NZ ETS Improvements. Consultation Aug-Sep 2018

Transcription

1 NZ ETS Improvements Consultation Aug-Sep

2 Morning overview 1. New Zealand Government Climate Change work programme 2. Unit supply framework (1) 3. Break 4. Unit supply framework (2) 5. Operational issues 2

3 New Zealand Government Climate Change work programme 3

4 Zero Carbon Bill Climate Change Commission (CCC) 2050 emissions reduction target in legislation Emissions budgets Plans to achieve budgets National Climate Change Risk Assessment National Adaptation Plan Adaptation Reporting Power 4

5 Emissions budgets (example) Set in 2020 Set in 2025 Budget 1 Emissions allowed under each budget Budget 2 Budget 3 Budget

6 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

7 Fitting it all together (1) How does the importance of target-setting, emissions-budget setting and ETS setting compare against other? Setting the 2050 target Setting the emissions budgets ETS settings The target choice is the most important driver of economic impact and climate change action outcomes. Emissions budgets provide some flexibility on a medium-term basis, but the overall direction of travel is set by the 2050 target. The ETS settings should mostly reflect the decisions that have already been taken in the earlier decisions about target-setting and emissions budgetsetting. 7

8 Fitting it all together (2) 2050 target Emissions budgets NZ ETS (framework and settings) The NZ ETS acts as a messenger between the 2050 target, emissions budgets and the economy Climate and economic outcomes 8

9 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

10 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 10

11 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

12 12 Unit supply framework

13 Unit supply framework: Overview 13

14 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

15 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

16 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

17 Million tonnes of carbon dioxide equivalent Unit supply NZ Nationally Determined Contribution (NDC) Forecast gross emissions = 804 Mt Abatement demand = 203 Mt NDC budget = 601 Mt Abatement demand NDC budget Gross emissions Source: Ministry for the Environment 17

18 Million tonnes of carbon dioxide equivalent Unit supply NZ NDC (detailed) Abatement demand Auction volume Industrial allocation Non-ETS Gross emissions Emissions budget Source: Ministry for the Environment 18

19 Million tonnes of carbon dioxide equivalent Abatement detail NZ NDC BAU forestry 1BT programme Abatement demand Auction volume Industrial allocation Non-ETS Gross emissions Emissions budget Source: Ministry for the Environment, Ministry for Primary Industries 19

20 Unit supply framework: Auctioning of NZUs 20

21 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

22 Choice of auction format How many rounds? Single round Multiple round Closed Closed or open bidding? Open Proposed option X X 22

23 Uniform or discriminatory pricing? Uniform pricing All successful bidders pay the auction clearing price, regardless of what they bid Discriminatory pricing All successful bidders pay their bid price Proposed option 23

24 Example of proposed auction format Bid price ($/NZU) Clearing price for auction Volume of units offered at auction $24 secondary market NZU price Bid volumes *Note that this graph is indicative only. 24

25 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

26 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 participants in each auction) Note: auction participation might require some additional criteria (for example, the ability to post a bond before an auction) 26

27 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

28 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

29 Unit supply framework: Price ceiling 29

30 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 30

31 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 31

32 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 32

33 Existing $25 Fixed Price Option (FPO) 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 over the transition period (the next 3-5 years) The Government is therefore considering making adjustments to the FPO price level in advance of

34 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. 34

35 Cost Containment Reserve (CCR) 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 predetermined volumes of NZUs at pre-determined prices There could be a single trigger price, or multiple trigger points 35

36 How would a CCR work? Base auction volume CCR example #1 Trigger ($) Volume (m) N/A 10 Trigger level 1 $ Trigger level 2 Trigger level 3 CCR example #2 Trigger ($) N/A Volume (m) 10 $30 1 CCR example #3 Trigger ($) N/A Volume (m) 10 $30 5 $35 5 $ Note: All prices and volumes are for example only 36

37 CCR trade-offs A CCR can be anywhere along this continuum, depending how many units are in it. Volume unlimited price ceiling Low Price risk for participants No ceiling High High Target risks Low High Fiscal risks Low 37

38 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 3. Other 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 38

39 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? 39

40 Consultation questions 7. Do you agree with the proposal to replace the $25 fixed priced option 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. 40

41 Unit supply framework: Limiting the use of international units 41

42 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 42

43 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 43

44 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 44

45 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? 45

46 Unit supply framework: Coordinated decision making 46

47 Bringing it all together Targets/budgets International unit limit Auction volumes Co-ordinated decisionmaking Banked NZU volume Price ceilings Industrial allocation 47

48 Coordinating supply decisions Proposal to coordinate unit supply decisions and announcements on a five-year rolling basis for: Introduce auctioning 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 Coordinat ed 5-year decision making Capped and predictable NZ ETS Limiting the use of internatio nal units A different price ceiling 48

49 Auction volumes (Mt/year) Current year Five-year rolling decision-making 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 49

50 Million tonnes of carbon dioxide equivalent Unit supply NZ NDC (detailed) Abatement demand Auction volume Industrial allocation Non-ETS Gross emissions Emissions budget Source: Ministry for the Environment 50

51 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 51

52 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 52

53 Unit supply framework: Industrial allocation 53

54 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. 54

55 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 offshore, which has no similar costs from carbon pricing or other climate policies. 55

56 Million tonnes of carbon dioxide equivalent Unit supply NZ NDC (detailed) Abatement demand Auction volume Industrial allocation Non-ETS Gross emissions Emissions budget Source: Ministry for the Environment 56

57 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. 57

58 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 other countries have on our calculations? Note: There are 26 activities that receive industrial allocation in the NZ ETS 58

59 Phase-down rate options 90% Industrial allocation factor 3% 2% 1%

60 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? 60

61 61 Operational issues

62 Operational issues: Market governance 62

63 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 63

64 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. 64

65 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 65

66 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 66

67 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. 67

68 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. 68

69 Operational issues: Market information 69

70 Market information You asked for better communication and information from us. New market information website ( 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 noncompliance should be published 70

71 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? 71

72 Operational issues: Compliance and penalties 72

73 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 noncompliance 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 or repay units by the due date. The enforcement agency is able to reduce this penalty by up to 100% in certain circumstances. 73

74 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. 74

75 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 75

76 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? 76

77 Operational issues: Technical and operational improvements 77

78 Technical and operational improvements We are also proposing a number of 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 78

79 Next steps - Submission period closes 5:00pm 21 September - Submissions will be evaluated and incorporated into policy advice - Submit through online form: - Questions and submissions forms sent to ETSconsultation@mfe.govt.nz Thank you! 79

80 80

81 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. 81

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? 82

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? 83

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? 84