Among the options currently considered in public consultations no units entering the New Zealand Emission Unit Register after the ban date could be used to meet surrender obligations, regardless of forward contracts.
New Zealand Government is considering (communication of 13 November 2012) restricting the following international emission units from surrender in the New Zealand Emissions Trading Scheme:
- Emission Reduction Units (ERUs) generated from HFC-23 and N2O industrial gas destruction projects
- Certified Emission Reduction units (CERs) and ERUs generated from large-scale hydropower projects (greater than 20 MW capacity) that do not meet the guidelines in the World Commission on Dams’ final report: Dams and Development: A Framework for Decision Making.
The restriction on the use of CERs generated from HFC-23 and N2O industrial gas destruction activities was introduced in the New Zealand Emissions Trading Scheme in December 2011 already.
As the reason for banning CERs generated from industrial projects that destroy HFC-23 and N2O industrial gases from the New Zealand Emissions Trading Scheme was the lack of environmental integrity, banning ERUs derived from the same activities would ensure a consistent approach is taken.
The legislative proposal is to exclude the use of these particular units either from 1 January 2013 or 1 June 2013 (two options are currently on the table, subject to consultation).
Option 1 would mean that the units at issue entering the New Zealand Emission Unit Register after 1 January 2013 could not be used to meet surrender obligations while the option 2 sets the relevant date on 1 June 2013.
The New Zealand Government recalls the fact that the European Union is also banning these units from 2013 and Australia is proposing a prohibition when their emission trading scheme comes into effect in 2015.
ERUs and CERs already in the New Zealand Emission Unit Register at the time the new regulations entered into force would remain eligible for surrender. As such, evidence showing when the ERU or CER was imported into the New Zealand Emission Unit Register is likely to be required when units are surrendered.
Consistent with the restriction on CERs from industrial gas destruction projects, participants would be responsible for identifying the restricted units and ensuring these units were not surrendered after the regulations had come into force. If banned CERs or ERUs were found to have been incorrectly surrendered (e.g. by the New Zealand Emission Unit Register’s verification process), the participant would be required to replace the units with eligible units and could face penalties.
The major problem, however, relates to forwards. It is said that signed forward contracts are likely to be exempted, like was the case under the previous restriction, where an industrial gas CER purchased by an account holder under a forward contract was exempt from the restriction if the forward contract was entered into before the restriction came into effect and units were delivered into a surrender account before a specified date.
Under the CER ban that was introduced in December 2011, banned CERs brought into the New Zealand Emission Unit Register under forward contracts could be surrendered up to 1 June 2013. This meant units for an additional two surrender periods (calendar 2011 and calendar 2012) could be surrendered after the ban came into effect.
Holders of forward contracts were required to apply for an exemption by registering their contract with a signed declaration to the Registrar of the New Zealand Emission Unit Register by a certain date.
The New Zealand Government is also consulting on whether the proposed restrictions should be imposed on forward contracts, and if so, under what terms.
Under the first option, as with previous restrictions, units purchased under forward contracts would be assessed on a case-by-case basis and would likely be exempt from the ban. This will ensure New Zealand companies with legitimate investments are not disadvantaged by the ban.
Under the second option currently put to consultation no units entering the New Zealand Emission Unit Register after the ban date could be used to meet surrender obligations, regardless of forward contracts.
The deadline for submissions in the said consultations is 5.00pm on Friday 30 November 2012.
The said changes can be perceived as a reflection of the wide-spread tendency, and generally should not be a surprise for the market. However, it should be ensured that the legitimate expectations of investors were protected, as required by the relevant legal standards.