Our submission on ETS settings
We have made a submission on the Government's proposed price and unit settings under the NZ Emissions Trading Scheme (ETS).
Our primary concern is that the proposed price and unit settings don't meet the test under the Climate Change Response Act, which requires the settings to be "in accordance with" NZ's 2030 Nationally Determined Contribution (NDC) under the Paris Agreement and our emissions budgets.
What are the price and unit settings, and why does the ETS matter?
The ETS is “the government’s key tool” for helping NZ achieve its climate targets.
It’s a ‘cap-and-trade’ system that puts a price on greenhouse-gas emissions across most of the economy.
Each year the, Government sets a cap on the total tonnes of emissions allowed, and issues or auctions an equivalent number of New Zealand Units (NZUs). Every emitter covered by the scheme, whether a power generator, fuel importer, or industrial plant, must surrender one NZU for every tonne of CO₂-equivalent it releases.
Our previous judicial review on the ETS
We brought proceedings against the former Minister for Climate Change in 2023, following decisions made by Cabinet in 2022 about price and unit settings under the ETS. In that judgment, Palmer J set out how the Minister must exercise his discretion when setting new ETS price and volume settings.
That judgment made clear that:
The Minister must be satisfied that the limits and price control settings are “in accordance with” the emissions budget, NDC, and 2050 target.
While the settings do not need to be in strict (exact or precise) accordance with the budgets or NDC, the Minister must still be satisfied that the settings nevertheless accord with the emissions budgets and NDC(s), and must be satisfied that any discrepancy is justified.
There must be an objective basis for, and analysis underpinning, any of the Minister’s subjective conclusions, including around the ‘accordance test’.
The Minister needs to consider the role the ETS is intended to play in meeting the emissions budgets, NDCs, and 2050 target, after considering the possible use of voluntary cooperation under Article 6 of the Paris Agreement.
“Accordance with” our NDC?
The Government's own predictions are that NZ will likely be around 84 million tonnes of CO2 short of meeting our 2030 NDC. But none of the Government's proposed ETS settings deal with that - instead, they are designed to only align with NZ's "domestic contribution to the NDC", on the basis that when NZ made its NDC, it intended to buy offshore mitigation to meet it.
The problem?
The Government hasn't committed to any offshore mitigation. In fact, the Minister for Climate Change called buying overseas carbon credits “unrealistic”, and the Government still hasn’t set out any alternative plan for how we will meet our 2030 NDC - despite our repeated requests.
In the absence of any such commitment, we're not sure how the proposed ETS settings meet the accordance test, and strongly encourage the Government to reconsider its options in light of this.
“Accordance with” our emissions budgets?
We’re also concerned the Government isn’t considering price and unit settings that accord with our emissions budgets.
NZ is currently not on track to meet our third emissions budget, which is our domestic 2035 target. It’s also set at the same level as our 2035 NDC.
While the Government doesn’t have to set price and unit settings that strictly accord with our targets, it does have to set targets that nonetheless accord with them.
The Government’s consultation projects that the settings do not accord with the third emissions budget. Also of concern is the fact that the Climate Change Commission has advised the Minister to tighten both our second and third emissions budgets, but there has been no analysis on what settings would accord with the Commission’s recommended budgets.
The ETS could be capable of driving real emissions reductions, but the Government needs to make good decisions to make that a reality.