Shaw JamesCLIMATE CHANGE RESPONSE (EMISSIONS TRADING REFORM) AMENDMENT BILLFirst ReadingHon JAMES SHAW (Minister for Climate Change): I move That the Climate Change Response (Emissions Trading Reform) Amendment Bill be now read a first time. I nominate the Environment Committee to consider the bill. At the appropriate time I intend to move that the bill be reported to the House by 2 April 2020. I also intend to move that the select committee have the authority to meet on Fridays of sitting weeks outside of Wellington during sittings during sittings of the House and during the evening after 6 p.m. on sitting days. I would also like to direct the committee to consider circulate and hear submissions on draft Climate Change Response Act amendments relating to agricultural emissions pricing which I will send to the committee before Christmas.This is the second of two bills that we are taking through Parliament to amend the Climate Change Response Act 2002: the zero carbon bill introduced in May this year and the bill I am introducing today the emissions trading reform bill. Together they put in place the architecture the institutions and the framework to support our transition to a low-emissions economy. The New Zealand emissions trading scheme (ETS) introduced by the previous Labour-led Government and supported at the time by the Greens is our primary tool for reducing climate pollution in Aotearoa. It operates on a simple premise. Businesses that are responsible for the greenhouse gases that cause climate change face a price for those emissions and those that reduce emissions or plant trees to take carbon out of the atmosphere get a financial reward. But for the decade that it has been in place it has not been allowed to do the job that it was designed to do—to cut climate pollution.These reforms were initiated by the previous Government when Cabinet made a series of in principle decisions following a review in 2015-16. These reforms are the result of five years of hard work by officials and I thank them for that. They have been well planned and well signalled to the market and they will ensure that from now on the emissions trading scheme can and will do the job that it was designed to do and cut climate pollution.The bill will refocus the Climate Change Response Act to incorporate the goals of the Paris Agreement and the zero carbon bill. Our long-term emissions reductions targets in the five-year stepping stone emissions budgets will be set through the zero carbon bill. The settings in the emissions trading scheme will reflect these emissions budgets through unit supply decisions. These will ensure that we have a strong link between our climate change goals and the main policy tool for achieving them.The emissions trading scheme is known as a cap-and-trade system but ours has been operating with no cap. For the first time since it was introduced in 2008 we will actually be able to cap emissions covered by the scheme. This limit is likely to reduce steadily over time in line with the emissions budgets set under the zero carbon bill. This will create a predictable sinking lid on climate pollution. Auctions will be introduced to allow the Government to align the supply of units into the market within the cap. Auctioning will support but not disrupt the secondary market for tradable units that already operates within New Zealand.Price controls will be enabled through the auctioning system to help manage unacceptably low and high prices. The current $25 fixed-price option will be replaced by a new cost containment reserve. Retaining the fixed-price option would prevent us from capping emissions because there is no limit on the extent to which it can be used. The cost containment reserve is a safety valve but one that still allows us to cap and reduce emissions.We need actual reductions in greenhouse gas emissions to meet our targets. The emissions trading scheme is currently closed to international units. These reforms mean that if the scheme were to re-open to international units in the future their volume would be limited to maintain our focus on reducing emissions at home. The bill does not open our ETS to international units now but it does help to clean up some of the mess from dubious international units in the past by allowing the Government to cancel units that don't actually represent real emissions reductions. Other units with legitimate origins but that are now out of date or of negligible value will also be cancelled.The bill will also start the phase out of free industrial allocation. Free allocation for some industries has been in place for nearly 10 years now to manage the risk of what is known as emissions leakage when production moves offshore leading to higher overall levels of pollution globally. A phase out was always planned but was suspended in 2012. These reforms will put us back on track. The bill will start reducing allocation at a modest rate from 2021 and increase the rate of phase down after 2030. The independent Climate Change Commission will be able to recommend changes to the rate of phase down after 2030. This ensures that robust evidence-based analysis will drive decisions and will allow us to distinguish between industries with differing risks of emissions leakage.This reform bill is not just about reducing the pollution businesses emit into the atmosphere. It is also about removing greenhouse gases from the atmosphere both discouraging deforestation and encouraging afforestation. I want to acknowledge and thank the Hon Shane Jones Minister of Forestry for leading the development of the forestry changes in this bill. The bill will add a permanent forest option for post-1989 forests into the emissions trading scheme. This will provide more incentives for landowners to integrate permanent trees into their landscape better use their less-productive agricultural land and diversify their income.Averaging accounting will be introduced as an option to eligible forests registered from the beginning of 2019. It will be mandatory for forests registered from 2021 onwards. Averaging accounting means that a forest owner will earn units as their forest grows up to a determined average level of long-term carbon storage. They will not face any liabilities upon harvest provided that they replant. Forest owners using averaging accounting will be able to trade more carbon at lower risk. They will also have the flexibility to change the location of their forest and will not have to pay back units after adverse events such as fires—again provided that they replant. The introduction of averaging and other policies that support this new accounting approach will incentivise new forest planting in New Zealand. The bill will also reduce the scheme's complexity and provide foresters with flexibility for changing land-use needs. New forests will increase the value that the forestry sector adds to regional economic development; an outcome which benefits all of us.New Zealand farmers have made many improvements in emissions efficiency per unit of production over the last few decades but voluntary efforts to reduce emissions have so far not led to absolute emissions reductions at the scale needed to avoid a climate crisis. Therefore this bill will put a price on agricultural livestock and fertiliser emissions from 2025. Livestock emissions will be priced at the farm level so that the efforts taken by individual farmers to reduce emissions can be recognised and rewarded. Farmers will receive 95 percent free allocation which reflects the Labour - New Zealand First coalition agreement.Some of the more detailed provisions to deal with the interim period to 2025 have not been included in the bill upon introduction. These will become part of the bill through the select committee process. These decisions include that the Minister for Climate Change and Minister of Agriculture table a report to Parliament in 2022 setting out further details of an alternative farm-level pricing mechanism. The bill will also reflect a formal agreement between the Government and the agricultural sector. This agreement will work to encourage on-farm emissions reductions prior to 2025 and will collaboratively build the systems and capability for a workable and effective farm-level pricing system by 2025. These changes will bolster the level of accountability and enforceability of that agreement. This includes the requirement for the Climate Change Commission to report on progress on the commitments contained in the agreement in 2022 and the ability to start emissions pricing before 2025 if progress is deemed insufficient.Our emissions trading scheme was one of the first in the world. There are now 20 emissions trading schemes around the world. This is an important stage in the evolution of our emissions trading scheme and will lead I believe to it finally living up to its promise and its purpose to reduce greenhouse gas emissions and to help avoid a climate crisis. I commend this bill to the House.