Salt welcomes the Government’s consultation on ETS reforms

Friday, December 20, 2019
Salt Funds Management welcomes the Government’s
consultation document on proposed new settings for the
NZ Emissions Trading Scheme

New Zealand is committed to taking action on climate change. In 2015, almost every nation
agreed to take action together by adopting the Paris Agreement. The Paris Agreement was
designed to ensure all countries, no matter how big or small, contribute to keeping average global
temperature increase to well below 2°C above preindustrial levels, with an aim to limit the
increase to 1.5°C.

Under the Paris Agreement, governments put forward a proposal for their highest level of
ambition towards contributing to the 1.5°C goal by proposing a nationally determined
contribution that they intend to achieve. Governments agreed on the need for global emissions to
peak as soon as possible, and to undertake rapid reductions thereafter.

The New Zealand Emissions Trading Scheme (NZ ETS) is an important tool the Government
already has available to drive emissions reduction in New Zealand. Pricing emissions is an efficient
and effective tool that works as part of a wider policy package to ensure a cost-effective and just
transition.

The NZ ETS is undergoing structural reforms to allow for setting an overall limit, or a ‘cap’, on the
total level of emissions that are available to be traded within the scheme and replacing the
current price ceiling mechanism, or ‘fixed price option’. Emissions are traded through New
Zealand units (NZUs) which represent the right to emit one tonne of carbon dioxide equivalent
(CO2-e) emissions.

The consultation document proposes a provisional emissions budget that can be used to
develop a proposed package of NZ ETS settings. After the provisional emissions budget is set,
several steps must be taken to reach the proposed volume of NZUs that will be available to
auction annually within the NZ ETS. NZ ETS price controls will provide the Government with a
mechanism to help manage unacceptably low or high NZU prices in the NZ ETS.

The Government proposals include the following:
• setting a provisional emissions budget that follows annual emissions reductions with an
approximate straight-line trajectory from 2022 towards the 2050 target;
• reduce the volume of NZUs available to auction annually, so that a portion of emissions
obligations must be met using stockpiled NZUs;
• that the fixed price option remains in place for emissions produced in 2020, but is
increased to $35;

• introducing a price floor of $20 through an NZU auction reserve for the period 2020 to
2025;
• The Government proposes to introduce a cost containment reserve price ceiling
mechanism that has a price of $50 for the period 2020 to 2025;
• that industrial allocation will begin to phase-down from 2021;
• to reduce the annual volume of NZUs available by auction to require participants to use
NZUs from the stockpile to meet their obligations.

The government are keen for feedback on the specific NZ ETS settings that are being proposed.
You can view the consultation page here.

About Salt Funds Management Limited
Salt Funds Management is an award-winning boutique funds management firm, with over
NZ$2billion in funds under management. Using proprietary research Salt specialises in managing
New Zealand and Australian listed equity and listed property portfolios. It operates an active
investment philosophy of seeking to invest in companies with strong management, which operate
within sound industry structures and generate superior shareholder returns. For more
information, please visit: www.saltfunds.co.nz

For more information, please contact:
Call: 09 967 7276 during normal business hours
Email: info@saltfunds.co.nz
Write to: Salt Investment Funds Limited, PO Box 106-587, Auckland, 1143