Climate Change Response (Auction Price) Amendment Bill

I declare the House in committee for consideration of the Climate Change Response (Auction Price) Amendment Bill. Members, this stage is a chance for an examination of the detail of the bill and the effects of its provisions. It is also an opportunity for engaging in discussions with Ministers by taking short calls and asking questions.

We come first to the debate on Part 1. This is the debate on amendments to the principal Act, the Climate Change Response Act 2002. The question is that Part 1 stand part.

Thank you, Madam Chair. I would like to speak to my tabled amendment, adding new clause 5A. That tabled amendment requires that the Minister, after the four auctions to sell the New Zealand units, establish an independent review of this confidential reserve price mechanism provided in regulations made under this Act, with the review report to be delivered within six months of commissioning by the Minister and tabled in the House of Representatives.

So the reason for this is because I am, as we all are, deeply concerned about the process that we have gone through for this bill—not only for this bill but, actually, for the bill last year where we set the rules around the auctioning—and also around the Minister’s actions and what he knew and didn’t know and when he was told that this might be an issue. We’ve seen in the Cabinet papers that the Minister, in fact, was advised that this could have potential problems and financial problems for the Crown. But he, at that time early last year, said that he didn’t think it was a problem, and nothing happened. So, I guess, in his response to my tabled amendment, I would like for him to delve into why he didn’t think that this was a problem all of last year, when we went through the bill in June, and then all the way to the end of the year. We are left in a situation where we are debating a bill that is making changes to an auction that’s happening in just over a week, as we mentioned earlier. This is highly, highly complex legislation.

I’m really keen to delve into what the Minister knew, when he knew it, and what his thinking was—especially around the very early months of last year when he stated that he didn’t think that we needed to set a reserve price, because clearly he had that thought for a very long time—and when did he change his mind—exactly when—and also, not only when did he change his mind but when did he decide to bring this bill to the House and why did he not bring it much earlier. We’re in a position now dealing with a highly complex bill that’s brought up a number of questions—and some of which we’ll talk about in later tabled amendments—that are highly complex in nature and that throw up all of these questions that we’re now asking at the very last hour that, despite what the Government speakers have said today, are actually very complex and need answering.

We are concerned about whether or not the Minister is, in effect, setting a tax. We are concerned about the fact that he is tinkering with an auction, when, I’m sure, as I said in my last speech at the second reading, he would have been told by his advisers, or possibly even Treasury, that it’s not a good idea to tinker with the rules of an auction, because you actually increase the risk. Actually, I’d be quite keen to hear from the Minister as to whether or not he did receive that advice very early on last year, which is, in fact, why he thought for such a very long time that a reserve wasn’t, in fact, needed. What advice was he given to not make any changes until now? You know, which officials and what did they tell him? And did they, in fact, tell him that, by tinkering with the auction, he was, in fact, going to be increasing the risk? As I said earlier, the more that we tinker around with these rules, the more we’re going to find ourselves in difficulty, which is why I have tabled this amendment which requires an independent review of exactly what we’re putting in place today, potentially, to make sure that we are not, in fact, increasing the risk and we’ve not made mistakes and that we get this looked at comprehensively to make sure that we are actually doing the right thing.

So the questions for the Minister are: why did he not make any changes until now? Why did he originally think that there was no need for a reserve price? What advice did he get from his officials, or maybe even Treasury, around the risks of tinkering? And why are we just fixing this at the very last minute? It would be appreciated if he would be able to respond.

I thank the member for her questions. It’s actually incorrect to say that I knew that there was an issue at the beginning of last year. So officials discovered that there was an irregularity between the legislation and the regulations as they were being drafted. That came to light in August, late August, of last year. I was advised on 3 September that the inconsistency between the legislation and the way that the regulations were able to be drafted meant that the Cabinet decision to include a confidential reserve price would not be able to be included in the regulations under that draft. So that was on 3 September.

The advice that I received from officials at that time was that the absence of a confidential reserve price in the early auction period this year presented a low risk. However, there was some commentary over subsequent months. In particular, on 2 November, there was a story in Carbon News about—sorry, I’ve got that wrong. There was a story a bit earlier that, essentially, meant that officials changed their view about the risk profile. So I then received further advice in about mid-November, and that was when we decided to go with the recommendation that we would introduce legislation.

I actually just want to correct something else for the record, because it’s, again, I think a misstatement of the facts. Scott Simpson talked about the stories in Carbon News and when we notified the market. It was quite important not to let individual companies knows earlier than anybody else, which is why we released the story via Carbon News, a media outlet. So OMF and Carbon Match, the two secondary market operators, found out that way. They didn’t get advance notice. They obviously would have notified their clients; most of their clients actually read Carbon News anyway. And also, I think a day or two after that story came out, there was an email out to market participants as well. So everybody did find out at the same time that we were going to introduce it. So that’s the time frame.

In terms of the actual substance of the amendment put forward, it’s under the existing legislation. I would say it’s unnecessary because it’s within the scope of the auction monitor to conduct exactly those sorts of reviews about things like whether the technical reserve price or any other component of the auctioning system is functioning well and what further improvements that we might need to do. Section 30GD of the Act allows the Minister to specify the auction monitor look at exactly that function, at the confidential reserve price, if we wanted to take a look at it. But also, of course, we will know the extent to whether it’s working or not due to the actual performance of the auctions as they occur during the course of next year.

Thank you, Madam Chair. I want to stand in support of my colleague’s Supplementary Order Paper (SOP), which is Erica Stanford’s, on the review of the auction. I listened carefully to the Minister’s response then, and yes, it may well be within the auction monitor’s purview to review that, but I think it should be wider than that and it should be a compulsory option. I think this is a very good SOP, and it requires quite a bit of thought, I think.

This has been rushed through, and I think, to just take it for granted that that small group of people who are involved in setting up the methodology themselves are also asked to critique themselves—and I think it’s important that we have a proper and open and transparent process of at least knowing that this has been reviewed properly and that we have the confidence that this is going to be functioning correctly, because, actually, as has been said, this is a really technical thing that we are doing. It is quite complex.

I had the pleasure on the weekend of speaking to a group in Marlborough called the Climate Karanga, who are very keen climate activists, who actually don’t understand the emissions trading scheme (ETS) that well. And I’m finding—that’s no criticism of those people at all, but it is quite a complex thing that we’re talking about here. And I think it’s more than just doing the functionary things correctly; we have to take people with us. They have to own this, because they’re going to pay for it one way or another. They’re completely unaware that they’re paying for carbon emissions now—at the fuel pump, for example—and when I explained that to them, it was a bit of a shock. Most of them drove Nissan Leafs, and I pointed out to them that, while they may be lowering their emissions, they’re not lowering the country’s emissions, because they’re simply making it cheaper for other emissions certificates to be purchased on the open market because they won’t be requiring them. And we have a set number of units that are going into the market. It’s a very simple process once you get your head around it, but it takes a little bit to get there.

I think that this bill—well-meaning—will do a job, but it needs some more belts and braces around it because it actually is so important to us in New Zealand to make sure that it works correctly. And I think the Minister actually could give us some more information around that, because, I think, surely the advice would be that the only auction really at risk would be this first auction. And, I think, as the member for ACT Simon Court spoke earlier about, those emitters who need some emissions certificates can buy up until some date in May from the reserve market to cover their emissions at a much lower price than the secondary market. And so why would it be an issue after that particular auction on 17 March? I think the second quarter auction will clean up everything if the auction did in fact fail, and I don’t think that’s a great risk anyway. But if it did fail, then we have a known quantity in the ETS—that’s what the ETS is all about, and we have a known quantity coming to the market this year. So there may be a risk that an auction would fail; it’s for 4.75 million units. That, I think, is not a massive amount, and if it fails, that will create some urgency, I believe, in the market.

So could the Minister please tell us if he received advice on that, and how thorough that was, and the process he went through to, effectively, make the decision he did. Thank you.

Thank you, Madam Chair. Look, I just want to correct something from the outset about when the member says that the auction would fail. If the Government chooses not to sell units into the market because the price falls below the confidential reserve price, that is not a failure of the auction; that is simply not selling something that was available at a price that is acceptable. In fact, you could argue that that is saying that the market—there is not sufficient demand in the market at a price that roughly approximates the secondary market price to release those units into the market at that time. So that is not actually a failure of the auction.

The other thing, of course, to remember here—and I know individual companies have submitted on this—is, if we decide that we’re not going to sell units into the market because there’s insufficient demand at an acceptable price at that auction, those units become available at the subsequent auction. Now, that is because what we’ve said is that, in any 12-month period, there will be a total volume of auctionable units, and so if some of those get carried—and that’s because, in the 12-month period, the obligation on the company is a 12-month period. So if they don’t get it at that first auction, then they can have another crack at a subsequent auction.

The other thing to remember is that the market currently is oversupplied; so there is actually a stockpile, an excess of units in the market in totality. We actually made a decision quite early on—because there was an argument to say, “Well, why would you auction any units into an oversupplied market at all? Why not just allow the stockpile to run down and then start auctioning into the system once the stockpile has run down?” We decided that what we would do is to auction, frankly, a fairly small amount of units on an ongoing basis to get that system up and running and run the stockpile down over a period of time at the same time, so that, by the time the stockpile does expire, there’s a long experience of auctioning units into the system.

So, essentially, saying that there will be a limited number of units available in any 12-month period and that you can choose not to sell them in any given auction, I think, is one way to safeguard the integrity of the overall system. That’s not a sign of the auction failing at all; it’s actually a sign of the whole system operating.

Thank you, Madam Chair. I want to raise with the Minister some questions, in Part 1 of the bill, relating to the methodology that he will use to set the confidential reserve price. But, before I get into that, I just want to pick up on a comment that he made in answer to my colleague Erica Stanford about “When did he know?” and “What did he know?” and the time frame. Did I hear him correctly say that the officials drew the drafting error—or the instructions that hadn’t been taken up by the Parliamentary Counsel Office—in August of last year? Was that correct?

Thank you, Madam Chair. Yes. I actually want to correct something that I said. I was actually incorrect when I said that the drafting instructions didn’t pass that on. So, actually, the drafting instructions did; there was a Cabinet decision to say that there would be a confidential reserve price. At the time, we referred to it as a “technical reserve price”. That piece of language has changed subsequently. So that was a Cabinet decision that was in the instructions. The bill was drafted and, obviously, went through Parliament, and it was at the stage when regulations were being drafted to match that they discovered there was an inconsistency that didn’t allow for the confidential reserve price to be built in at that point. The advice that I received was that that was discovered in late August, and then I was advised on 3 September.

Thank you. Look, I don’t want to be overly pedantic about it, but I think that the timing is actually quite important, because that’s partly why we are in urgency discussing this bill today, literally a few days before the first auction. There were a series of Cabinet papers that were presented. So one that went back—and this is according to a report in the much-quoted Carbon News, and well-respected Carbon News. It says in an article that they published that Cabinet accepted Shaw’s recommendation and on 21 September, so after August 2020, invited the Minister for Climate Change to report back to Cabinet regarding—and then there was a piece redacted—the technical reserve price before the third reserve auction in 2021.

Now, that commentary gives rise to a suggestion that, actually, the Cabinet didn’t have a sense of urgency—that, in fact, there wasn’t any particular urgent need to address this issue, and that something changed, something clearly changed. If the Minister had drawn to his attention by officials a fault in the regulations that had become clear in August, why was it then still back a month later, in September—towards the end of September, on 21 September—that Cabinet was “inviting the Minister for Climate Change to report back to Cabinet regarding”—something redacted—“the technical reserve price before the third reserve option in 2021”, which is, you know, some time away? So I’m keen to just clarify the timing, please.

No, that is consistent. So the advice I received on 3 September was advice from the Ministry for the Environment (MFE) saying that they had discovered there was this irregularity that meant that we weren’t able to produce that, and the advice at that time was that it presented a low risk. I then took that to Cabinet—which is where you get that reference to the Cabinet decision later in September—because the advice was to say let’s fix it up over a longer period of time, because we, at that time, thought that we had another emissions trading scheme amendment bill that would be coming in and we could put them in together at that time.

However, subsequent to late September, when that decision was made, as I mentioned before, there was some commentary, including as previously noted from the Opposition spokesperson on climate change at the time, calling attention to this. And that itself changed the risk profile—that MFE felt that that could then induce a different type of behaviour by participants in the auction process—and so, therefore, I then received, in, let me get this right, mid-November, new advice that said it was felt that, actually, we should go ahead with an amendment prior to the first auction, which is what we’re now dealing with.

Thank you, Minister, and I’m very pleased that the Opposition spokesperson at the time was able to cause such concern amongst the ranks of the officials in the ministry. This is cause for great optimism about the role of the Opposition in keeping the Government and holding them to account. But we still find ourselves here under urgency literally a few days before the first auction and passing this piece of legislation which, in a previous debate, my colleague Dr the Hon Nick Smith has made clear is likely to be the source of further amendment because of its rushed state.

I particularly wanted to raise matters in Part 1 of the bill that go to the setting of the methodology by which the Minister will determine the confidential reserve price to be used in the auction process. There was quite a lot of discussion around that at the Environment Committee; the select committee has recommended some changes to provide a more robust approach to the setting of the methodology. But what I’m keen to know from the Minister, specifically, is his understanding of what will be required of the process that he will be undertaking and leading and what will be the role of his officials, what will be the specific role of the Minister of Finance, and will there be any other of his Cabinet colleagues involved? And I guess what I’m really seeking is some kind of reassurance that this methodology-setting process will be robust, that it will stand scrutiny, and that it will be one that the participants in the auction process can, with confidence, rely on in terms of them placing bids for what will be multimillion-dollar transactions. I think that they deserve to understand, essentially, what’s in his head and his interpretation of the words that we are probably going to soon pass in this piece of legislation.

So, just very briefly, my understanding is that officials will prepare advice as to what the formula should be. I will then consult with the Minister of Finance, who, presumably, will also receive advice from Treasury on that. No other Cabinet colleagues will be involved in that process, and we’ll also, as a result of the amendments that have come through from the Environment Committee—which I completely agree with—consult with the auction monitor, not the auction operator as somebody previously mentioned, about that, and then we’ll sign that off.

It is also really important—I think some members have confused, in some of the statements I heard in the second reading, the formula with the price. So the Minister will not set the price at all, but they will, essentially, sign off on the formula by which the price is set. It’s actually the market that sets the confidential reserve price, because the formula relates to what’s happening in the secondary market.

Thank you, Madam Chair, and thank you, Minister. There was some concern expressed at the Environment Committee as to whether indeed the Minister of Climate Change was actually the right person to be setting the confidential reserve price, and I’m interested to know whether the Minister took advice about any alternatives to the setting of a confidential auction price by a process that maybe didn’t involve him as Minister. The reason that people raised some concerns about it is that there is an obvious correlation between the Minister of Climate Change, the auction process, the involvement of quite significant financial transactions, and the effectiveness and efficacy of the whole emissions trading scheme system.

So this goes more to a question of, I think, perception, but I do think that market participants and, indeed, the broader general public need to understand what the process was in coming to deciding that it should be the Minister of Climate Change. Was, for instance, there any suggestion that it might be some independent body of experts or maybe another, potentially more appropriate, Cabinet colleague that could do that, that was—in terms of the public perception—one or two steps removed from the climate change broader debate, if I can put it that way? As I say, I think this goes to a question of perception rather more than reality, but I do think it’s an issue that is clearly of concern to some people, and I’d appreciate the Minister’s answer, particularly to the question of whether there was consideration given to any other mechanism or person or office being the appropriate form for setting the confidential reserve price.

So the responsibility relates to the ministerial responsibilities in relation to the regulations. So the analogy that I would draw would be the regulatory settings around the electricity market, which are the responsibility of the Minister of Energy and Resources, and the Minister of Energy and Resources has certain responsibilities relating to the regulations for the electricity market. So that’s the analogy. So to have a Minister responsible for regulations that they aren’t otherwise responsible for would be inconsistent with an approach that’s widely accepted across Government. However, it was felt that it made sense, given the fiscal implications, for the Minister of Finance to be consulted in that, and I did like the Environment Committee’s proposal, which we’ve accepted as amended, that the auction monitor also be consulted. So you do have, through the auction monitor, essentially an independent body whose job it is to look at the overall health and functioning of the market and to provide that view.

Thank you, Madam Chair. The Minister mentioned that the market is oversupplied with units at the moment, and I accept that. He went through the rationale of running small auctions in 2021 to get the market up and running and to ensure that everyone knows how it works and gets used to utilising the market. My question is: how much is it oversupplied by, and how long does he think it will take to run down the stockpile? And, should the first auction fail to clear, what kind of difference will that make to that time horizon, given that it’s very important for us to have some clarity on these matters, particularly for the people who will operate in this market, so that they can have confidence that they are participating in a market that they understand fully, because this will be the first time this market has run like this? While we have a secondary market, it’s not an auction system like this one, where a certain number of units go up for sale and, if they reach the parameters around a clearing price, then that price is set and the auction is successful or a failure. You can call it whatever you like, but, essentially, they either sell or they don’t sell those units. And so how much is the oversupply estimated to be, and how long will it take to sell that through? And what impact would 4.75 million units—in the first sale, should that fail to clear—mean in that extended time frame? Thank you.

Thank you, Madam Chair. The member will be disappointed, but probably unsurprised, to learn that it’s not a simple answer, because it relates to the emissions trading scheme.

💬 Hon Scott Simpson: We’ve got plenty of time.

Ha, ha! We estimate that there are, in effect, about three years’ worth of total demand in oversupply, right? But you’re not going to use all of that at any one time, and there are two factors that mean that you don’t get an exact number, one of which is how forestry units work in the system and, essentially, the impact that that has in any given year on demand. Also, the other big thing being that, when you talk about oversupply, you should always have a little bit of excess in the system, right? To enable the functioning of the system. So there is more oversupply than we’re comfortable with—is probably a way of describing it.

Now, what we have said is that the intention is to try and manage that down in a kind of very measured way over an extended period of time. So we’ve estimated—and I’m saying “estimated” very consciously because it’s not like a target or hard data or anything like that—but we’ve said about 10 years to run down that oversupply, rather than try and sort of squeeze it out of the system really early on. So that’s why, when you look at the charts, which kind of show the total emissions budget, there’s emissions that fall outside the emissions trading scheme, and then, of the emissions that fall inside, it’s divided up into, essentially, the stockpile units that are freely allocated under the industrial allocation system, and then, essentially, the difference between those two is what we’re saying we’ll auction off in any given 12-month period.

I move, That the question be now put.

Thank you, Madam Chair. To the Minister: so the ACT Party supports a fully functioning emissions trading scheme, and while the bill as presented to the House does not yet represent that—it does still fall short of that objective—we believe that any improvement to the functioning of the emissions trading scheme is desirable. So that’s why we’ve tabled an amendment, which addresses a lot of the risks that some of the other members have addressed, have spoken about: the risk that, should the auction fail to clear, should the bidders bid above the reserve price but not enough of them bid above the reserve price—so the entire volume of New Zealand units does not all clear—

CHAIRPERSON (Hon Jacqui Dean): Order! If the member could confine his comments to Part 1, and when he’s addressing his amendments, do that under Part 2 of the bill.

Thanks very much, Madam Chair. So in terms of Part 1—just let me get back to the first page—the principal Act, which allows for the emissions trading scheme and for the auction of these credits, does still have some flaws which need to be addressed. Some of the submitters raised issues around the confidential reserve price, which we’ll get to. They also raised issues relating to the functioning of the bill, such as the need for bidders to provide collateral to be able to—they’re required, essentially, to put up 20 percent of their bid, and what that means is that is a drain on working capital for their businesses. So we did hear from officials that those costs hadn’t fully been taken account of when designing the Climate Change Response (Zero Carbon) Amendment Act and this Climate Change Response (Auction Price) Amendment Bill but that in future they would do something to address that.

We would hope that the submissions from those organisations who do have a large stake in the emissions trading scheme are taken heed of at select committee and, in future, when future amendments are brought. But also there are a number of smaller, what you’d call mom and pop, organisations, and these are people that we might not consider unless we’ve been there—places on the West Coast or in the South Island, where a small family-owned coal mine might supply a single dairy company and their operation, for example, or a sawmill. So they’re not intended to be big players in this auction process, but they rely on other carbon traders to make trades on their behalf. One of the risks that was raised by those carbon traders—people who are experienced in working in these markets—is that they may not be able to secure the units for their smaller clients at auction, and that they may therefore be forced into a disrupted secondary market. For that reason, they were asking for more than the considerations which officials and the Environment Committee were able to give them.

But I do look forward to discussing that further when we get to Part 2. Thank you, Madam Chair, and, Minister, I’d appreciate you just to offer your perspective on those comments.

Thank you, Madam Chair. Minister Shaw mentioned the oversupply and how the auction would work and cope with the oversupply—that was very helpful; thank you very much. I wonder, though—given that we might have a supply and it might take 10 years to run down; the Climate Commission mentioned in their report their concern about too much forestry and restricting it to just 380,000 hectares—if the Minister took advice on whether international offsets could be bought by the Government and auctioned through the auction system, primary market. As the Minister will be aware—and I think, it was mentioned earlier by someone, anyway—about the much cheaper price for offsetting offshore, I think that there will be a time when we will need international offsets. And one way to bring them into the market and to satisfy that demand but to manage it through the Government’s process would be to introduce it through this mechanism, thereby selling at a premium, and some way of, then, the Crown recycling that capital through all sorts of ways—perhaps the way that it’s done in Canada, where it goes back on a per household basis, or some of those sorts of things. I get that’s outside the scope of this bill, but this could be the mechanism to do that. Does this bill allow it? Is there anything precluding those international units going through this mechanism, and did the Minister seek advice on that, and was there anything that we should know about that was raised as a result of that?

I’ll take those issues raised by Simon Court and Stuart Smith together. They all fall outside of the scope of this bill, because this really is just to do with a mechanism inside the auctioning system, and it doesn’t preclude any future decision about the use of international units or the way that those might come into the system at all, because really this bill just deals with that very small matter of the confidential reserve price in the auctioning system. And so, in relation to this bill, no, I have not taken any advice on international offsets.

💬 Stuart Smith: Any at all?

Well, that would be outside of the scope of this bill. Some of the questions that Mr Court raised were about collateral and the ability of, essentially, small operators to be able to access the market. Again, those are unaffected by the presence or absence of a confidential reserve price in the auctioning system. They speak to wider design principles of the emissions trading scheme, and I’d just like to say that I think that he will have plenty of opportunity to debate those in this House subsequent to the passage of this bill.

Thank you, Madam Chair. I would like to ask the Minister whether or not he sees a future in which we won’t need a reserve price, or a secret price, for that matter. And the reason that I’m asking this is because someone much older than me—because I’m not old enough to remember this, but when the New Zealand dollar was floated, we had a similar situation where people were very worried—

💬 Hon Scott Simpson: Was the Minister old enough?

Ha!—were very worried in this Parliament, apparently, so I hear, that we would need some sort of floor and ceiling, and in the end, we didn’t. And we look back now and say, “Well, that’s ridiculous that we would even be thinking that.” So I’m interested in whether or not the Minister received any advice on whether or not there may well be a future in which this isn’t required or, in fact, that the reserve price doesn’t need to be secret.

The reason I’m asking this particular question is in relation to my amendment, which seeks to have an independent review of that confidential reserve price mechanism to actually look at the whole reasoning behind it, and whether not only is it working in the way intended and not actually increasing the risks rather than reducing them but also in going so far as to consider whether or not the market is actually able to function as it should. And there may not, in fact, be a need either for a reserve at all or a secret reserve price, which would take away all of the concerns that we have on this side of the House around who sets that mechanism that flows through into the price and all of the bits and bobs that go around that that we’re worried about.

So did he receive any advice from his officials on whether or not this may not be required in the future or, in fact, that the reserve price, as it often is, could just be made widely known? And if he did, you know, why didn’t he take that advice?

So when it comes to the confidential reserve price, the analogy that I would use is selling your house at auction, which is a system that New Zealanders are very familiar with. Usually when you sell your house at auction, you don’t tell the market what your minimum price would be. You don’t say, “I will only sell this property for $500,000.”, because then bids will tend towards $500,000, and, obviously, you’d like to sell it for more than that. So the question that you raised about the price floor of $20, which is public, and currently the $35 fixed price option, which is going to be replaced by the cost containment reserve trigger—those, really, are mechanisms to allow the economy to adjust over a period of time.

So the idea of a cap on the price was actually introduced by the previous National Government as a way of limiting the price, and I think it was initially—$15? [Interruption] Twenty-five dollars was the price that that Government said, “We will not allow prices to float above $25. Rather, at that point people can start exercising the fixed-price option.” That was because it was felt that, beyond $25, there would, essentially, be kind of too much damage to the New Zealand economy, with cost to businesses and so on. And the net result of that, of course, was that it severely limited the impact of the emissions trading scheme. It was one of the factors that severely limited its impact over that sort of 10-year period. Now, one of the reforms that we introduced was to allow that to move up to $35, and then we’ve said that, from next year, once we’ve got this cost containment system operating, that will move and that $50 is the price there. What that does is it allows businesses to say, “That’s roughly the band within which we can see the market operating.”

Now, is there a world in which you won’t need either a clear price floor or a cost containment reserve? The answer is: I don’t know. But, at the moment, as a transition mechanism, we think it is an important part of the system in terms of being able to signal to the market, but I think that having a confidential reserve price in which you are, essentially, trying to say, “Is there sufficient demand in the market at an acceptable price, without disrupting the secondary market?”—that that mechanism is valuable, and that’s why we’re introducing the bill.

Thank you, Madam Chair. In the first reading speech, I mentioned concern about whether this was a tax or not. I actually asked officials for advice; never really got a satisfactory answer. I would really like to know if the Minister has had advice, or sought advice—any advice at all—on whether this is actually a tax or not. If it is a tax or could be construed as a tax—I know it’s a bit pointy-headed, but it could be—then Parliament must set the tax. By yourself, the Minister of Climate Change, the Minister of Finance, and the auction monitor setting the methodology, which doesn’t directly set the price but it actually is linked to the secondary market price—so it does, effectively, set a price, if that is a tax—then constitutionally it should be Parliament that sets that, and what this bill does would usurp that right. I think it’s actually quite an important issue to get ticked off at this stage, one way or the other—and I see someone’s rushed out the back to get something, whether it’s just a pen to write down or some statute book to look through.

I think it would be very interesting for the House to have confidence that we are not passing a piece of legislation that trammels over a long-held principle going back to our Bill of Rights that it is, in fact, Parliament that sets taxes, not Ministers, by Order in Council. If anything is done that way, without Parliament setting it, then it has to be validated by Parliament by the end of the session, which would be the end of the year. That could be done for this bill; there’s no doubt about that. We could be back here after the last auction, then validating the methodology for the confidential reserve price. And, as is probably likely to be the case, it is unlikely it will be needed from that point on, in which case we would require legislation, as this bill has introduced, to remove the methodology once it’s been put in place. So I’d be very interested if you’ve had that advice, and I think we should all hear it. So I look forward to your response. Thank you.

Thank you, Madam Chair. Clearly, no, it is not a tax; it is a market. The Hon Dr Nick Smith talked about and exchanged words with the Hon Dr David Clark about the debates that were had in the 2000s, when there was an attempt to introduce a carbon tax, which, because National pushed hard on it, said that “No, we wouldn’t introduce a carbon tax as a country; we would, in fact, have an emissions trading scheme.” So what we have is an emissions trading scheme (ETS) and not a carbon tax.

For clarification, a tax is where the value of the charge or the price per unit is set by the Government in advance and your activities determine the extent of the liability. The primary purpose of a tax is to raise revenue for Government purposes. The primary purpose of the emissions trading scheme is not to raise revenue; it’s to drive down emissions. In fact, people actually say, “What do you think the price of emissions should be?” Now, as Minister, I have to be aware that anything I say would influence the market, but, in an ideal world, the price of an ETS unit should be zero, because there would be no demand, and there would be no demand because New Zealand would have reduced its emissions down to net zero, right? So that is actually the demonstration of whether or not it’s a tax, because if you wanted a tax, you would put something in place that was, essentially, raising revenue for the purposes of raising revenue over an extended or, in fact, a permanent period of time. That is not the purpose of this emissions trading scheme. I have to say, once again, that that is not a question in the scope of this bill, which is to examine whether or not there should be a confidential reserve price.

To use another analogy: we were talking about house auctions before. One way to think about this is that the Government, essentially, establishes and regulates a number of markets. One of those is the electricity market. There are a number of mechanisms which are very similar between the way that the electricity market operates and the way that this operates. So you could no more argue that the price of a New Zealand Unit is a tax than you could argue that your price of electricity is a tax, right? You would be saying, “Well, I’m being taxed on my use of electricity.” Well, that’s just the price that you pay for the service that you receive of electricity. So I think the distinction is very clear.

Thank you, Madam Chair. To the Minister, you’ve raised a very good point: the analogy between house auctions, electricity markets, and auctions under the emissions trading scheme (ETS) might, on the surface, appear to have some similarities, but a slightly more detailed look will indicate that they are, in fact, wildly different. And I think the point you make about what control businesses have over how they mitigate their emissions through the scheme—and this bill is intended, by setting a confidential reserve price, to send a signal.

The Government sends a signal: this is what we think, roughly, the cost of emissions should be and businesses should plan on that basis to make changes in their businesses either to mitigate their emissions or, if they can’t, then to budget for having to offset them through the ETS. That’s quite different from the electricity price market, where you’re able to hedge, engage in forward purchases, and, at the end of the day, there is a willing seller, willing buyer element. In other words, a generator is able to sell electricity from a hydro dam or a coal-fired power station—and that seems to be much more popular this year than it was last year or the year before. They’re able to sell that to their customers at a willing seller, willing buyer price—although the electricity market has its own flaws, in that the cost of units through the emissions trading scheme appears to be flowing through into significantly increased prices in the electricity market.

So I’m wondering: has the Minister had advice as to these combined effects? We have increasing costs of New Zealand units, we have increasing volumes of coal being burnt, and we know that Genesis Energy—which has been responsible for managing the dry year risk through the Huntly power station—are importing more coal. They’re proposing to stockpile hundreds of thousands of tonnes and to bring their third Rankine generator online. Has the Minister had advice as to whether setting a high confidential reserve price—a price of potentially close to where it currently is in the secondary market—is likely to lead to increasing electricity prices? And, if so, is that likely to have a negative impact on the decarbonisation of New Zealand business and our economy—quite the opposite effect of that which you’re trying to achieve? So have you had any advice on that, Minister?

First of all, it’s incorrect to say that the Government sends a signal about what we want the price to be, because the confidential reserve price, through the formula that this bill enables, relates to approximately where the secondary market value is. You have to remember that the secondary market price is determined by the market participants themselves, not by the Government. So it’s actually the market that is setting the price, not the Government, in sending that signal about what they think the value of it is. And so when you say a high confidential reserve price, well, whether something is high or low is entirely relative to the secondary market price. So, actually, it is not a function of what the Government thinks that the price should be at all; it’s just that’s what the market value is.

Thank you, Madam Chair; just a couple of questions. So, if the Minister is talking about market price like that, does the Minister agree that the carbon price actually influences the forestry market and planting?

Well, of course the carbon market determines forestry plantations, but that’s well outside the scope of whether or not there’s a confidential reserve price in the emissions trading scheme.

So one part of the primary industries has a confidential minimum price that producers would be able to achieve. Is that not true now?

So foresters don’t auction units into the system; it’s the Government that’s auctioning units into the system.

Yes, but foresters get paid, don’t they, for their units?

💬 Hon James Shaw: Yes.

On the price that’s set at the market?

💬 Hon James Shaw: In the secondary market.

Yes, and this influences the secondary market price, doesn’t it?

💬 Hon James Shaw: Yes.

So the Government, effectively, influences the secondary market price, which is the price a forester will get for the product that they produce, isn’t it?

Look, I’m not sure where the member’s going with this. So New Zealand is unusual in having forestry units in the emissions trading scheme, and a number of other schemes don’t have that at all. If you didn’t have foresters being, essentially, able to say, “We’re going to draw down carbon dioxide out of the atmosphere”, that would make the emissions budgets even harder to reach. And you could argue that, therefore, an emissions unit would be even higher as a result, because you wouldn’t have that ability to net off at any point in the system.

Yeah, I understand that. I just asked the question. So if a forest owner that’s selling credits into the market, or getting the carbon price, that is on the secondary market, and that price is now, effectively, influenced by the Government policy?

The member David Bennett will sit if he’s not using his call.

I move, That the question be now put.

Motion agreed to.

The question is that Erica Stanford’s tabled amendment to Part 1 inserting a new clause 5A be agreed to.