The Government has decided to raise trigger prices and reduce the potential supply of New Zealand Units (NZUs) under the emissions trading scheme (ETS) following a High Court judgment ordering that the Government reconsider its prior decision not to adopt the recommendations of the Climate Change Commission in that regard. Prices for NZUs have risen sharply following the Government's announcement of the revised settings.
In addition to the direct impact of the Government's decision on market prices, the decision is also significant because it demonstrates the potential for judicial review claims to influence climate change policy, as outlined in our previous update here. Specifically, the claim brought by Lawyers for Climate Action New Zealand Inc (LCANZI) has influenced the Government both to reverse its previous decision-making in relation to ETS trigger prices (which related to the 2023 – 2027 period), and to impose higher trigger prices for the next period (2024 – 2028). The decision will undoubtedly also influence future decision-making in this context.
As outlined in our previous update, Government decisions that fail to comply with an express or implied requirement of the statutory decision-making power are very likely to be overturned on review. The current decision is an example of such a case – indeed, the Minister for Climate Change accepted that that the prior decision in relation to the relevant ETS settings was ultra vires because there were not reasonable grounds to be satisfied that the settings were consistent with the Climate Change Response Act 2002 (CCRA). It accordingly remains important for parties to judicial review claims (whether as applicant or respondent) to undertake a careful analysis of the relevant legislative scheme. This concession, which was presumably a result of the Minister reconsidering matters following the filing of the claim, also highlights the strategic impacts that climate change litigation can have outside the courtroom.
Further details in relation to the Government's decision and the judicial review claim are set out below. Please get in touch if you would like to discuss the implications of the decision further.
How is the Government required to review and set ETS trigger prices and unit controls?
The Government is required to review ETS trigger prices annually, with each review relating to a 5-year period. These trigger prices relate to the process by which NZUs are auctioned to the market, and include:
an auction reserve price, below which NZUs are not allowed to be sold at auction; and
a cost containment reserve trigger price, at which a reserve amount of NZUs (known as the Cost Containment Reserve (CCR) is released for sale at auction.
In addition to reviewing these prices, the Government is required at the same time to set the number of NZUs available through auctioning (NZUs are also available through removal activities, free allocation to certain industries, or on the secondary market).
The Minister is responsible for recommending the price control and unit limit settings outlined above each year, following advice from the Climate Change Commission. The relevant settings are then put into effect through regulations. Before recommending the making of the relevant regulations, the Minister for Climate Change needs to be satisfied that the settings accord with New Zealand's domestic emissions reduction target, emissions budgets and its nationally determined contribution (NDC) under the Paris Agreement. A discrepancy with the budgets and/or NDC is permitted if it is justified after consideration of certain factors in the Act (for example, the proper functioning of the ETS), but the settings must always be consistent with the emissions reduction target.
Why did the Government decline to raise prices in late 2022?
In July 2022, the Climate Change Commission recommended that ETS prices be significantly increased as follows:
Auction reserve price: increase from $32.10 to $60 in 2023, rising to $75 by 2027.
Cost containment reserve trigger price: increase in the CCR trigger price and a two-tier structure implemented, with the first tier increased from $70 to $171 in 2023, rising to $214 by 2027.
The Minister recommended to Government that the Commission's advice be followed in full. However, the Government decided on lower trigger prices, with no two-tier structure, noting concerns that raising ETS trigger prices could have flow-on effects and contribute to cost of living issues.
The Minister then considered and received advice on whether the settings agreed by the Government were in accordance with the emissions target, budgets and the NDC. At that time, the Minister confirmed that he was satisfied that all requirements were met and the relevant regulations were made on that basis.
The Commission has subsequently doubled down on its recommendations to raise ETS trigger prices, in the context of its advice on the next round of settings (for the 2024 – 2028) period released in March of this year (see our earlier update on this here).
Why did the High Court find the Minister's decision to recommend the regulations was unlawful?
In its judicial review claim, LCANZI claimed that the Minister did not have reasonable grounds to be satisfied that the settings adopted were consistent with the CCRA.
The Minister accepted that his decision to follow Government's recommendations was ultra vires because, on the materials he had regard to, he did not have reasonable grounds to be satisfied they were in accordance with the emissions reduction target and either:
strictly in accordance with the emissions budgets and the NDC; or
if not strictly in accordance, any discrepancy was justified under the CCRA.
Notably, the Minister did not admit that the adopted settings was necessarily unavailable to him, rather the materials before him were deficient as they did not contain an adequate evaluation or analysis of whether the settings adopted (particularly those which differed from the Commission's recommendations) accorded with the emissions reduction target, budgets, and the NDC.
What has happened following the High Court's decision?
On 25 July 2023, the Minister announced that the Government has made its annual decision on unit limits and price control settings, which covers the 2023 – 2028 period as it includes a reconsideration of the decision made in December 2022.
The Commission's proposals as set out in the July 2022 advice have now been adopted in full, with the auction reserve price increasing to $60 and the CCR trigger price increasing to $173 in December 2023.
Alongside increasing trigger prices, the Government has decided to change the overall limit on NZUs, so that there will be 17.6 million fewer NZUs auctioned over 2023 – 2028 when compared to the current settings.
The changes will come into effect from the 6 December auction of NZUs onwards.
Tables setting out the new settings in full are available here.
This article is intended only to provide a summary of the subject covered. It does not purport to be comprehensive or to provide legal advice. No person should act in reliance on any statement contained in this publication without first obtaining specific professional advice. If you require any advice or further information on the subject matter of this newsletter, please contact the partner/solicitor in the firm who normally advises you, or alternatively contact one of the partners listed below.