Climate Change Response (Auction Price) Amendment Bill

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Climate Change Response (Auction Price) Amendment Bill

Government Bill

7—1

Explanatory note

General policy statement

This Bill enables a confidential reserve price to be set for auctions in the New Zealand Emissions Trading Scheme (NZ ETS) to ensure units sold at auction cannot be sold significantly below the prevailing secondary market price and thereby avoid unduly influencing the secondary market.

The NZ ETS is one of New Zealand’s main tools for helping to meet our climate change targets under the Climate Change Response Act 2002 and our international commitments under the Paris Agreement. Auctions provide a mechanism for the Government to manage the supply of emission units into the market in line with our climate change targets.

Auctions will commence in March 2021. Reforms to the NZ ETS enacted in June 2020 set out the types of decisions that the Minister of Climate Change (the Minister) needs to make when recommending that auctioning regulations be made. Regulations have subsequently set the schedule and rules for auctioning. The June 2020 reforms did not enable a confidential reserve price to be set.

Most of the trading in units takes place on the secondary market, which is open for trading daily. Therefore, it is the secondary market that sets the price for emission units. Auctions, on the other hand, occur infrequently and are designed to allow the Government to sell units into the secondary market without disrupting its operation.

Without a confidential reserve price, there is a risk that auction participants will strategically bid to undercut secondary market prices. This would undermine the integrity of the NZ ETS. The changes in the Bill address this risk and protect the Crown against the fiscal cost of such underpricing.

The Bill will amend the Climate Change Response Act 2002 (the Act) and the Climate Change (Auctions, Limits, and Price Controls for Units) Regulations 2020 (the regulations).

The Bill will enable the Minister to specify a methodology for the auction operator to set a confidential reserve price, based on the secondary market price, in addition to existing price controls. The confidential reserve price, and methodology used to set it for each auction, must be kept confidential to ensure they do not become the target of bidding strategies that may disrupt the market. The methodology must be set in consultation with the Minister of Finance.

The Bill means that the confidential reserve price only applies to auctions whose clearing price is between the 2 price controls already set by the regulations, because it only applies to auctions that are operating in normal circumstances. Therefore the confidential reserve price will never be higher than the lowest trigger price for the auction (set at $50 for 2021).

Specifically, the Bill will amend the Act and regulations to—

  • empower the Minister to make regulations to set a confidential reserve price methodology to enable the auction operator to set confidential reserve prices at auction:

  • require the Minister to consult with the Minister of Finance on the methodology:

  • prevent the sale of units at auction if the final auction clearing price does not match or exceed the confidential reserve price:

  • require the auction operator and any other person to keep the methodology and calculated prices confidential.

Departmental disclosure statement

The Ministry for the Environment is required to prepare a disclosure statement to assist with the scrutiny of this Bill. The disclosure statement provides access to information about the policy development of the Bill and identifies any significant or unusual legislative features of the Bill.

Regulatory impact assessment

The Ministry for the Environment produced a regulatory impact assessment in March 2020 to help inform the main policy decisions taken by the Government relating to the contents of this Bill.

Clause by clause analysis

Part 1 of this Bill amends the Climate Change Response Act 2002 (the principal Act). Part 2 amends the Climate Change (Auctions, Limits, and Price Controls for Units) Regulations 2020 (the principal regulations). The amendments commence on 15 March 2021.

Amendments to principal Act

Section 30GA of the principal Act provides for regulations to be made by which the Minister may sell New Zealand units by auction and appoint auction operators to conduct the sales (under section 6A). Section 30GA is amended so that the regulations may let the Minister set a methodology that an auction operator must use to calculate a price (which may become a confidential reserve price). A confidential reserve price is the price below which New Zealand units must not be sold at a particular auction, overriding any lower minimum price prescribed under section 30GB(2)(e)(iii) (for all auctions that year). Its purpose is to prevent auction sales at prices significantly below the prices of New Zealand units sold on secondary markets so that the auction sales do not unduly affect secondary markets.

Section 30GB is amended to clarify the effect of a minimum price prescribed under that section.

Amendments to principal regulations

Regulation 15 of the principal regulations is amended to clarify that, if there is a confidential reserve price at an auction, that price (rather than the prescribed minimum price) is the lowest price at which New Zealand units may be sold at the auction.

New regulations 15A to 15C are inserted.

New regulation 15A requires the Minister to set a methodology that an auction operator must use to calculate a price that may become a confidential reserve price (if greater than the prescribed minimum price for auctions that year). The methodology can be changed at any time.

New regulation 15B requires an auction operator to calculate the confidential reserve price for an auction using the relevant methodology.

New regulation 15C requires the methodology and calculated prices to be kept confidential so that they are not disclosed to auction bidders.

Regulation 16 is amended so that a pre-auction notice must also state that the auction may have a confidential reserve price.

Regulation 33 is amended to provide that no bids are successful, and no units may be sold to bidders, if an auction’s final clearing price is less than its confidential reserve price. Regulation 30 is amended for consistency with that change.

Regulation 36 is amended so that, if no bids were successful at an auction because the final clearing price was less than the confidential reserve price, then the only published auction result is a statement to that effect.

New regulation 36A is inserted. It requires an auction operator to provide information relevant to confidential reserve prices to the chief executive after an auction.

Schedule 1 is amended to insert more transitional provisions. The provisions ensure that new requirements in the principal regulations can be satisfied, or not breached, when the amendments first commence.