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Talking points for your Cabinet Expenditure and
Regulatory Review Committee on Tuesday 9 April
Purpose
1. This aide memoire provides you with talking points and Q+As to support your Cabinet
Expenditure and Regulatory Review (ERR) Committee meeting on the Cabinet paper:
Approval to consult: Annual NZ ETS unit settings and regulatory updates 2024, on
Tuesday 9 April.
Background
2. You are seeking Cabinet approval to publicly consult on 2024 Annual NZ ETS unit
settings and regulatory updates. There are two consultation documents.
3. The first consultation document is the NZ ETS unit settings consultation document. It
seeks feedback on options to update unit settings for the next five years (2025 to 2029),
including those recommended by the Climate Change Commission (the Commission).
9(2)(f)(iv)
4. Topics that may be raised at your Cabinet meeting include the potential fiscal impact of
the Commission’s recommendations, and the impact updating unit settings could have
on NZU price.
5. The second consultation document is the NZ ETS regulatory updates consultation
document, which presents a range of routine technical updates to ensure that the
scheme is accurate, efficient, and up to date.
6. The only policy proposal in this consultation document that is not routine is the proposed
change to the management of unsold auction units, which will be of interest to market
participants.
7. Based on above, we have attached talking points and Q+As to support your Cabinet
ERR meeting as
Appendix One.
Next steps
8. We are continuing to work with the Ministry for Primary Industries on minor amendments
to the wording of the NZ ETS unit settings consultation document following lodgement.
These changes will not affect your seeking approval from Cabinet.
9. Officials will be available to support your Cabinet ERR Committee discussion.
10. Subject to Cabinet approval, the two consultation documents will be published on 17
April 2024. Consultation will close on 24 May. This consultation period is not expected to
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overlap with the consultation on the second Emissions Reduction Plan, which is
currently planned to take place from early June to mid-July.
11. We will provide you with final policy advice following analysis of consultation feedback,
to support your seeking final policy agreement from Cabinet in July.
Signatures
Mark Vink
General Manage
Climate Change Mitigation and Resource Efficiency
08/04/2024
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Appendix One: Suggested talking points and Q+As
Suggested talking points
• I seek Cabinet approval to publish two public consultation documents for annual updates
to the NZ ETS.
• Consulting on both annual updates to ETS unit settings and other ETS regulatory
updates together now supports better engagement from the public, greater efficiency,
and enables changes to be made before the statutory deadline, which is the end of
September.
• Public consultation is a mandatory legal requirement before any changes to NZ ETS
regulations can be made.
Annual update to NZ ETS unit settings
• The first consultation document presents options to update ETS unit limits and price
control settings for the next five years.
• I am seeking approval now because these updates must be prescribed in regulations by
the end of September this year, to make sure there is a five-year look ahead window to
provide regulatory certainty to market participants. This helps support confidence and
stability in the market.
• I have not indicated preferred options in this consultation document.
• Options presented in this document include the Climate Change Commission’s (the
Commission) recommendations (as published in March), as the Government must
consider advice from the Commission.
• I am seeking Cabinet decisions to progress with consultation only. Following
consideration of consultation feedback, I will return to seek Cabinet final policy decisions
in July.
• I will seek Cabinet decisions to consult on the second Emissions Reduction Plan, and
Cabinet decisions on the strategy for achieving New Zealand’s Nationally Determined
Contribution in the coming months. I will also consider responding to advice provided by
the Commission (as announced for consultation last night) which includes the fourth
emissions budget and the 2050 target.
• Any implications of these decisions and advice will feed into future decisions on NZ ETS
Unit Settings.
Other NZ ETS regulatory updates
• The second consultation document presents a package of routine technical updates to
ensure that the scheme is accurate, efficient, and up to date.
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• I seek delegation from Cabinet to issue drafting instructions on purely technical matters
for future years. This delegation still gives Cabinet the opportunity to review amended
regulations.
• The only policy proposal that is not routine is to change the way unsold auction units are
managed.
Q&As
How does the Commission’s recommendations compare to the current NZ ETS unit
settings?
• The main changes to the current settings from the Commission’s recommendations are
to:
o Significantly reduce (by half) the auction volumes for 2025 to 2029 from the volumes
that are currently in regulations, due to the significant increase in the Commission’s
new surplus estimates.
o Adjust the first two years of NZ ETS settings, which can only be adjusted in specific
circumstances.
• The Commission recommended retaining the existing amount of NZU in the cost
containment reserve, and maintaining the current price control settings, with adjustment
to inflation from 2027.
What is the fiscal impact of the Commission’s recommendations?
• NZ ETS auctions provide revenue-neutral cash inflow. Cash inflow from auctions are
matched by a liability on the Crown’s balance sheet.
• This means ETS auctions do not generate revenue, and therefore do not directly impact
the operating balance, but do have an impact on net debt as auctions raise cash.
• Based on the NZU price of $73.85 at the end of January 2024 (the NZU priced used for
March Baseline Update), the current NZ ETS unit settings means auctioning could
provide cash receipts of $3.693 billion over 2023/24 to 2027/28.
• The Commission’s recommended auction volume could reduce those cash receipts to
$2.352 billion (a difference of approximately $1.3 billion).
• I will present the fiscal impact of proposed updates to unit settings when I return to
Cabinet seeking final agreement in July, following consideration of consultation
feedback.
What is the impact updating settings would have on NZU price?
• Unit settings, including auction price controls, affect supply and demand, and indirectly
influence secondary market prices.
• The Commission recommended significantly reducing (by half) the auction volumes for
2025 to 2029 from the volumes that are currently in regulations. This would reduce
supply at auctions. 9(2)(g)(i)
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