Government agrees to nudge up ETS auction reserve price, lower unit cap

The Government has agreed to nudge up the auction reserve price of New Zealand’s key emissions-curbing tool, bringing settings closer to what our independent Climate Change Commission advised. Photo / NZME

The Government has agreed to nudge up the Emissions Trading Scheme’s auction reserve price following a successful legal challenge, bringing settings of the key tool closer to what our independent Climate Change Commission advised.

It’s also decided to raise trigger prices for the cost containment reserve in the scheme, while lowering the cap on the number of the units that can be auctioned within the system over the next five years.

That meant there’d be some 17.6 million fewer units to be auctioned, encouraging unit holders to use what they’d stockpiled over time.

The changes, kicking in at auction on December 6, will come with the introduction of a two-tier cost containment reserve (CCR) trigger price, with the Tier 1 price rising from $82 to $173.

“The CCR is a mechanism designed to keep the carbon price from rising too high,” Climate Change Minister James Shaw said.

“We believe the new settings will prevent market participants from trying to hit the ceiling price, thus releasing more units, and will instead allow the market to operate in a more sophisticated manner.”

Auction price floor settings, meanwhile, would rise from the current level of $33.06 to $60 in December.

Shaw said the new settings would help New Zealand meet its domestic and international climate targets, while putting policy in “lock step” with recent advice given by the commission.

The ETS works by requiring companies in the scheme to match each unit (NZU) of emissions they report with an allowance, or credits, they must pay to the Government.

People who plant forests, meanwhile, can report the carbon dioxide they take out of the air and claim credits, which they can sell, thus creating a trading market and an incentive to lower emissions.

Shaw said annual reviews of the unit settings and price control limits provide an important opportunity to ensure the settings were fit for purpose.

He expected any short-term impacts of the latest reset on living costs would be “minimal.

“Modelling shows that an increase of $10 per NZU will increase average annual household costs by about $1.67 per week,” he said.

“For lower-income households, the increase is estimated at $0.88 to 0.95 per week.”

The Government had been prompted to take another look at its 2022 unit limits and price controls after losing a judicial review launched by the group Lawyers for Climate Action New Zealand Incorporated (LCANZI).

“The judicial review was about the process followed for the 2022 NZ ETS settings decisions, not the decisions themselves,” he said.

“The government accepts there were deficiencies in the process and has moved quickly to fix them.”

LCANZI president Bronwyn Carruthers KC welcomed the decision.

“It is vital that the ETS settings are made in accordance with our emissions budgets and not out of political concerns about the ETS price going too high,” she said in a statement released this morning.

“The ETS is an important tool for pricing emissions and meeting our emissions reduction targets, but to do so it has to be operated in line with those targets.”

“The amendments mean that the supply of units will now be in accordance with our emissions budgets, and the changes will help reduce the large stockpile of existing units.”

“We would particularly like to applaud the Government’s willingness to front up to the mistakes that were made last December, and to correct them in a timely way.”

Dr Sebastian Gehricke, director of Otago University’s Climate and Energy Finance Group, was hopeful the changes were an indication of the Government keeping its decisions more in line with the commission’s advice, “even when that decision is hard.

“We cannot price emissions without the cost of emitting activities increasing,” Gehricke said.

“It will be interesting to see how this feeds into the ETS review currently under consultation and how the issue of exotic forests in the ETS is addressed.”