Shaw JamesCLIMATE CHANGE RESPONSE (LATE PAYMENT PENALTIES AND INDUSTRIAL ALLOCATION) AMENDMENT BILLSecond ReadingHon JAMES SHAW (Minister of Climate Change): I present to the House a legislative statement on the Climate Change Response (Late Payment Penalties and Industrial Allocation) 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 (Late Payment Penalties and Industrial Allocation) Amendment Bill be now read a second time.New Zealand has committed to a net zero target for 2050 and the emissions trading scheme (ETS) is a critical tool for achieving this by putting a price on the pollution that causes climate change. This bill will make the New Zealand emissions trading scheme more accurate and reduce an unnecessary cost to the Crown. It will also more equitably treat other sectors and reduce the pressure on our emissions budgets.Currently industries that are emissions intensive and which compete with foreign companies that are not exposed to a carbon price receive what we call industrial allocation" or free New Zealand emissions units up to a certain percentage of their expected emissions costs but some industries are receiving more free emissions units than they need. This bill improves the way that the ETS functions by updating the decade-old baselines used to calculate industrial allocation. The bill also tightens the eligibility criteria for new industrial activities wanting to receive free emissions units.Addressing over-allocation is long overdue. Over-allocation is a significant cost to the Government of almost $50 million every year. The bill also reduces the risk of over-allocation in the future by introducing five- to 10-year review and update window periods for updating baselines in eligible industries—in other words no sooner than five years and no later than 10 years. This window aims to balance the risk of additional cost to Government due to over-allocation whilst also providing businesses and investors the certainty that they need to invest in new ways of working that will lead to emissions reductions.The bill also includes three technical improvements to industrial allocation policy. These are first enabling updates to allocative baselines if technical settings change; second easier access to data from industrial allocation applications; and third a new methodology for resetting the electricity allocation factor.The bill also makes changes to penalties for late payments by small forestry participants to reduce the risk of serious financial hardship. Small foresters are forestry participants with liabilities of less than 25000 units on average per year. The revised penalty will take effect from 1 January 2025 to allow for sufficient time to educate participants on how the penalty will work.I do want to thank the Environment Committee for its diligent consideration of this important piece of work. I also want to acknowledge everyone who has submitted on the bill during the select committee stage. The bill received over 100 submissions including submissions from the Climate Change Commission not-for-profit organisations individuals industries and climate experts. Your input has proven invaluable in this process.I now want to focus on the changes that the select committee has made to this bill which all relate to industrial allocation. In my first reading speech I asked the select committee to look into proposed changes that may increase eligibility for industrial allocation. The select committee examined these settings closely and has recommended some changes. Again I do want to thank the submitters and particularly independent experts such as Dr Christina Hood for their work with the select committee and with the Ministry for the Environment officials to get to where we did on this.The first change is to retain rather than to change the current thresholds used to test whether an industry or activity should be eligible for industrial allocation. In addition the bill will require that eligibility for existing activities not be retested as part of the upcoming allocative baseline update. I welcome this change. It addresses concerns from many submitters that updating the eligibility thresholds using a recent carbon price would have made it easier for some businesses to receive industrial allocation. The bill will keep the current classifications and maintain the high bar for eligibility supporting the broader emissions reductions goals.The second change concerns eligibility for new industrial activities. The select committee recommended changing the additional test for eligibility for new industrial activities and I also endorse this change. The test requires the Minister of Climate Change to consider additional matters. Under this new test it will be difficult for new activities to gain eligibility for industrial allocation. As well as being consistent with our broader climate change commitments this will help the Government to manage the scheme's fiscal costs.The third change that the select committee recommended relates to the over-allocation test for future updates to allocative baselines. The bill proposes that the Government can update baselines when allocation is more than 60 percent of the emissions costs associated with moderately emissions-intensive activities such as the production of ethanol or of tissue paper. For highly emissions-intensive activities the baselines can be updated when allocation is more than 90 percent of the emissions costs. Highly intensive activities include cement production and aluminium smelting. This is an important change. The revised test will deal more effectively with any significant over-allocation that occurs as companies decarbonise. Having two different trigger levels for moderately intensive and highly intensive activities will treat companies more equitably.Lastly each eligible activity has at least one associated product. For example a product from the production of cementitious products is cement clinker. The select committee made a change to the bill so that new products within an existing eligible activity could use projected data to set its allocative baselines when actual data is not yet available. Without the ability to do this a firm could be better off continuing with its current method of operation and receiving free allocation rather than decarbonising. I support this change as it would encourage firms to pursue decarbonisation investments which is crucial for our transition to a more resilient low-emissions economy.This bill as reported back by the select committee supports the review and the update of industrial allocation settings that are long overdue. This bill futureproofs the emissions trading scheme by ensuring that we more accurately determine the rates of allocation and that there is a framework to update them in the future. The changes that we make today will help us to meet our emissions budgets our international obligations and our broader climate change goals. Thank you Mr Speaker. I commend this bill to the House."