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Progressing consultation on NZ ETS settings
1. This briefing responds to 9(2)(g)(i)
2. This briefing seeks your feedback on proposed approach to revising this Cabinet paper
and consultation document for settings, and NZ ETS settings consultation document,
and agreement to the timeframe for next steps.
The relationship between decisions on NZ ETS settings and the Government’s climate
change objective (Government target 9)
3. The Government has commit ed to reducing net greenhouse gas emissions in line with
emissions budgets under the Climate Change Response Act 2002 (the Act) and
described in Government Target 9.
1
4. The New Zealand Emissions Trading Scheme (NZ ETS) is the Government’s key tool for
meeting those targets. NZ ETS unit limits and price control settings for auctions
(NZ ETS settings) are reviewed every year to ensure the NZ ETS is working as well as it
can to achieve emissions reductions targets – emissions budgets, New Zealand’s
nationally determined contributions under the Paris Agreement (NDCs), and the 2050
target under the Act.
5. NZ ETS settings provide a five-year lookahead period for NZ ETS participants. This was
established to provide some regulatory certainty to support participants in their business
planning and decarbonisation decisions. This is balanced with flexibility for the
Government to update the settings in response to changing circumstances.
6. NZ ETS market participants expect consultation to begin shortly. This was noted in your
press release following the tabling of the Climate Change Commission’s (‘the
Commission’) settings advice
2. Market commentators have also recently reported that
they expect consultation to begin shortly.
Minimum legal requirements: NZ ETS settings must follow a statutory process and
accord with emissions budgets, NDCs, and the 2050 target
7. The Act sets out a number of legal requirements for the annual NZ ETS settings
amendments. These include:
i
the requirement to consult on proposed settings; and
ii the requirement to consider a range of mandatory matters including the
Commission’s advice.
8. The Act’s central legal requirement is for the Minister of Climate Change (‘the Minister’)
to be satisfied that the NZ ETS settings are in ‘strict accordance’ with emissions
1 Government Target 9 is to be on track to meet New Zealand’s 2050 net zero climate change targets,
with total net emissions of no more than 290 megatonnes from 2022 to 2025 and 305 megatonnes
from 2026 to 2030
2 Commission’s advice on ETS settings tabled | Beehive.govt.nz
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budgets, NDCs, and the 2050 target. Or, if settings are not in strict accordance with
achieving budgets or NDCs
3, the Minister must be satisfied that any departure is justified
with reference to considerations listed in the Act. Collectively, these are the Act’s
‘accordance tests’.
9. We have attached a more detailed summary as
Appendix 1.
How the Commission’s advice relates to the minimum legal requirements
10. The Commission’s advice and recommendations on NZ ETS settings must satisfy the
same accordance tests.
11. Of icials have assessed the Commission’s recommendations for the 2024 NZ ETS
settings and our initial assessment is that they constitute a viable option that is likely to
meet the accordance tests.
12. Under the Act, you do not have to consult on the Commission’s recommendations. You
also do not have to accept the Commission’s recommendations; you are only required to
consider them.
13. However, consulting on the Commission’s recommendations shows that you have
considered them and have met this legal requirement. Providing the Commission’s
recommendations in the consultation material also helps to ensure submit ers have
access to the relevant information. 9(2)(h)
14. There are likely to be other NZ ETS settings options included in the consultation
document that meet the accordance tests, albeit with less certainty than the
Commission’s recommendations. If you choose to consult on (or ultimately adopt) other
options for NZ ETS settings, you must have good reasons to be satisfied that the
accordance tests are still met. The Act also requires you to table a report in Parliament
explaining any differences between the Commission’s recommendations and your
chosen settings.
9(2)(h)
3 Settings must always be in strict accordance with achieving the 2050 target
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18.9(2)(h)
The timing of this year’s NZ ETS settings process does not align with forthcoming
strategic decisions on how New Zealand intends to meet its climate change targets
21. Strategic decisions, 9(2)(f)(iv)
and the second emissions reduction plan
are progressing on their own respective timelines. However, currently, they are both
behind this year’s NZ ETS settings decision timelines.
22. This is because the Government must make decisions on settings by the end of
September. Taking into account time needed for Cabinet process and drafting by the
Parliamentary Counsel Of ice, final approval from Cabinet to consult on this year’s
setting must be obtained by 6 May. We have attached this timeframe as
Appendix two.
23. This means the approval to consult on NZ ETS settings Cabinet paper wil likely be the
first Cabinet paper relating to the NZ ETS to be considered by Cabinet with Cabinet
papers regarding the NDC and the second emissions reduction plan likely to follow (on
current timelines). 9(2)(g)(i)
24. Based on the current timeline, the tail end of NZ ETS settings consultation wil overlap
with the beginning of the consultation on the second emissions reduction plan, which is
expected to take place from mid-June.
25. We have considered if there were any alternative timelines for NZ ETS settings that
could enable settings to be considered within the wider strategic context this year. We
do not consider there is a viable alternative, given the legal requirements prescribed in
the Act. However, the Government wil be able to make decisions on NZ ETS settings
next year that incorporate the outcome of these strategic decisions.
Proposed approach to revise the Cabinet paper and consultation document to address
feedback from Cabinet Committee
26. To support you to seek approval from Cabinet to begin consultation on this year’s
settings, we propose to redraft the Cabinet paper to make it clear the legal requirements
for consultation. We will also redraft to be clear that while we recommend the
consultation document include the Commission’s recommendations, the Minster (with
agreement from Cabinet) has ultimate decision-making authority to determine NZ ETS
settings (subject to the legal requirements of the Act). We seek your feedback on this
proposed approach.
27. We also seek your approval on the attached timeframe on next steps (attached as
Appendix Two), which would enable regulations for NZ ETS settings to be made prior to
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30 September 2024. This timeframe is now very tight and there is a risk that there may
not be sufficient drafting time for the range of amendments proposed across both
consultation documents. Options for reducing the scope of the optional amendments to
regulations may need to be considered following consultation to ensure the mandatory
NZ ETS settings updates are able to be made by this statutory deadline.
28. If you agree, we wil send you a revised Cabinet paper in the week beginning 15 April for
you to start Ministerial consultation.
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Recommendations
We recommend that you:
a.
note the Act - through its ‘accordance tests’ in section 30GC - requires the Minister to be
satisfied that NZ ETS settings align with the achievement of emissions budgets, NDCs,
and the 2050 target
b.
note the Commission’s recommended settings were developed to satisfy the accordance
tests, and officials’ initial assessment is that they are likely to do so
c.
note officials consider other options included in the consultation document could also
meet the tests if supported by good evidence
d.
provide feedback to proposed approach to revise the Cabinet paper and the
consultation document, as outlined in this briefing
e.
agree to include the Commission’s recommendations as an option in the discussion
document
Yes | No
f.
note that Cabinet approval to consult on this year’s settings must be obtained by 6 May
to enable regulations to be made by the end of September
g.
agree to proposed timeline as outlined in
Appendix Two
Yes | No
h.
note the legally mandated deadline for settings means Cabinet wil not be able to
consider settings in the strategic context for achieving Government Target 9 this year
i.
forward this briefing to the Associate Minister of Climate Change.
Yes | No
Signatures
Mark Vink
Hon Simon WATTS
General Manager
Minister of Climate Change
Climate Change Mitigation and Resource
Efficiency
Date
11 April 2024
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Appendix 1: summary of key legal requirements for the NZ
ETS settings process
29. The Act governs the NZ ETS settings process, requiring the Minister to make regulations
to ensure set ings are always in place for each of the next five years
4. The Minister must
therefore make amendment regulations annually to add new settings for the next year in
the five-year sequence (in this case, 2029).
30. The Minister:
i
must also consider whether to amend settings for the two years before that (in this
case, 2027 and 2028); and
ii may amend settings for either or both of the two years before
those (2025 and 2026)
if price controls in the current year (2024) have been tiggered, or if prescribed
exceptional circumstances apply.
31. When making the regulations, the Minister must be satisfied
5 that either the settings
‘strictly accord with’ any emissions budgets, NDCs, and the 2050 target, or - if the
settings do not strictly accord with budgets or NDCs - any departure is justified by
reference to prescribed matters (see paragraph 30). Any departure must stil ‘generally
accord’ with emissions budgets and NDCs. Strict accordance with the 2050 target is
always required.
32. 9(2)(h)
33. When assessing NZ ETS settings in light of the accordance tests, the Minister must
consider the following prescribed matters:
6
i
Projected emissions trends for the next 5 years (for both NZ ETS and non-NZ ETS
emissions).
ii The proper functioning of the NZ ETS.
iii New Zealand’s international climate change obligations and any agreements to
access the carbon markets of other jurisdictions.
iv The forecast availability and cost of ways to reduce greenhouse gas emissions.
v The Commission’s advice and recommendations.
vi Any other relevant matter.
4 Section 30GB(3) of the Act
5 9(2)(h)
6 Section 30GC(5) and (6)
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vii The impact of emissions prices on households and the economy (*price control
settings only).
viii International emissions prices (*price control settings only).
ix Inflation (*price control settings only).
34. The Act requires consultation on the proposed settings with anyone likely to be
substantially affected
7. 9(2)(h)
35. The Minister must prepare, publish, and present a report to the House of
Representatives explaining any dif erences between the Commission’s advice and final
decisions on NZ ETS settings
8.
7 Section 3B of the Act
8 Section 30GC(7) of the Act
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