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Talking points for Cabinet Economic Policy
Committee on Wednesday 1 May
Purpose
1. This aide memoire provides you with talking points, Q+As, a summary of feedback
addressed and responses to questions from Cabinet EXP Commit ee on 9 April 2024,
as well as a timeline of next steps to support your Cabinet
Economic Policy (ECO)
Commit ee meeting on the Cabinet paper: Approval to consult: Annual NZ ETS unit
settings and regulatory updates 2024, on Wednesday, 1 May.
Background
2. This paper was previously deferred at Cabinet EXP Committee on 9 April 2024. We
have attached feedback addressed and changes made in response following the
deferment in Appendix Two.
3. We have updated the Cabinet paper to support Cabinet consideration at ECO on 1
May to:
• include legal requirements around consultation
• increase clarity about ETS settings’ relationship with other strategic decisions
about climate change
• describe the relationship between ETS settings and Target 9
• simplify the description of the impacts of non-NZ ETS policies
• add a legal implications section
• use a more up-to-date NZU price and text about revenue impacts in the fiscal
impact section.
4. To support your meeting at ECO, we have structured the talking points attached as
Appendix One to focus on:
• legal requirements for consultation and timing of decisions
• preserving flexibility for final decision-making
• wider strategic decisions on climate change.
5. Further talking points provide more detail on specific topics if required, including
relationship to government priorities, legal implications, financial implications and
other regulatory updates.
6. New Zealand’s 2024 Greenhouse Gas Inventory was published on 18 April 2024. Due
to the recent release of this data, the new Inventory data has not been incorporated
into the consultation document. However, new Inventory data may be used to inform
final recommendations.
Next steps
7. Of icials wil be available to support your Cabinet ECO Commit ee discussion.
8. We expect to receive legal advice from Crown Law early next week to support you to
discuss legal requirements for consultation at ECO.
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9. Subject to Cabinet approval, the two consultation documents wil be published on 8
May 2024. Consultation wil close on 14 June. This consultation period is necessary
to ensure adequate consultation and is now expected to overlap with the consultation
on the second emissions reduction plan, which is currently planned to take place from
early June to mid-July.
10. The Government must make decisions on settings by the end of September.
Considering time needed for Cabinet process and drafting by the Parliamentary
Counsel Of ice, final approval from Cabinet to consult on this year’s set ing must be
obtained by 6 May.
11. We wil provide you with final policy advice following analysis of consultation
feedback, to support you to seek final policy agreement on updated ETS settings
from Cabinet in July.
Signatures
Mark Vink
General Manager – Markets Unit
Climate Change Mitigation and Resource Policy
24 April 2024
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Appendix One: Talking points and Q&As
Context
• The NZ ETS is the government’s key tool to ensure that we meet our climate commitments, as set
out in target nine.
• To support this, I seek Cabinet approval to release two consultation documents on:
— options for price and unit volume settings for the NZ ETS regulations; and
— routine technical changes to other NZ ETS regulations.
• I seek approval to start consultation in May to ensure final decisions can be made by the statutory
deadline of 30 September.
• Market participants are expecting consultation to begin shortly, as this is part of the regular annual
process. Further delays to consultation may increase market uncertainty.
Unit settings
• The Act requires the Government to update regulations for NZ ETS unit settings each year, for the
next five years.
• This annual update is critical to ensuring that the NZ ETS is aligned with emissions budgets and is
legally required under the Act.
• I have sought Crown Law advice on the legal requirements for unit settings consultation. The key
points are:
— Public consultation is explicitly required by the Act.
— I am required to consider, and need to be able to demonstrate that I have considered, the
Commission’s advice.
— I expect close scrutiny of these decisions. Consulting on the Commission’s advice reduces
the risk of successful legal challenge (following policy decisions).
— Any legal challenge is likely to create significant uncertainty for market participants, who rely
on settings decisions to plan investments.
• The consultation document therefore includes consideration of the Commission’s advice
alongside other options, including the status quo.
• The consultation document does not indicate preferences.
• Consulting on options and the Commission’s advice preserves flexibility for Cabinet decisions later
this year, following consideration of submissions.
Other NZ ETS regulations
• I am also seeking agreement to consult on technical and operational NZ ETS matters. As with unit
settings, no decisions are being sought on these updates now, only approval to publicly consult.
• Stakeholders expect annual updates to NZ ETS regulations. Some participants are actively
anticipating consultation and have been engaging with officials on some issues.
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• NZ ETS settings decisions next year (which will cover 2026-2030) will incorporate any decisions
made later this year on the second emissions reduction plan, which covers the same period.
How does the Commission’s advice compare to the current unit settings?
• The Commission recommends the fol owing changes from status quo settings:
— Reduce (by half) the auction volumes for 2025 to 2029, due to a significant estimated
increase in the NZU surplus. These surplus NZUs are held in private accounts and are surplus
to surrender requirements.
— Adjust the first two years of NZ ETS settings, which can only be adjusted in specific
circumstances.
• The Commission recommends retaining the existing amount of NZUs in the cost containment
reserve, and maintaining the current price control settings, with adjustments for inflation from
2027.
What are further options to proceed if Cabinet defers decisions to consult?
• If this committee does not come to a decision now, my options are to:
— Shorten the consultation period, which wil need to be supported by additional efforts to
ensure the consultation remains adequate and does not lead to increased market
uncertainty (the proposed consultation is already shorter than the standard 6 weeks,
currently proposed for 4 weeks)
— Prioritise the drafting of mandatory regulations changes by PCO, to ensure statutory
requirements are met. This may mean that some of the other routine updates are not
drafted in time to come into effect for 2024, and would need to be reconsidered next year.
• 9(2)(h)
Why are we not publishing the model ing underpinning the consultation document?
• The quality assurance panel assessed the proposals as “partially meets” because the modelling
underpinning the consultation document is not included and this may affect how wel submitters
understand the predicted impacts.
• The following information is available to submitters:
— A summary of MFE model ing results is provided in the consultation document and the NZ
ETS market model used for the analysis is available on the MFE website. This is the first time
this sort of analysis and information has been available as part of a settings consultation.
— The Commission’s modelling information is also available to submitters, including the
detailed spreadsheets they used to come to their recommendations.
• MFE are currently updating the modelling for the recently released inventory data, this can inform
final policy decisions.
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