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Progressing NZ ETS market governance - Approval
to lodge Cabinet paper
Key messages
1. On 23 June 2023 Cabinet agreed:
i
in principle that a centralised exchange should be compulsory and directed officials
to begin a Request for Proposal process with a report back to Cabinet, to procure a
centralised exchange.
2. Cabinet also agreed to:
i
amend legislation to enable the Register/Environmental Protection Authority (as
applicable) to publish or share certain market information already collected and
require account holders to provide more information when NZUs (New Zealand Unit)
are traded;
ii establish an education campaign for all people interacting with the NZU market; and
iii treat NZUs as a financial product for the purposes of Part 2 of the Financial Markets
Conduct Act (FMCA) and add regulation-making power to the FMCA [DEV-23-MIN-
0135 refers].
3. Subsequently, you have decided not to progress the procurement of a centralised
exchange and clearinghouse [BRF-4290 refers].
4. The attached Cabinet paper reflects your decision not to progress procurement of an
exchange and notes the refreshed agenda and on-going focus of the market governance
work programme as:
i
proposals to enable the Financial Markets Authority to monitor and enforce rules
that prohibit misleading and deceptive conduct within the NZU market;
ii improving how the government collects and reports New Zealand Unit transaction
information;
iii options to undertake market monitoring and consideration of associated risks; and
iv developing an information initiative for the NZU market.
5. The Department of the Prime Minister and Cabinet, Ministry of Business, Innovation and
Employment, Ministry for Primary Industries, Treasury, Environmental Protection
Authority and Financial Markets Authority were consulted on the Cabinet paper, and
their feedback was incorporated.
6. We propose that the paper go to Cabinet Economic Policy Committee on 22 May 2024.
We recommend that you lodge the paper on 16 May 2024. The paper wil go to Cabinet
on 27 May 2024.
BRF-4609
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Recommendations
We recommend that you:
a.
Agree to provide feedback on changes to the draft Cabinet paper (Appendix 1) to of icials
by Monday, 6 May.
Yes | No
b.
Agree to aim for Cabinet consideration of the paper on 27 May 2024. Note the following
steps to lodging the Cabinet paper for Economic Policy Commit ee and Cabinet
consideration:
i. 6 to 10 May: Ministerial consultation;
ii. 16 May: Cabinet paper lodgement;
iii. 22 May: Economic Policy Committee; and
iv. 27 May: Cabinet consideration.
Yes | No
Signatures
Mark Vink
Executive Director, Markets
Climate Change Mitigation and Resource Efficiency
24/04/2024
Hon Simon WATTS
Minister of Climate Change
/05/2024
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Appendix 1: Cabinet paper
BRF-4609
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Policy and Privacy
Sensitive
Office of the Minister of Climate Change
ECO - Cabinet Economic Policy Committee
Progressing NZ ETS market governance
Proposal
1
This paper outlines my intent to make changes to the work programme to improve the
market governance of the New Zealand Emissions Trading Scheme (NZ ETS). As part
of these changes, I have decided not to progress with the previous Government’s
intention to procure a centralised exchange and clearinghouse for the NZ ETS
secondary market (NZU market). I am seeking to inform Cabinet of the refreshed
market governance work programme, after which I intend to make a public
announcement on these updates.
Relation to government priorities
2
One of the nine stated targets of the Coalition Government is to reduce net greenhouse
gas emissions, putting New Zealand on track to meet its 2050 net zero climate change
targets. The National Party’s manifesto states that ‘the ETS is the main tool for
reducing New Zealand’s net emissions’. It commits to ‘ensure professional
management and oversight of the ETS and introduce appropriate market regulations’.
Ensuring that the market governance of the Scheme is robust and fit for purpose is
essential.
Background
3
The previous Government agreed to progress work to enhance the market governance
of the NZ ETS [DEV-23-MIN-0135, CAB-23-MIN-0280 refers]. The central aim of this
work was to address the lack of governance and oversight of the NZU market.
4
I note the following key decisions from this time:
4.1
Directing of icials to begin a Request for Proposal (RFP) process to procure a
centrally cleared, optional to use exchange and associated market
infrastructure, with an associated fiscal cost of an initial $10 mil ion and ongoing
costs of $5 mil ion per annum;
4.2
Agreeing to make necessary amendments to the Climate Change Response
Act 2002 (CCRA) and other relevant legislation, such as the Financial Markets
Conduct Act 2013 (FMCA) to enable the collection of better information and
enhanced oversight of the market;
4.3
Agreeing to progress an ‘education campaign’ for all people interacting with the
NZU market.
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Analysis
5
I consider the market governance work programme to be a core component of the
Coalition Government’s approach to the NZ ETS. Establishing the conditions for a
strong and stable NZ ETS, including the NZU market, will be essential to achieving our
near and longer-term emissions reduction goals.
Refreshed work programme
6
I have decided to make changes to the market governance work. Of the changes, the
most consequential is the decision to not progress the procurement of an exchange
and clearinghouse for the NZU market.
7
The details of the refreshed work programme are set out below. This refreshed work
wil progress in consultation with the Minister of Commerce and Consumer Af airs and
the Minister of Forestry.
8
In line with previous directives, I intend to report to Cabinet on the progress of the
market governance project in the middle of this year. This report-back will include
comprehensive supporting details and wil seek Cabinet approval on specific initiatives.
Decision to not procure an exchange and clearinghouse for the NZU market
9
Previous Cabinet decisions to initiate an RFP process for the procurement of an
exchange and clearinghouse were intended to improve transparency and oversight,
alongside assisting the general development of the NZU market.
10
I agree that transparency and oversight of the NZU market must be improved;
however, I consider the most immediate improvements to the market governance of
the NZU market are best delivered through other targeted measures as discussed
below.
11
The procurement and ongoing operational costs associated with an exchange would
be considerable. Moreover, a voluntary exchange, which participants can choose not
to use, may not address the underlying issues facing the market. Alternatively, a
mandatory exchange would risk disrupting the existing platform providers. I believe a
staged approach to market governance is prudent and in line with our fiscal goals. An
exchange could be considered at a later stage after the impact of the targeted
measures is evaluated.
Decision to direct officials to advise on the adoption of stronger transaction reporting
12
A key component of the market governance programme is considering how to improve
the transparency of trading information in the NZU market. Currently, there is weak
transparency of this information which affects both the ability for participants to make
informed trading decisions and for the government to detect market misconduct. I have
directed officials to investigate options for capturing information about all trades
relating to NZUs.
Decision to develop enhanced standards and oversight of the NZU market
13
Currently, there is no framework for acceptable conduct in the market and no dedicated
monitoring of the market, creating market manipulation risks and the potential for
market failure. I have instructed officials to consider measures and provide advice on
options for market monitoring and to consider the associated risks, including proposals
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to enable the Financial Markets Authority to monitor and enforce rules that prohibit
misleading and deceptive conduct within the NZU market. I have also asked officials
to explore opportunities with trading platform operators and potentially other market
participants about what can be achieved voluntarily.
Decision to develop an information initiative for the NZU market
14
The NZ ETS and the NZU market are complex. Some current and prospective
participants in the market may not fully comprehend how the market operates or the
extent of risk they are exposed to when trading. Accordingly, I have instructed officials
to progress with an information initiative. It will aim to provide clearer and more
consolidated information for NZU market participants and the wider public about the
NZU market and government decisions that could affect it. Providing clear information
on how the NZU market operates and what risks are involved is a cost-effective way
to improve its efficiency and social licence, and participant understanding.
Implications
15
There are no cost-of-living, population, or human rights implications associated with
these decisions regarding the market governance programme.
16
The estimated upfront cost of $10 mil ion for the procurement of a centralised
exchange and clearinghouse, alongside $5 mil ion per annum ongoing will not be
required. I wil provide further information regarding the fiscal implications of the market
governance work programme, including the existing Tagged Contingency, following
the 30 May Budget Economic and Fiscal Update (Budget 2024).
17
I wil provide detailed advice on the legislative and Treaty implications for this work
when I report back to Cabinet on this work in August 2024.
Consultation
18
Public consultation on the direction of market governance took place at the end of
2022. I do not consider further consultation to be necessary at this stage. However, I
have asked officials to complete targeted engagement with stakeholders on specific
aspects of the work programme and we will follow-up on points raised by submitters in
the last round of engagement.
19
The Department of the Prime Minister and Cabinet, Ministry of Business, Innovation
and Employment, Ministry for Primary Industries, Treasury, Environmental Protection
Authority and Financial Markets Authority were consulted on this paper, and their
feedback was incorporated.
Communications
20
Feedback from the 2022 consultation indicated broad support for enhancements to
market governance. Since the RFP process and the previous Government’s decisions
related to the market governance work programme, no public announcements on this
work have been made. I anticipate that NZU market participants and the respondents
to the previous RFP process are expecting an update on the status of this work.
21
Following Cabinet consideration of this paper, I propose to publicly announce the
refreshed work programme for Market Governance including the decision to not
progress the procurement of an exchange and clearinghouse for the NZ ETS market.
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22
I propose that the announcement occur via press release, with scheduling set for
outside of market trading hours, and after Budget 2024. Respondents to the previous
RFP for the exchange and clearinghouse wil be contacted.
Proactive Release
23
This paper wil be proactively released following the public announcement.
Recommendations
1
Note the market governance programme wil improve information transparency, and
the integrity and efficiency of the NZU market. This wil foster confident and informed
participation, and ultimately strengthen the NZ ETS as a tool to support the Coalition
Government’s climate change goals.
2
Note Ministers wil not progress work on a procurement of a government-provided
exchange and clearinghouse.
3
Note the refreshed market governance
work programme wil include:
3.1
Proposals to enable the Financial Markets Authority to monitor and enforce
rules that prohibit misleading and deceptive conduct within the NZU market;
3.2
Improving how the government collects and reports NZU transaction
information;
3.3
Options to undertake market monitoring and consider associated risks; and
3.4
Developing an information initiative for the NZU market.
4
Note the above work programme wil progress in collaboration with the Minister of
Commerce and Consumer Af airs, and the Minister of Forestry.
5
Note my intent to make a public announcement via press release on the market
governance work programme.
6
Note I have instructed my officials to undertake targeted engagement on specific
aspects of the work programme and follow-up on points raised by submit ers in the
last round of engagement.
7
Note I wil report back to Cabinet on the progress of this work in August 2024.
Hon Simon Watts
Minister of Climate Change
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