Govt leaves door open for higher emissions price cap

Friday 14th December 2018

The government appears to have left the door open for an increase in emission prices before it moves to regular auctions of emission units in 2020.

Acting Climate Change Minister Julie Anne Genter this week confirmed the current $25 cap will apply as the fixed-price option for next year’s surrenders – those relating to 2018 emissions.

But the government was silent on the price that will apply for surrenders due in 2020 for emissions generated during the coming year, or the process it will use for setting that.

Today, Ministry for the Environment staff said they were unable to offer more detail beyond that announced by Genter on Wednesday.

The consultation paper the ministry issued in August stated that a fixed-price option would remain in place until at least 2020 but also noted that $25 may not be appropriate throughout that period.

Wednesday’s announcement on the ministry’s website makes no specific comment on plans for 2020 surrenders. Under the ETS, emitters have the option of paying the ceiling price rather than buying units from other participants.

“The government has agreed that several considerations must be taken into account when setting the future price ceiling level, including international emissions prices and impacts on households,” the ministry said.

Spot NZ units were recently trading at $24.85. April 2019 contract prices were at $25.15, while those for 2020 and 2021 were at $26 and $26.95 respectively, according to OMF.

The government, having made political hay from the record fuel prices in September, appears to be considering its next moves on the ETS carefully, given the impact the changes will have on petrol, electricity and gas prices, and transport and freight costs more generally.

The move to auctions – intended to cap the volume of units available, keep them consistent with international prices, and align their availability with the country’s emission budgets – was widely supported by submitters.

They will be single-round, sealed bid auctions, with participants paying a uniform clearing price. They will also include a cost containment reserve as a replacement for the current $25 cap.

But their frequency - monthly or quarterly – is yet to be settled. Regulations to set the volume of units available in the reserve, and the trigger price for releasing them, are also still to be prepared.

The government also repeated its intention to retain the option of including high-quality international units in the ETS in future, but appears to have made no decision on whether participants can buy them directly, or whether the government would buy them and then auction a matching volume of NZUs.

A limit would be placed on their use, and they would only be used in a way that maintains incentives for domestic abatement, the ministry noted this week.

Another key decision deferred until next year is the phasing down of free emission allocations for high-emitting, trade-exposed industries like steel, aluminium and methanol production.

The government has been considering phasing down the allocations – set a decade ago – to better reflect firms’ improving emissions intensity. Leaving the allocations at current levels would be more generous than needed and would also use up a lot of the country’s emissions budget out to 2030, putting additional costs on other sectors.

Currently, 143 million units are expected to be allocated free to industry from 2021 to 2030. That would leave only about 44 million units available for auction during the same period.

Officials previously noted that many submitters on the changes favoured a decision-making process to determine the pace of any reductions across the 26 industrial activities covered by the allocations.

The suggested option of 1 to 3 percent annual reductions was considered too blunt a tool, given the varying technological options different industries had, and the varying risk of carbon leakage depending on whether rival producers operated in jurisdictions with less stringent controls.

(BusinessDesk)

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