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Emissions trading reform takes another step

Home Insights Emissions trading reform takes another step

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Contributed by: Emmeline Rushbrook, Hannah Bain and Jessica Hayman

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Published on: June 08, 2020

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On 2 June 2020, the Minister for Climate Change James Shaw announced several changes in relation to the Emissions Trading Scheme (ETS), illustrating the continued momentum of the Coalition Government on climate policy in spite of COVID-19 challenges.
 
There are three key components to the changes announced by Minister Shaw. These are:

  • The setting of a provisional emissions budget of 354 million tonnes of CO2 equivalent greenhouse gases in the 2021-2025 period. The Government has indicated that, while a provisional budget is being set in order to provide regulatory certainty and to allow auctioning to start in March 2021, future budgets will be set following advice from the Climate Change Commission (which is still in its infancy). This will include the budget for the 2022-2025 period, which is due to be set by 31 December 2021.

  • The introduction of a cap on carbon units over the period 2021-2025, which would limit carbon credits to 160 million tonnes of CO2 equivalent greenhouse gases over this period (excluding forestry units), with the per-year cap reducing over the period. This cap is expected to stimulate the carbon unit market, although the price of units will be constrained as set out below.

  • The introduction of new price controls for auctioning units. The price of units will be constrained between the newly-established price floor ($20) and ceiling (the "cost containment reserve") ($50). These price controls will increase with forecast inflation.

The cap and price floors and ceilings described above will be set through regulations, which Cabinet will promulgate after the Climate Change Response (Emissions Trading Reform) Bill has been passed.
 
The Bill went through the Committee of the whole House stage on 3 June 2020 and through a Supplementary Order Paper released on 2 June 2020, Minister Shaw proposed a number of substantial amendments to the Bill. For example:

  • The Bill previously sought the power to remove the fixed price option (which is the current "de-facto" price ceiling) by Order in Council (or by 1 January 2023 at the latest). The fixed price option will be extended for activities occurring in the 2020 year, in order to provide businesses with certainty about compliance costs. However, the fixed price will increase from $25 to $35, which will increase compliance costs in some cases.

  • The Government had planned to implement a number of policies to encourage participation in forestry by January 2022, including averaging accounting for post-1989 forests and the creation of a new permanent forestry activity in the ETS. The commencement of these policies will be delayed by a year to January 2023, which allows further time to develop the regulations required to govern those new policies. However, forests registered in 2022 will be able to choose whether to remain on stock change accounting (which requires a forester to return units to the government at each harvest cycle) or switch to averaging accounting (under which they will no longer be required to do so).

  • The Climate Change Commission's statutory deadlines for its preparation of the first three emissions budgets and the first emissions reduction plan can be extended by the Minister for Climate Change in some circumstances. This allowance has been made because of the disruption caused by COVID-19.

  • The new scheme for the surrender/repayment of units will be delayed for small forestry participants and will not apply to activities carried out before January 2023. 

  • The Bill will introduce cover for liabilities incurred through temporary adverse events (for example, fire) for all post-1989 forest land, with this policy being introduced on 1 January 2023. The effect of this will be that, for example, if a forest were destroyed in a storm, foresters will not be required to return units to the government, provided that the forest is re-established.

While law reform in some areas has been put on hold in light of COVID-19, the Government remains steadfast on its journey toward responding to climate change. 
 
This latest development is part of a wider picture of climate change action by the Government since 2018. This has extended to the proposed inclusion of climate change as a relevant matter for consideration under the Resource Management Act (see our article here). 
 
If you would like to discuss this in further detail, please get in touch with our experts.

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