committee (iCCC) will provide evidence and analysis on: “How surrender obligations could best be arranged if agricultural methane and nitrous oxide emissions enter into the New Zealand Emissions Trading Scheme (NZ ETS) ” • As part of a thorough analysis of this NZ ETS question, the iCCC intends to consider the full range of options that could deliver reductions in agriculture • Advice from the iCCC will be passed to the CCC when it is established • The CCC will then advise the Government on this topic • More detail on this can be found at http://www.iccc.mfe.govt.nz 10 10
Prospective timeframes • Zero Carbon Bill (ZCB) – aim is to introduce the bill before the end of 2018 • Climate Change Commission – established after ZCB passes the house (likely in second half of 2019) • Climate Change Response Act (CCRA) legislative changes (i.e. NZ ETS improvements) should start in mid-2019 • We also expect to consult on more detailed NZ ETS settings in 2019 for regulations to implement the new framework proposed in this document 11 11
Unit supply framework 12
Unit supply framework: Overview 13
2015/16 NZ ETS Review outcomes • The key findings of the Review were: ⁃ the Government does not have the tools required to effectively manage the supply of units into the NZ ETS ⁃ current settings and management of the NZ ETS create significant regulatory uncertainty for participants ⁃ operational and technical issues are causing administrative inefficiencies. • These findings mean that NZ ETS unit supply volumes need to align better with our national targets. 14 14
2017 in-principle decisions • introducing auctioning of units, to align the NZ ETS to our climate change targets • limiting participants' use of international units when the NZ ETS reopens to international carbon markets • developing a different price ceiling to eventually replace the current $25 fixed price option • coordinating decisions on the supply settings in the NZ ETS over a rolling five-year period. The unit supply framework improvements are focussed on operationalising these in-principle decisions 15 15
Unit supply • New Zealand’s nationally determined contribution (NDC) under the Paris Agreement includes a target to reduce emissions 30 percent below 2005 levels by 2030 (‘the 2030 target’) • For the purpose of today’s session, we will be discussing the unit supply framework proposals in relation to this 2030 target 16 16
Unit supply – NZ Nationally Determined Contribution (NDC) Million tonnes of carbon dioxide equivalent 90 Forecast gross emissions = 804 Mt 80 70 Abatement demand = 203 Mt 60 Abatement 50 demand NDC budget 40 NDC budget = 601 Mt 30 Gross 20 emissions 10 0 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 Source: Ministry for the Environment 17 17
Unit supply – NZ NDC (detailed) 90 Million tonnes of carbon dioxide equivalent 80 Abatement 70 demand Auction 60 volume 50 Industrial allocation 40 Non-ETS 30 Gross 20 emissions 10 Emissions budget 0 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 Source: Ministry for the Environment 18 18
Abatement detail – NZ NDC 90 BAU Million tonnes of carbon dioxide equivalent forestry 80 1BT 70 programme Abatement 60 demand Auction 50 volume 40 Industrial allocation 30 Non-ETS 20 Gross 10 emissions 0 Emissions 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 budget Source: Ministry for the Environment, Ministry for Primary Industries 19 19
Unit supply framework: Auctioning of NZUs 20
Auctioning overview • Auctioning will be used to align volumes with our target • Auctioning is (effectively) the Government selling NZUs at the market price • As all NZUs are identical, the market price for an NZU will have a strong influence on the price that NZUs are likely to sell for at auction • We can see this in other ETS. For example, in the EU ETS: ⁃ sometimes auctions clear a few cents over the market price ⁃ sometimes auctions clear a few cents under the market price 21 21
Choice of auction format How many rounds? Single round Multiple round Proposed Closed X option Closed or open bidding? X Open 22 22
Uniform or discriminatory pricing? Uniform pricing Discriminatory pricing All successful bidders pay the All successful bidders pay auction clearing price, their bid price regardless of what they bid Proposed option 23 23
Example of proposed auction format Clearing price for auction Volume of units Bid price offered at auction ($/NZU) $24 secondary market NZU price Bid volumes * Note that this graph is indicative only. 24 24
Auctioning frequency • The choice of auction frequency will be important for the market • If auctions are: ⁃ Too frequent then the cost of participation is high relative to the volume available. ⁃ Too infrequent then the volume available at each auction would overwhelm the market. • The appropriate auction frequency is likely to change over time 25 25
Auction participation • In order to receive/hold NZUs, an NZ ETR account is needed • This means that only account holders could participate in auctions • However, the government could make it only accessible to NZ ETS participants (ie, only NZ ETR account holders with NZ ETS surrender obligations) • The government wants to make auction participation as broad as possible • However, overseas experience suggests that there will not be a large number of auction participants (for example, the EU auctions ~900 million units per year and has 15-25 participants in each auction) • Note: auction participation might require some additional criteria (for example, the ability to post a bond before an auction) 26 26
Uses of auction proceeds • In markets overseas, auction proceeds are sometimes assigned to be spent on a specific purpose, such as supporting emissions reductions, or directed towards disadvantaged communities • The Government is interested in hearing whether auction proceeds should be used here for specific purposes • It is not common for the New Zealand Government to link revenue from a particular source to a specific spending programme • If there is no decision to earmark auction proceeds for a specific purpose(s), the proceeds will be used across Government 27 27
Consultation questions 3. Do you agree with the proposal to implement a single-round, sealed bid auction format with uniform pricing? 4. What do you think that the auctioning frequency should be? 5. Do you agree with the proposal that all NZ ETR account holders should be able to participate at auction? If not, why not? 6. Do you think that the Government should use the proceeds gained from the auctioning of NZUs for specific purposes? 28 28
Unit supply framework: Price ceiling 29
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