Climate Change Response (Auction Price) Amendment Bill

Thank you, Madam Speaker. I present a legislative statement on the Climate Change Response (Auction Price) Amendment Bill.

ASSISTANT SPEAKER (Hon Jenny Salesa): That legislative statement is published under the authority of the House and can be found on the Parliament website.

I move, That the Climate Change Response (Auction Price) Amendment Bill be now read a first time. I nominate the Environment Committee to consider the bill. At the appropriate time I intend to move that the bill be reported to the House by 4 March 2021 and that the committee have authority to meet at any time while the House is sitting (except during oral questions), during an evening on a day on which there has been a sitting of the House, on a Friday in a week in which there has been a sitting of the House, and outside the Wellington area, despite Standing Orders 193, 195, and 196(1)(b) and (c).

E te Māngai tēnā koe. Tēnā koutou e te Whare. This bill amends the Climate Change Response Act 2002 and the Climate Change (Auctions, Limits, and Price Controls for Units) Regulations 2020. Its purpose is to ensure that when the emissions trading scheme (ETS) units are auctioned for the first time next month, that they are sold at a price that reflects activity in the secondary market. It is a technical but necessary amendment that will help to create a more reliable carbon price signal and help ETS participants to make long-term investment decisions.

To reduce greenhouse gases in the most cost-effective way, there needs to be a sufficient and a predictable price on emissions. To that end, you will recall that legislation to reform the New Zealand emissions trading scheme passed through this House last year. Of the changes made, one of the most important was the introduction of a cap on the total emissions allowed within the scheme. Prior to this, Aotearoa New Zealand, somewhat absurdly, had a cap-and-trade scheme without a cap, meaning that the emissions permitted under the scheme were, effectively, unlimited. Because of this anomaly coupled with open access to a glut of cheap international units, many of which had little or no environmental integrity, the New Zealand ETS had failed to deliver on its primary purpose, namely to bring down emissions. By putting in place an emissions cap and amending the principal Act to align with New Zealand’s contribution to meeting the goal of limiting average global temperature increases to 1.5 degrees Celsius, we have now changed that.

We’ve also changed the way that some ETS units will be allocated, by introducing a set of rules for auctioning, which is what brings me to the purpose of the bill that we’re here to debate today. Over the course of 2021, we expect that a total of 19 million New Zealand units (NZUs) will be auctioned through the emissions trading scheme. The availability of these units will be spread evenly across four scheduled auctions, the first of which will take place next month on 17 March. If these auctions are to create a long-term, well-defined, and transparent framework for the efficient allocation of units, which is what we intend, especially as the pre-allocations of units is phased out, and if auctions are to encourage investment in low-emissions technologies, which the Climate Change Commission made clear last week are urgently needed, then these auctions will need to operate within certain parameters. That is why the $25 fixed-price auction, which was always meant to be temporary but has ended up as an artificially low ceiling on the cost of emissions, has been replaced with both a price floor and a cost containment reserve.

Working in tandem, these mechanisms will help to stop the price of emissions getting either too low or too high. They’ll work like this: if, when an auction takes place, the clearing price for units is higher than $50, the cost containment reserve will be triggered. At this point, an additional number of NZUs will be made available to help moderate the price. The price floor complements this by ensuring that unit prices at auction do not drop below $20 in 2021. This will help to manage the risk of emissions prices falling for the wrong reasons, thereby undermining investment. It is between the price floor and the cost containment reserve, between the lowest price an emissions unit can drop to and the highest it can reach before it triggers the cost containment reserve, where the ETS auctions will now operate.

Of course, the mechanisms that we legislated for last year support price stability in the auction itself, which would be known as the primary market. But one of the features of the ETS is the creation of a secondary market where already issued units can be traded between various buyers and sellers. Put simply, the primary market is where a unit changes hands for the first time; whereas the secondary market comprises all subsequent transactions. These secondary markets are crucial to the functioning of the emissions trading scheme, not least because they provide a means for participants to sell surplus units, which creates a powerful incentive to reduce emissions. But for that incentive to exist over the long term, which is a prerequisite for any organisation looking to make low-carbon investments, the secondary market needs to remain stable. And that’s what this bill is for.

It introduces a mechanism for New Zealand units to be held back from sale if, at the end of the auction, the clearing price for a unit is lower than what is known as “a confidential reserve price”. The principle is simple: ahead of each auction, a confidential reserve price would be set relative to the secondary market price of New Zealand units; if, once the auction has been completed, the clearing price has dropped below this reserve price, no units will be sold. This will help to maintain a minimum carbon price and strengthen the incentives for major long-term investments in low-emissions technologies, which, in turn, will stabilise the secondary market should prices collapse if an auction does not go to plan. A reserve price will also mitigate the risk of exposing the Crown to a fiscal cost if units are sold for less than the prevailing secondary market price.

As you know, Madam Speaker, the changes that we made to the emissions trading scheme last year were the result of five years’ work that was carefully signposted and consulted upon every step of the way. Following the passage of the subsequent reform bill, there was agreement from both sides of the House that a confidential reserve price was necessary to the functioning of auctions under the ETS.

The orderly passage of this bill ahead of the first of those auctions, on 17 March, is crucial for building trust in the integrity of the process, as well as signalling to business that this House can provide the long-term policy certainty that they are calling for, particularly in the wake of the Climate Change Commission’s draft advice. It is in no one’s interest to undermine the auctioning process and to allow the secondary markets to be undercut, not least because the greater stability that this bill provides for will encourage investment which will lead to increased productivity and employment opportunities, as well as lower pollution levels. I therefore commend this bill to the House.

Thank you, Madam Speaker and it’s a pleasure to speak on the Climate Change Response (Auction Price) Amendment Bill. I met James Shaw prior to Christmas where he asked me whether we would support this change in this bill because of the anomaly in the Act that we had passed last year. And I said, well, yes, but depending on what was in the bill and I’d like to see that. Unfortunately, I didn’t find out it was coming up until this morning, even though it was published late on Friday. I think that’s quite poor and I thought James is better than that, actually.

I also note that, James, during your time in Opposition, you railed against urgency unless there was almost a near-death emergency on our way. This is not the case with this bill. This could have been brought to the House before Christmas, giving us plenty of time for a select committee process and people to put in submissions. That would have been quite—it’s not as though the legislative calendar was that full last year, as it was they were scraping for legislation. So I think it’s appalling. We’ve gone through this whole debate about truncated processes in the previous bill, but I won’t go across all of that country again.

But this is a highly technical bill and a highly technical—or particularly the markets and how they operate are highly technical. We need expert advice on this as to whether it’s the right thing to do in the way this bill was drafted. We support getting this right. We absolutely support that.

We want this to work efficiently and effectively. But is this the right mechanism? We simply don’t know, and I’m sure that the Government doesn’t know either. So to have what is a three week-and-a-bit select committee process, I don’t think is long enough to get that expert advice. We know that the traders in the market, commodity markets are—and this is effectively what this is, it’s a commodity market—massive and they’re very complicated in the way that they work, and I’ll talk about how the system might be gamed a little later. So it’s important we get those people in, and to give their submissions. I’d like to hear from Fonterra, actually, they run a very good auction system. I’d like to know what their view is on this. But we want to ensure, of course, as the Minister said, that the secondary market remains intact and keeps its integrity, and I support that.

And I note, in the whole process—and this is the rules for auctioning in the New Zealand emissions trading scheme (ETS)—what the Minister didn’t quite explain is that each bidder puts in a bid stating their price and the quantity of the New Zealand units that they want to acquire, they are then ranked from highest to lowest. Then, each successful bidder receives a quantity bid at prices at, or above, the clearing price. That uniform price means that all bidders pay the same clearing price and that price is the lowest successful bid. So effectively what the concern is here is that people in the market could get together, come to an agreement, a side agreement—which would probably be illegal—and then ensure that the low bid was very low, acquire those units at that very low price, then sell them on the secondary market later, or, in fact, wait for the price to go up. So I think we understand why you’d want to do that, and we do need to get this to function properly, and we want confidence in the market, but the other—in terms of fiscal risk, at $25, it’s just over $2 billion, just over $2 billion, up to $20, $25. Actually, that’s at $25, it’s more likely to be $3 billion. So there is a significant fiscal risk for the Crown, and I think that’s great that we get this sorted.

I note, also, that the cost containment reserve, where the Government will put back into the market other units to ensure that the price stays within that containment reserve, I think that’s also a very important point that we need to understand, and I want to hear a lot more about that through this process. Carbon budgets and the ETS, or the carbon budgets with the sinking lid that we will effectively have on our emissions through the ETS, is the best way for us to manage our emissions. It’s far better than utilising a policy approach which is a top-down approach, which I note that the Government seems to be quite keen on. The Climate Change Commission talks at great length about policies. They also talk about us walking more and cycling more and put a number on that, so I’m not quite sure how they think they’re going to manage that.

But we can see how that doesn’t work when we look at the power market in Germany and the UK. In Germany, they utilised high subsidies to encourage wind and solar power production. They now have the highest power prices in Europe, and also a very small reduction in their emissions. In contrast, the UK, which utilises an ETS, had a very successful rate at lowering their emissions quite significantly, and that was when power producers who had coal power supply stations changed over to gas. Gas has half the emissions of coal, and they’ve significantly reduced their emissions, and also have kept their power prices much lower than in Germany. So the ETS is the right mechanism for us to lower our emissions. So the National Party supports that.

We also think the carbon budgets and the sinking lid, as I said before, are really important, and we can see that the ETS is working here in New Zealand. There’s quite a debate about the number of farms or the hectares going into forestry, particularly on the East Coast of the North Island, and that is as a result of the high carbon price in New Zealand—at $38 it’s trading at at the moment. That is encouraging the market to plant more trees. We also see it working in the transport sector. The Climate Change Commission—I’m somewhat surprised—don’t believe that the ETS is working that well, but, actually, we can see that if you hop into a taxi at any time, more than likely it’s a hybrid, and it’s a hybrid because the taxi drivers are very sensitive to price of their operating expenditure, which is fuel, and hybrids are much cheaper. So they’re making a rational market decision, and that’s what the ETS does. We should have more trust in that. But, of course, it does depend on having a market that’s going to be effective and efficient, and one that participants will have a lot of confidence in.

Is the Minister the right person to set up the mechanism and the reserve price? I’m unsure whether that’s the right way to go about it. As I said earlier, I’d like to hear from Fonterra and other commodity traders. I’d like to hear from the banks and so on. They have a very short period of time to put their submissions together. Like the rest of us, they’ll have only found out that this has come out, probably, today. By the time they get their submissions together, the select committee gets its head around it, I think it’s a fairly short process. I worry that the select committee won’t get the best opportunity to go through those submissions to get our heads around it. I’m very much looking forward to hearing from these people, because we need to know if this is the right way to go about it.

In fact, there’s even a debate to say that if, indeed, people went about this—certainly not illegally, but if the price fell lower than the secondary market, there would an argument to suggest that’s not a bad thing. We’d be finding the lowest cost option to lower emissions, and that would be a good thing from New Zealand’s perspective. The ETS—the way it works is it will not necessarily go up at the same rate all the time linearly, because it’ll react as the economy slows down, the increasing price of New Zealand units will likely slow down along with that. As the economy becomes more successful, if you like, or as our economic activity goes up, the New Zealand units will probably go up along with that—that’ll follow that along. So I don’t think that’s a bad thing.

So, in short, we support this through to the select committee. We think that this is a slow process, which we think is quite regretful—sorry, should be a much slower process. We think it’s regretful that the Government have put us in this position, and we would really like to hear from the Government side as to all the reasons why they didn’t deal with this in a much more timely manner and ensure that we got a far better process and a better outcome as a result of that. So with that, I commend it.

Thank you, Madam Speaker. I rise to take a short call in favour of the Climate Change Response (Auction Price) Amendment Bill. As the statement that has been tabled by the Minister, James Shaw, has said, this is necessary to rectify a mistake in the regulatory underpinnings of the auction process. There was always intended to be the ability to set a reserve price. That did not make it into the drafting, and therefore there’s a lacuna in the legislation.

For member’s benefit, I’m sure other members will have been approached by some of the facilitators of carbon trading in New Zealand during the election period. They pointed out that there was a real danger that without a reserve price, given the relatively small number of large participants in the emissions trading scheme that there could be collusion amongst them and the price of carbon could be collapsed. That would be undesirable.

I think we do want to have a relative period of stability in the price of carbon, and it is appropriate that there be a reserve price. I think just about anyone who ever sells another valuable asset by way of a tender or auction reserves the right to reject unduly low offers that don’t reflect the vendor’s view as to what the minimum should be. When you auction a house you have a reserve, when you auction the house you don’t tell the people that are coming up to the auction what the reserve is. They find that out by whether the auction is passed in or not, because the reserve is kept confidential to the vendor and the vendor’s agent. So that’s essentially what is being proposed here.

💬 David Seymour: If it was that obvious, why wasn’t it done before?

It is obvious, as the member says, and it was meant to have been done before. That’s clearly set out in the statement that’s already been tabled by the Minister for Climate Change. The bill rectifies the issue which was meant to include the possibility of a confidential reserve price. It didn’t, through error, and this amendment fixes that so that we can proceed with auctions.

💬 Todd Muller: Can we blame Winston?

That would be unfair.

Debate interrupted.