Shaw JamesCLIMATE CHANGE RESPONSE (AUCTION PRICE) AMENDMENT BILLSecond ReadingHon JAMES SHAW (Minister of Climate Change): Thank you Mr Speaker. I present a legislative statement on the Climate Change Response (Auction Price) Amendment Bill.DEPUTY SPEAKER: That legislative statement is published under the authority of the House and can be found on the Parliament website.Hon JAMES SHAW: Thank you Mr Speaker. I move That the Climate Change Response (Auction Price) Amendment Bill be now read a second time. E te Māngai tēnā koe. Tēnā koutou e te Whare. A stable price signal is one of the most effective ways of driving investment in low-carbon technologies. This bill will help to provide that stability by amending the Climate Change Response Act 2002 and the Climate Change (Auctions Limits and Price Controls for Units) Regulations 2020 to introduce a minimum acceptable price for emissions trading scheme units sold at auction. To put it simply if the clearing price at the end of an auction were to fall below the confidential reserve price provided for by this bill then the units that had been available for purchase will not be sold. Holding them back from sale will help to maintain a minimum unit price that reflects activity in the market up until the point of the auction which will help to encourage polluters to change behaviour and reduce pollution in line with our domestic and international targets.We have seen from examples around the world what can happen when a carbon price collapses: the market signal necessary to drive investment in clean technologies ceases to exist pollution continues and catastrophic climate change is further locked in. This bill together with the price control measures that were put in place through the emissions trading scheme (ETS) reform bill last year will manage the risk of that happening here and help to avoid emission prices falling for the wrong reasons and undermining much-needed low-emissions investments.Later this month New Zealand will for the first time auction a proportion of units available under the ETS. The exact number of units that will be auctioned in this and the other three auctions that will take place in 2021 has been determined based on the volume of emissions remaining in the emissions budget and after taking into account emissions that sit outside the ETS and emissions covered by units that are freely allocated. Where this has got to for us this year is the expectation that a total of 19 million New Zealand units will be auctioned. These 19 million units will be spread evenly across four scheduled auctions. In each of these auctions two price-control mechanisms will be in operation: a price floor of $20 and a cost containment reserve. The latter will be triggered if the auction clearing price comes in at higher than $50 at which point an additional 7 million New Zealand units will be released into the auctioning system helping to meet demand and bring the price down.The purpose of these price-control measures is in short to stop the price of units available at auction getting either too low or too high. Exactly where the clearing price falls within the parameters of the price floor and cost containment reserve will be determined by a range of other factors not least of which is the activity on the secondary market. The secondary market is where trades take place between various buyers and sellers through which we get a sense of market opinion about the current value of a New Zealand unit. 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. Stability then like in any other market is crucial. Its absence risks undermining confidence that the cost of population remains at a certain level which could all but eliminate the price incentive to reduce emissions and make it much harder for participants to make long-term investment decisions. This bill will provide for that stability through the introduction of a reserve price to ETS auctions.In any auction a reserve price is the lowest price that the seller—in this case the Government—is willing to accept for the auctioned product. It is a way of protecting the Government from selling units at a level significantly below the prevailing secondary market price which in the absence of this bill could occur as a result of unexpectedly weak competition during the auction or from bidders seeking to gain from a low clearing price by withholding bids or bidding in a coordinated way at prices significantly below the secondary market price. And so what this bill does is introduce a mechanism for New Zealand units to be held back from sale if at the end of an auction the clearing price for units is lower than the reserve price.Now it is necessary to note that this is different to a price floor. The price floor supports long-term investment decision-making by setting a level below which the price of a New Zealand unit will never fall. The confidential reserve price on the other hand is set for each auction to ensure units are sold at a price that reflects the prevailing market activity. Put simply if the clearing price were to fall below the confidential reserve price units would not be sold in that auction. The bill will ensure that this does not jeopardise the predictability of units to be auctioned because if the reserve price is triggered unsold units will be rolled over automatically into a later auction. Instead the reserve price would simply restrict the supply of units at a particular auction and support the stability of the secondary market price which is where the bulk of ETS trades take place and where market forces combine to help determine the cost of pollution.The methodology for calculating the confidential reserve price will be set ahead of each auction by the Minister of Climate Change in consultation with the Minister of Finance and any auction monitor. So whilst the auction operator—which in this case will be the New Zealand Stock Exchange and the European Energy Exchange—will be required to use the methodology that Ministers agree no Minister now or in the future will be able to set the actual price themselves. That will be influenced by the market itself.It has been accepted for decades that a well-designed system for pricing emissions needs to be a central part of any Government's climate change policy framework. Together with the changes that we introduced last year this bill will help to ensure that we have a clear transparent and predictable set of rules for emissions pricing which will drive investment into low-carbon solutions and cut pollution.Nō reira tēnā koutou tēnā koutou tēnā tātou katoa.DEPUTY SPEAKER: The question is that the motion be agreed to.