BRF 5055 NZ ETS Settings and Regulatory updates 2024 Draft Cabinet paper Redacted.pdf

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NZ ETS Settings and Regulatory updates 2024: Draft
Cabinet paper
Key messages
1.  This briefing seeks your feedback on the attached draft Cabinet paper for New Zealand
Emissions Trading Scheme (NZ ETS) settings decisions and other regulatory updates
with a view to beginning Ministerial consultation at the end of this week. In parallel to
receiving your feedback, we will continue to refine the drafting and undertake quality
assurance.
2.  The attached paper has been drafted in line with your direction from our meeting with
you on Friday 11 July, discussing this year’s NZ ETS settings key issues and options
[BRF-4919 refers]. The paper:
i
includes three options:
i.  partial drawdown option
ii.  full drawdown option
iii.  9(2)(f)(iv)

ii
includes stakeholder feedback in table form as an Appendix to the Cabinet paper
(refer Appendix 2).
3.  We have presented the full drawdown option as your preferred option. We understood
this as likely to be your preferred approach, but welcome feedback on this once you
have reviewed the draft Cabinet paper.
4.  All options include our recommendation to retain existing price control settings (including
auction price floor, cost containment reserve price, and cost containment reserve
volumes) extended to 2029. All options also include our recommendation to allocate
emissions budgets to the NZ ETS using the status quo approach and using the 2024
Greenhouse Gas Inventory [BRF-4919 refers].
5.  All numbers are undergoing quality assurance, so there may be changes ahead of
Ministerial consultation commencing.
6.  In addition to including a summary of stakeholder feedback on key issues, we have also
attached a summary of recent market commentary on NZ ETS settings as Appendix 3
following your request at the meeting on Friday.
7.  We are continuing to work with Crown Law Office (CLO) on the accordance assessment
of the options. The summary of the assessment in the Cabinet paper is placeholder text
and is subject to change as we work through the assessment.
8.  We will attach a draft accordance assessment, outlining detailed analysis of the
probability of each option meeting emissions budgets and targets, to the next version of
the Cabinet paper that we provide to you, ahead of beginning Ministerial consultation.
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Recommendations
We recommend that you:
a.  note the attached draft Cabinet paper includes options that incorporate our
recommendations on key issues as described in BRF-4919
b.  provide feedback on the draft Cabinet paper, attached as Appendix One
c.  agree to include the full drawdown option as your preferred recommendation
Yes | No
d.  agree to begin Ministerial consultation on the draft Cabinet paper, incorporating your
feedback, from 19 July
Yes | No
Signatures

Mark Vink
Hon Simon WATTS
General Manager, Markets Unit
Minister of Climate Change
Climate Change Mitigation and

Resource Efficiency
Date
16 July 2024

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Appendix One: Draft Cabinet paper

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Appendix Two: Table of submissions on key questions by
sector

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Appendix Three: Summary of recent market commentary on
NZ ETS settings
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Summary of recent market commentary on ETS settings
Observation window June – July 2024, mainstream media and selected commentators
Summary
Market commentary regarding the Government’s upcoming decisions on NZ ETS settings has remained
consistent with the commentary following the initial release of the consultation document in May. Primary
concerns focus on the potential lowering of the price corridor, and whether the Government may take a
materially diﬀerent approach to the recommendations of the Climate Change Commission.
Commentary has shifted from speciﬁc focus on ETS settings to instead take a broader view on how upcoming
decisions will align with the Government’s overall climate strategy. In particular, the market is looking at the
upcoming release of the ERP2 discussion document as the next key signal for the direction of government
policy.
This commentary has focussed on two broad themes:
1.  The need for the Government to commit to policy decisions (including, in some areas, choosing not
to act) that start to build back conﬁdence in the NZU market.

2.  The Coalition’s internal dynamics, emphasising that the perception of a politicised NZ ETS poses a
risk to market stability.

Speciﬁc commentary examples
Kristen Green from Kapiti Climate Insights
Green, K. (2024b) ‘Uncertainty abounds in the NZ ETS’ , Kapiti Climate Insights (Substack), 10 June. Available at:
Uncertainty abounds in the NZ ETS - by Kristen Green (substack.com) (Accessed: 15 July 2024).
-  ‘I’ve seen speculation in the public domain that this second option (to lower the price corridor) could
have been inserted at the last minute to appease Coalition partners or prompted by a desire to
ensure revenue generation from auctions. Both of these conjectures seem credible.’

-  ‘Recent volatility in spot-market prices fol owing the auction is partly a response to the
Governmnent’s consultation itself, and the market has consistently demonstrated its volatility in
response to political signals. Therefore, with the ongoing surplus overhang in the NZ ETS, a lower
auction price ﬂoor does not guarantee that spot markets won’t plumb lower depths.’

-  ‘Considering that both the Commission and the Government have further annual decision points that
could be used to inject additional liquidity back into the market to oﬀset any failed auctions this year
(if necessary), my personal view is that maintaining the status quo auction price would lead to
healthier outcomes for the market.’

Christina Hood from Compass Climate:
Hood, C. (2024a) ‘Linkedin Commentary on NZ ETS to do lists’, Christina Hood (Linkedin post), 5 July. Available at: NZ ETS
– to list (Accessed: 15 July 2024).
Hood, C. (2024b) ‘Linkedin Commentary on NZ ETS settings process’, Christina Hood (Linkedin post), 1 July. Available at:
NZ ETS settings – reaction to proactive release of cabinet material (Accessed: 15 July 2024).

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-  ‘If there is conﬁdence in the overall direction of climate policy, then the fundamentals of supply and
demand wil  drive price to a greater extent.’

-  ‘Taking the Climate Change Commission’s advice on ETS settings – which would maintain the previous
strength of the ETS, not al ow it to be eroded.’

-  ‘The most striking story in the documents (OIA requested material re Cabinet approval of ETS settings
consultation) is that it took a long time for the Minister to get this consultation document through
Cabinet.’

-  ‘The decision on auction settings wil  be going through Cabinet in July/August ahead of the 30
September deadline. But before then the ERP2 consultation wil  have been released, which wil
hopefully give more clarity on the Government’s direction for the ETS.’

Nigel Brunel from Carbon News:

Brunel, N. (2024) ‘Govt must not lower ETS auction ﬂoor price’, Carbon News, 11 July. Available at: Govt must not lower
ETS auction ﬂoor price - Carbon News (Accessed: 15 July 2024).
-  ‘It takes years to develop a market that can be self-sustaining. Many attempts fail. The architecture is
complex but the number one building block of any market is conﬁdence. Conﬁdence that there won’t
be any structural surprises that question the integrity of the market itself.’

-  ‘The NZU market has been lurching ever since Labour blinked three years ago and went against the
Commission’s recommendations. It needs to be put back into balance by doing absolutely nothing
more at the moment. Conﬁdence and certainty need to be restored.’

-  ‘Do not lower the price ﬂoor. There is no rational reason to lower it. If we do – that wil  almost
guarantee destroying any conﬁdence that is left.’

-  ‘If current settings (and projected paths) are left alone, it wil  allow the market to continue its reset.
This means, most likely, the rest of the auctions this year won’t clear entirely. Prices wil  start to rise
as conﬁdence returns – most likely towards the 2025 ﬂoor if not above, which means the Government
wil  start to get its revenue.’

Richard Lauder – Independent ETS Commentator
Lauder, R. (2024) ‘ Linkedin Commentary post second NZ ETS auctions’, Richard Lauder (Linkedin post), 2 July. Available
at: NZ ETS – post second auction commentary (Accessed: 15 July 2024).
-  ‘Political certainty via communications is just as important as any structural change. Without both a
restructure and political certainty, I don’t believe the NZ ETS wil  deliver the behaviour our
government desires in GHG emissions reductions.’

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