Shaw JamesCLIMATE CHANGE RESPONSE (LATE PAYMENT PENALTIES AND INDUSTRIAL ALLOCATION) AMENDMENT BILLFirst ReadingHon JAMES SHAW (Minister of Climate Change): Madam Speaker thank you very much. I present a legislative statement on the Climate Change Response (Late Payment Penalties and Industrial Allocation) Amendment Bill.ASSISTANT SPEAKER (Hon Jacqui Dean): That legislative statement is published under the authority of the House and can be found on the Parliament website.Hon JAMES SHAW: I move That the Climate Change Response (Late Payment Penalties and Industrial Allocation) 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 20 July 2023 and that the committee have authority to meet at any time while the House is sitting except during oral questions during any evening on a day in which there has been a sitting of the House on a Friday in a week in which there has been a sitting of the House and outside the Wellington area despite Standing Orders 193 195 and 196.I would like to preface my comments today to acknowledge all of those who have been affected by Cyclone Gabrielle and of course the earlier floods over Auckland anniversary weekend in Auckland and the north of the country. This is precisely why we need to keep working hard to get climate pollution under control.In 2008 New Zealand established an emissions trading scheme (ETS) in order to tackle greenhouse gas emissions and we were one of the first in the world to do so. I'd like to acknowledge the role that the Hon David Parker played in that as a member of the Clark Labour-led Government at the time. Carbon pricing is a simple idea—that is to provide the incentives that businesses need to cut their greenhouse gas emissions. Those that remove carbon from the atmosphere are rewarded while those that continue to emit carbon dioxide face a financial penalty.Now for most of its history the emissions trading scheme was rendered almost completely ineffective as a result of decisions by the Government of the time. Fixing it was one of my top priorities when I became the Minister for Climate Change in 2017 so that we can get to the point where clean climate-friendly technologies are more cost-effective than those that for so long have locked us into a high-emissions pathway.Since then we've put in place the foundations for long-term meaningful action on climate change including the country's first emissions reduction plan and emissions budgets and the ETS has been turned into one of the most effective tools that we have to reduce emissions. However there are still some aspects that are not operating as we would like them to that are not fair and just and that is what this bill proposes to fix. The improvements that we make today will help to futureproof the emissions trading scheme by ensuring that we more accurately cost carbon pollution.This bill focuses on two key elements of the ETS for improvement. The first is the free allocation of units to industry known as industrial allocation. The second is a revised penalty for small forestry participants who fail to pay units on time.Now when the ETS began it was decided that some companies would receive up to 90 percent of their pollution credits for free. The purpose of this was to help protect these companies from more lightly regulated competitors outside of New Zealand. However the baseline that was used to decide how many credits each company would receive is exactly the same today as it was 12 years ago. Over the last decade major polluters have changed how they do business and are now receiving many more credits than they need. The Government at the time said that it would begin phasing down the free allocation of units from 2013 slowly driving up exposure to the cost of pollution. However the subsequent Government intervened and this did not happen meaning that we have been stuck with an out of date system that has directed large amounts of taxpayers' money towards big polluters whilst keeping emissions higher than they should be. Allowing this to continue would be incompatible with the climate targets that we have set and so we are stepping in to fix it.Our biggest polluters will receive only the pollution credits that they need making sure that they play a major role in meeting our country's targets. These changes will encourage innovation industrial decarbonisation and the proper functioning of our carbon market. Together with our plan to phase out free allocation over time this will push bigger polluters to make a larger contribution to meeting our goal of building a net zero future.Let's start with the industrial allocation reforms. When the ETS was established it was decided that some companies should be given free credits to help offset their greenhouse gas emissions. This is called industrial allocation and it was set up to help to protect companies from unfair competition from businesses in other countries where there is no price on carbon pollution which could lead to companies moving to other countries in what is known as carbon leakage. For some companies this allocation of free credits was up to 90 percent of their entire obligation. However the baseline used to decide how many credits each should receive is exactly the same now as it was at the very start of the emissions trading scheme despite the fact that because of advances in technology and efficiency many companies no longer need as many credits. As a result many are in fact getting more than they need offering them windfall gains and costing New Zealand $60 million a year.At the time that the ETS was established the Government said that the allocation of free credits to trade-exposed industrial emitters would start being phased out in 2013. As I mentioned that did not happen and we've been stuck with an out-of-date system that has seen large amounts of taxpayers' money being directed to big climate polluters and keeping New Zealand's emissions higher than they should have been.Our biggest polluters should receive only the credits that they need making sure that they play their part in meeting our climate targets. Changes to industrial allocation are long overdue and making those changes now will help us to meet our carbon budgets and our international obligations to cut emissions. Our biggest emitters should receive only the credits that they need making sure that they play their part in meeting the country's climate targets. These changes will remove a major obstacle to innovation to industrial decarbonisation and the proper functioning of our carbon market.The bill proposes changes to three key areas of industrial allocation policy. First updates to the rates of allocation for businesses in ineligible industries. These are known as allocative baselines and reflect the emissions cost per unit of production—for example in the cement industry an allocative baseline is the amount of emissions costs per tonne of cement produced. Many of these baselines are out of date which is leading to over-allocation.Built into this bill is the ability for baselines to be reviewed again. These reviews can happen every five years. All allocative baselines will need to be reviewed every 10 years to see if they need updating. These periodic reviews will balance the risk of additional cost to the Crown from over-allocation with providing businesses and investors with the certainty that they need to invest in the innovations technologies and new processes that will lead to emissions reductions.Second the bill proposes reassessing eligibility for current activities and a new approach to assessing the eligibility of new activities. This will make the process clearer. The qualification thresholds which make a part of the eligibility test will be updated to reflect the recent carbon price. We will update the eligibility criteria to make sure that we are getting the settings right for each industry. One industry might no longer need as much support while another industry may need more. We will update the emissions intensity thresholds to account for the significant increase in the emissions price in the last two years. As the emissions price increases so do costs to businesses which increases the risk of emissions leakage. At the same time we are aware that some industries may now have lower emissions.Now there is one element of this that I would like the select committee to pay particular attention to which is that the proposed settings may increase eligibility for industrial allocation while for the most part industrial allocation will decline. I did take the official advice on this but I am keen to hear what the select committee has to say about it.Third the bill comprises technical improvements to industrial allocation policy. These are enabling technical updates to allocative baselines if emissions factors or other technical settings change better access to data submitted for industrial allocation applications and a new methodology for resetting the electricity allocation factor used in determining levels of free allocation. It is likely that we will need to update baselines and eligibility in the future as technological developments and economic changes occur. The earliest the changes to industrial allocation could take effect from is 2024 following extensive data collection and regulatory change as empowered by this bill.The other major element that this bill addresses is the penalty that applies when small forestry participants fail to pay units on time. Small forestry participants are those with average yearly forestry liabilities of fewer than 25000 units. On 1 January 2021 new penalties came in for ETS participants who fail to surrender units on time. Set at three times the price of carbon there was concern that this could cause small forestry participants serious financial hardship so the penalty for these small forestry participants was kept for the time being at the old rate but this transitional arrangement will expire at the end of next year.In summary this bill proposes to make improvements to two aspects of the ETS the industrial allocation settings and small forestry participants. It is time to set these reforms into play and I commend this bill to the House.ASSISTANT SPEAKER (Hon Jacqui Dean): The question is that the motion be agreed to.