NZ ETS Improvements Consultation Aug-Sep 2018 1 Morning 1. New - - PowerPoint PPT Presentation

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NZ ETS Improvements

Consultation Aug-Sep 2018

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• 1. New Zealand Government

Climate Change work programme

• 2. Unit supply framework (1)
• 3. Break
• 4. Unit supply framework (2)
• 5. Operational issues

Morning

• verview

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New Zealand Government Climate Change work programme

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Zero Carbon Bill

2050 emissions reduction target in legislation Emissions budgets Plans to achieve budgets National Climate Change Risk Assessment National Adaptation Plan Adaptation Reporting Power Climate Change Commission (CCC)

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Emissions budgets (example)

Emissions allowed under each budget 2020 2025 2030 2035 2040 Set in 2020 Budget 1 Budget 2 Budget 3 Set in 2025 Budget 4

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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

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The target choice is the most important driver of economic impact and climate change action outcomes. Setting the 2050 target 1 Setting the emissions budgets Emissions budgets provide some flexibility on a medium-term basis, but the overall direction of travel is set by the 2050 target. 2

Fitting it all together (1)

How does the importance of target-setting, emissions-budget setting and ETS setting compare against other? ETS settings The ETS settings should mostly reflect the decisions that have already been taken in the earlier decisions about target-setting and emissions budget- setting. 3

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Fitting it all together (2)

2050 target Emissions budgets NZ ETS (framework and settings) Climate and economic outcomes The NZ ETS acts as a ‘messenger’ between the 2050 target, emissions budgets and the economy

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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

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Agriculture

This consultation does not cover whether Agriculture should have a surrender

• bligation 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

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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

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Unit supply framework

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Unit supply framework: Overview

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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.

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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

• perationalising these in-principle decisions

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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

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10 20 30 40 50 60 70 80 90 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 Abatement demand NDC budget Gross emissions

Unit supply – NZ Nationally Determined Contribution (NDC)

Source: Ministry for the Environment

Abatement demand = 203 Mt Forecast gross emissions = 804 Mt NDC budget = 601 Mt Million tonnes of carbon dioxide equivalent

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Unit supply – NZ NDC (detailed)

Source: Ministry for the Environment

10 20 30 40 50 60 70 80 90 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 Abatement demand Auction volume Industrial allocation Non-ETS Gross emissions Emissions budget

Million tonnes of carbon dioxide equivalent

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Abatement detail – NZ NDC

Source: Ministry for the Environment, Ministry for Primary Industries

10 20 30

40

50 60

70

80 90 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030

BAU

forestry 1BT programme Abatement demand Auction

volume Industrial allocation

Non-ETS Gross emissions Emissions budget

Million tonnes of carbon dioxide equivalent

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Unit supply framework: Auctioning of NZUs

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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

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Choice of auction format

How many rounds? Single round Multiple round Closed or open bidding? Closed Open Proposed

• ption

X X

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Uniform or discriminatory pricing?

Uniform pricing Discriminatory pricing

All successful bidders pay the auction clearing price, regardless of what they bid All successful bidders pay their bid price Proposed

• ption

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Example of proposed auction format

$24 secondary market NZU price

*Note that this graph is indicative only.

Bid price ($/NZU) Bid volumes Volume of units

• ffered at auction

Clearing price for auction

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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
• verwhelm the market.
• The appropriate auction frequency is likely to change over time

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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

• bligations)
• 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)

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Uses of auction proceeds

• In markets overseas, auction proceeds are sometimes assigned to be spent
• n 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

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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?

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Unit supply framework: Price ceiling

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Context – price ceiling

• Price ceilings seek to limit the emissions price from rising to unacceptably

high levels

• Price ceilings operate by providing more units to the market when a

‘trigger’ price is reached

• Price ceilings risk shifting the cost of emissions reductions from

participants to the Government

• The NZ ETS currently has a $25 Fixed Price Option (FPO) that allows any

surrender requirement to be met by paying $25 in place of each NZU

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Issues with the current FPO

There are several problems with the current price ceiling (the FPO):

• The $25 price level may be too low
• The FPO price level is static at $25
• There is a high risk that participants will use the FPO extensively
• The FPO is not volume-limited

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Price ceilings

Existing $25 Fixed Price Option (FPO) Government is aware that its current $25 level might not be appropriate in the future Proposed Cost Containment Reserve New price ceiling that would be implemented as part of auctioning

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• Currently set in legislation
• FPO will be retained until it is

replaced by the new price ceiling (i.e. at least 2020)

• Government has indicated that

the $25 might not be appropriate

• ver the transition period (the

next 3-5 years)

• The Government is therefore

considering making adjustments to the FPO price level in advance

• f 2020

Existing $25 Fixed Price Option (FPO)

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The next three-to-five years

• This consultation is proposing a number of improvements to the NZ ETS
• The Zero Carbon Bill and the Climate Change Commission may also have

an influence on the operation of the NZ ETS in the future

• These changes will take time to be legislated and implemented in practice
• The Government is committed to ensuring that emissions prices in New

Zealand remain in line with international emissions prices

• The NZ ETS needs to deliver a stable, predictable price to support a

transition that’s planned, gradual and carefully phased in.

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• The Government’s proposal is for

a volume limited Cost Containment Reserve (CCR) that is included as part of the auction mechanism

• A CCR would release pre-

determined volumes of NZUs at pre-determined prices

• There could be a single trigger

price, or multiple trigger points

Cost Containment Reserve (CCR)

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How would a CCR work?

CCR example #1 Trigger ($) Volume (m) Base auction volume N/A 10 Trigger level 1 $30 100 Note: All prices and volumes are for example only CCR example #2 Trigger ($) Volume (m) N/A 10 $30 1 CCR example #3 Trigger ($) Volume (m) N/A 10 $30 5 $35 5 $40 100 Trigger level 2 Trigger level 3

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CCR trade-offs

A CCR can be anywhere along this continuum, depending how many units are in it.

Volume unlimited price ceiling No ceiling

Price risk for participants Target risks Fiscal risks High Low Low Low High High

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Options for how the CCR settings could be managed over time

1. Decision-maker has discretion to determine the settings while having regard to certain factors These could include; forecasts of the abatement required for NZ to meet its targets, modelling of abatement costs, international carbon prices, inflation rates, recommendations from the Climate Change Commission 2. Settings are determined by mandated formulae For example, the trigger price could be set $5 higher each year, or $5 higher plus inflation. The volume could (again for example) be set at 10% of auction volumes 3. Other

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What should happen if the CCR trigger prices are hit?

• Increasing the price ceiling trigger level
• Increasing the limit on international units
• Undertaking a fuller system review
• Government buying international units to compensate for

additional units added to the market through the price ceiling

• Adjusting the overall cap
• Other?

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Consultation questions

7. Do you agree with the proposal to replace the $25 fixed priced

• ption with a cost containment reserve price ceiling implemented

through the auctioning mechanism? If not, why not? 8. How do you think the price level and number of units in the cost containment reserve should be managed over time? 9. What actions should occur if the price ceiling is struck?

• 10. Do you agree with the proposal to review the price ceiling if

another significant event occurs?

• 11. Do you agree that the $25 FPO may not be appropriate for the

short term, and may need to be adjusted before 2020? Please explain.

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Unit supply framework: Limiting the use of international units

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International units

• This consultation is seeking views on the best way to import and limit the

volume of international units in the NZ ETS

• This consultation is not seeking views on either:
• The potential source of international units
• The potential volume of international units that might be allowed into the

NZ ETS

• The Government has signalled that international carbon markets may be

used after 2020 if:

• the units are genuine and have environmental integrity
• progress towards a net zero target is maintained
• it makes economic sense to do so
• it can be done in a way that maintains incentives for domestic abatement

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Two different import pathways

Direct NZ ETS participants purchase and surrender international units directly themselves Indirect The NZ government purchases international units and then auctions these units into the NZ ETS as NZUs Volume would likely be limited through applying a percentage limit on surrender Volume would likely be limited by restricting the volume that was purchased (and then auctioned) by the government

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Varying surrender limit by activity

• If a ‘direct’ mode of purchase is used for international units,

different activities might have access to different surrender limits

• Types of participants this could apply to include are:
• firms that receive industrial allocation of NZUs.
• forestry participants who receive NZUs
• The use of international units by these participant types could

contribute to windfall profits unrelated to emissions reductions efforts

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Consultation questions

• 12. Which mode of purchase for international units (direct or

indirect) would be the best approach for the NZ ETS, acknowledging that there are other significant factors that will influence this decision? Please explain.

• 13. If NZ ETS participants are able to purchase and surrender

international units directly, do you think that there is justification for varying the percentage of allowable international units by participant type? If not, why not?

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Unit supply framework: Coordinated decision making

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Bringing it all together

Targets/budgets Auction volumes Price ceilings Industrial allocation Banked NZU volume International unit limit Co-ordinated decision- making

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Coordinating supply decisions

• Proposal to coordinate unit supply

decisions and announcements on a five-year rolling basis for:

• Volume of NZUs to be auctioned
• Limit on international unit
• Price ceiling, including the

trigger price and volume of units to be held in the reserve

Capped and predictable NZ ETS

Introduce auctioning Limiting the use of internatio nal units A different price ceiling Coordinat ed 5-year decision making

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Five-year rolling decision-making

Current year Y0 Y + 1 Y + 2 Y + 3 Y + 4 Y + 5 Fixed and cannot be changed Announced by the Government but can be adjusted Volume for Y + 5 must be announced each year Auction volumes (Mt/year)

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10 20 30 40 50 60 70 80 90 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 Abatement demand Auction volume Industrial allocation Non-ETS Gross emissions Emissions budget

Unit supply – NZ NDC (detailed)

Source: Ministry for the Environment

Million tonnes of carbon dioxide equivalent

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Coordinated decision making (considerations)

• We are seeking feedback on how this process should operate
• what factors should be considered when making decisions on unit

supply volumes

• the process for how changes are made, especially years 2-5
• Need to balance predictability for participants with flexibility

for the decision-maker to change settings when circumstances require

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Consultation questions

1. What issues should the decision-maker consider when making unit supply decisions? 2. What, if any, restrictions should be placed on the NZ ETS decision maker when making unit supply decisions? (For example, currently one year’s notice must be given for changes to unit supply volumes). Note: the “decision-maker” might be the Government and/or the CCC

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Unit supply framework: Industrial allocation

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Agricultural allocation

This consultation is not considering how free allocation would be handled if the agricultural sector were to have a surrender obligation in the NZ ETS in the future Under the Labour-NZ First coalition agreement, if agriculture were to face a surrender obligation under the NZ ETS in the future, 95% of this would be provided for free. Any revenue generated from the remaining 5% will be recycled back into agriculture in order to encourage agricultural innovation, mitigation and additional planting of forestry.

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Industrial allocation - background

• Industrial allocation is the free allocation of New Zealand emission units

(NZUs) to firms that carry out eligible industrial activities.

• Eligible activities need to be both emissions intensive and trade exposed

(‘EITE’ activities)

• The purpose of industrial allocation is to mitigate the risk of emissions

leakage.

• Emissions leakage would occur if the cost of ETS obligations in New

Zealand means that the activity is unable to compete with a similar activity

• ffshore, which has no similar costs from carbon pricing or other climate

policies.

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Unit supply – NZ NDC (detailed)

Source: Ministry for the Environment

10 20 30 40 50 60 70 80 90 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 Abatement demand Auction volume Industrial allocation Non-ETS Gross emissions Emissions budget

Million tonnes of carbon dioxide equivalent

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Three options for a phase-down of industrial allocation

1. Make an up-front decision to start a phase-down from 2021 at a specific rate The rate would be set in the NZ ETS legislation and would apply to all industrial allocation activities. 2. Set a test or condition that would begin a phase-down after it was met This approach could lead to differentiation in the start date for phase-down, and the rate of phase-down, between different industrial allocation activity types. 3. Establish a decision-making process (for officials and/or the CCC) for determining allocation rates over time This approach could also lead to differentiation in the start date for phase-down, and the rate of phase-down, between different industrial allocation activity types.

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Making international comparisons (in a test or decision-making process)

• Which countries compete with our exports/imports and price emissions?
• Is the test or decision-making forward-looking or retrospective?
• What are the impacts of any exemptions/free allocation etc.?
• How often should this test be re-assessed?
• What impact should the availability of (new) low-emissions technologies in
• ther countries have on our calculations?

Note: There are 26 activities that receive industrial allocation in the NZ ETS

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Phase-down rate options

3% 2% 1% 2051 2066 2111 2021 90% Industrial allocation factor

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Consultation questions

• 14. How do you think decisions on a phase-down of industrial

allocation should be made? Select all that apply.

• 15. If a decision-making process for industrial allocation is

implemented, what factors should the decision-maker take into account?

• 16. If a phase-down is initiated in future, which of the following

rates for phasing-down industrial allocation should be considered? 0.01, 0.02, 0.03 or another rate?

• 17. What impact would changes to the levels of industrial allocation

from 2021 have on your investment or business decisions?

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Operational issues

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Operational issues: Market governance

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Market governance - background

• This work is seeking to improve both deliberate and unintentional market

misconduct

• Other emission trading schemes have experienced misconduct issues
• An effective market governance regime can help ensure market

participants are adequately informed and protected when they trade with each other

• There is a trade-off in this work between:
• ensuring sufficient rules and oversight to prevent market misconduct
• allowing participants sufficient flexibility to transact

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Market governance - outlook

There are a number of future events which might raise the risks of misconduct in the NZ ETS, including:

• the introduction of auctioning
• possible direct trading links to international markets
• the potential for higher trading volumes and/or prices in the future.

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Types of potential misconduct

• inadequate, false or misleading advice provided to participants
• a potential lack of transparency, monitoring and oversight of trades
• manipulation of the NZU price
• insider trading
• money laundering
• credit and counterparty risks
• conflicts of interest involving an NZ ETR account or a trade involving NZUs

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Market governance is complex

• A report on governance was commissioned on this topic (Covec 2017)
• From this work, and its own analysis, the Government has determined that

there is no single ‘broad brush’ solution available

• Rather, a range of targeted interventions are likely to be needed
• The Government is seeking information in this consultation about the

particular areas in which any targeted interventions might be useful

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Examples of targeted interventions

Here are some examples of the types of interventions that might be considered (this list is not prescriptive or exhaustive)

• requiring providers of advice to be licensed
• disclosure requirements when providing advice
• transaction reporting
• prohibiting certain conduct – such as insider trading or market

manipulation

• require exchange based trading
• a range of other measures as/if deemed appropriate.

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Consultation questions

• 18. For each of the seven areas that we have identified as being

sources of potential risk, what is your assessment of the level of risk that they create, both now and in the future? Please provide examples or evidence if possible.

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Operational issues: Market information

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Market information

You asked for better communication and information from us.

• New market information website (http://www.mfe.govt.nz/ets/market-

info-portal) which we are seeking feedback on

• The Government is seeking feedback on whether there would be value in

publishing individual emissions data from NZ ETS participants

• Publishing facility- or company-level data is common practice overseas,

but the structure of the NZ ETS might make this data more difficult to interpret

• The Government is also seeking feedback on whether cases of non-

compliance should be published

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Consultation questions

• 19. Do you think that there would be benefits from publishing

individual emissions data reported by NZ ETS participants?

• 20. Do you think cases of non-compliance should be published?
• 21. How would publishing these types of information impact you?

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Operational issues: Compliance and penalties

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Compliance and penalties

• It is critical to the integrity of the NZ ETS that participants comply with

their obligations

• The NZ ETS legislation includes prosecutable and civil penalties for non-

compliance

• Where participants fail to collect information, register as a participant or

submit an emissions return they can be prosecuted.

• A civil penalty of $30 per unit applies where a participant fails to surrender
• r repay units by the due date. The enforcement agency is able to reduce

this penalty by up to 100% in certain circumstances.

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Compliance regime change proposals – low-level non compliance

• The review found that prosecutable offences for low-level offending are

not appropriate

• Low-level offending has often gone unsanctioned.
• This is because the only option for these errors is prosecution.
• Instead, the enforcement agency has often relied on warnings.
• We are proposing that some prosecutable offences are replaced by

infringement offences:

• Maximum $1000 for individuals, $2000 for body corporates
• This proposal would mean that simple offences would no longer be

prosecutable, but serious offending will.

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Compliance regime change proposals

• $30 per unit penalty
• The $30 per unit penalty for failing to surrender or repay units may not be

suitable:

• the $30 level may no longer be appropriate
• the discretion available to reduce penalties may be creating

uncertainty for participants and can be time-consuming and challenging to apply consistently.

• There is no proposal - two options have been identified, the penalty is:
• a fixed value per unit
• percentage of the value of the outstanding surrender

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Consultation questions

• 22. Do you agree with the proposal to introduce strict liability

infringement offences for low-level non-compliance? If not, why not?

• 23. What are your views on the levels of the proposed fines?
• 24. Has the excess emissions penalty for failing to surrender or

repay units by the due date caused issues for you? If so, please explain.

• 25. Should the excess emissions penalty for failing to surrender or

repay units by the due date be changed? If so, please explain.

• 26. What option do you see as most appropriate for the excess

emissions penalty?

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Operational issues: Technical and operational improvements

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• We are also proposing a number
• f other administrative

improvements

• These are explained further in the

discussion document

• If you are interested in discussing

these please see an official during the break

Technical and

• perational

improvements

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Next steps

• Submission period closes 5:00pm 21 September
• Submissions will be evaluated and incorporated into policy advice
• Submit through online form: www.mfe.govt.nz/consultation/ets
• Questions and submissions forms sent to ETSconsultation@mfe.govt.nz

Thank you!

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Consultation questions

• 27. Do you agree with the proposal to use approved units to repay

any overdue unit obligation from a previous reporting period, before any remaining balance is transferred to the owner? If not, why not?

• 28. Should large purchasers of coal, natural gas or obligation fuels

have the ability to opt-in for only a portion of their obligations?

• 29. As a mandatory participant that supplies this controlled fuel,

what burden would it create if more of your large purchasers were to opt-in? Please explain.

82 82

Consultation questions

• 30. Do you agree with the proposal that all coal sold or used from a

stockpile be reported, regardless of whether the participant meets the threshold for coal importing or mining in the year the coal was sold or used? If not, why not?

• 31. Do you agree with the proposal that the Government should be

able to amend Unique Emission Factors from previous years? If not, why not?

• 32. Do you agree with the proposal that participants should repay

the same type of units, rather than the exact same unit? If not, why not?

83 83

Consultation questions

• 33. Do you agree with the proposal to extend the general 30 day

due date for repayments to annual allocation adjustment repayments? If not, why not?

• 34. Do you agree with the proposal that the deadline for surrenders

and repayments is 60 working days from the date a notice is sent? If not, why not?

• 35. Do you agree with the proposal that industrial allocations can

be transferred to a consolidated group account? If not, why not?

84 84

Consultation questions

• 36. Do you agree with the proposal that account operators continue

to operate NZ ETS accounts until a succession plan is in place? If not, why not?

• 37. Do you agree with the proposal that units should vest in the

Crown if the account operator chooses to close the account? If not, why not?