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Government’s Climate Change Mess Just Got Messier And The Answer More Obvious

The High Court changes the rules.

Just after 5pm last Thursday night, the High Court released a judgment finding Government regulations which did not follow the Climate Change Commission’s 2022 advice on NZ ETS unit limits and price control settings for 2024 - 2028, were not lawful.

The Climate Change Response Act 2002 requires the Minister (Shaw) to satisfy himself as to certain matters before regulations are promulgated. Shaw agreed with the Commission’s 2022 advice. He didn’t think the cost-of-living impact was relevant to future price and supply settings for the ETS. The Cabinet did, but it was not its call to make. Shaw then promulgated regulations in accordance with Cabinet’s view, but not his own.

The High Court has given Shaw until 30 September to reconsider his view. Unless the Government changes the law, it appears they are bound to accept his view, although they retain the right to persuade him to theirs. If, in coming to a view, he considers irrelevant considerations, or fails to consider relevant considerations, he will likely be judicially reviewed again.

What the High Court decision shows is two things: first, the ETS is not a government plaything, liable to be pushed out of shape by political and ideological considerations. The Court has a role to play in ensuring the Minister and the Government don’t try to make it one. Second, and subject to Court control, it is the Minister and not the Cabinet that is in control when it comes to price and supply settings.

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The full implications of the High Court decision are yet to be felt.

Before the invalid regulations were promulgated last December, NZU spot prices were near $90/NZU. As a result of those regulations, reflecting the Cabinet’s views but not Shaw’s, the price fell to around $53/NZU as buyers refused to pay more for NZUs when it appeared Cabinet could change ETS settings for political and not climate reasons. Then the Government scored an own goal on 19 June 2023, when it launched its ETS Review consultation, by further signalling to the market that it cannot be trusted not to change the rules for 28-year investments after they were made, causing prices to drop as low as $34/NZU.

The full implications of the High Court decision have yet to be felt. First, the auction in early September of NZUs will be under the invalid settings, but little probably turns on this as the consensus is it will likely fail as the last two this year have. Second, after the auction, but before 30 September 2023, the Minister must satisfy himself on new price and unit settings under the ETS for 2023-2027. And third, invalid decisions have legal consequences, and no doubt someone will seek legal redress for losses the invalid regulations have caused them, at least if the NZU price doesn’t recover sufficiently and they haven’t been forced to sell in the meantime. Below we look at the second of these.

What the Minister must consider before 30 September.

The main matters the Minister must consider, amongst others, are anticipated volumes of GHGs to 2028; the proper functioning of the ETS; international climate change obligations, the effect on the NDC and the 2023 recommendations of the Commission. The impact of emissions on households and the economy is only an “additional” matter.

Shaw could of course determine that he was right all along to agree with the Commission’s recommendations in 2022. He cannot accept the Commission’s 2023 recommendations because they do not reflect the new realities below.

If Shaw determines he will not accept the Commission’s 2022 recommendations (which he agreed with last year) or prefers the Commission’s 2023 recommendations, then he walks a perilous legal path.

The world has changed since 2022 when Shaw agreed with the Commission’s recommendations. He must make new decisions and satisfy himself on real facts, not ones that inhabit an alternative political or ideological universe. If he doesn’t, he will be open to further review (even if he is no longer Minister after mid-October). Those facts are:

  1. Forestry investors have no confidence that the Government will not continue to meddle with the ETS on spurious grounds. Left as things are there will be no planting in 2024 and in the years after, again assuming this Government is re-elected: see Treadwell “Carbon News 4 July 2023”. That will hugely impact on our international obligations and the NDCs. Every year without planting leaves a deficit that will never be made up (e.g., 60,000 ha x 50t CO2/ha x 20 years x NZD160 = NZD9.6b). The Minister’s officials only need to pick up the phone to find seedling contracts for next year are being cancelled wholesale and no new contracts are being offered to forestry workers for planting.
  2. The Minister has continually stated new forests are necessary to meet net carbon zero in 2050.
  3. The Review of the ETS has signalled that forestry NZUs may in effect be nationalised by 2025 (only the Government will buy at a price and time it chooses) with dramatic consequences for Māori and other investors, as well as tens of thousands of people that rely on forestry, such as workers, seedling contractors and so on.

In addition to these facts, the Minister now likely has the UN breathing down his neck. (TV1 News 15 July 2023).

Can the Minister ignore the Review when making his 30 September decisions?

He is bound to because it is a flawed document. He must treat it as a dead horse for two reasons. First, because it is premised on oversupply of NZUs by 2037, as were the Commission’s 2023 recommendations. But these gravity defying assumptions overlook the fact investors will not plant if they think there will be no market for NZUs in 24 years, quite apart from the fact they will not invest while the prospect of nationalisation of their NZUs is being considered. And second, because of the Review’s error in not counting NZUs that are held against deforestation costs, as recognised in Figure 3 of the Review, but including them in Figures 4 and 5 to arrive at the scenario of a supposed future oversupply.

In terms of the decisions to be made before 30 September, Shaw cannot ignore the Review without the prospect of another judicial review. Shaw is bound to recognise that NDC deficits will be larger and our international obligations harder to meet unless he or the Government:

  1. ditches the Review, or
  2. at the least, tries to convince investors to start planting again by grandfathering existing forests from the Review (signalling to investors that if they plant their risk/reward assumptions will not be altered by the Government).

Less forest removals likely means that, to comply with the Act, Shaw must go further than the Commission’s 2023 recommendations and satisfy himself that the only way to comply with 2050 zero net carbon, and not force higher costs on future consumers or tank the economy going forward, is for even higher carbon price settings and/or less units coming onto the market.

Shaw, the Government, and the market

The Government must pull the Review immediately to rescue forestry planting going forward. That would make Shaw’s 30 September decisions less legally hazardous. Grandfathering would be a second-best option, if it restores investor’s confidence to plant (a big if) but may not be enough to satisfy Māori aspirations. If neither happens, Shaw will probably have no alternative but to satisfy himself that even higher NZU prices and fewer auctioned credits are necessary. And Shaw must also be cognisant that the market will never recover to do its job (one of main considerations he must take into account) if the Review does not grandfather existing plantings.

There is a political aspect to this. Pulling the review or at least grandfathering is so obvious a step that it is hard to understand why the PM is not insisting on it. Voters in marginal electorates and Māori are currently being adversely affected by Shaw’s refusal to pull or grandfather the Review, whatever becomes of it, and the Government is 90 days out from an election. It’s a dead horse anyway.

Halt NZU Grab

Campaign Co-convenors: H. Bradbury and S.Thomson

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