emissions and make it much harder for participants to make long-term investment decisions. This bill will provide for that stability through the introduction of a reserve price to ETS auctions.
In any auction, a reserve price is the lowest price that the seller—in this case, the Government—is willing to accept for the auctioned product. It is a way of protecting the Government from selling units at a level significantly below the prevailing secondary market price, which, in the absence of this bill, could occur as a result of unexpectedly weak competition during the auction, or from bidders seeking to gain from a low clearing price by withholding bids or bidding in a coordinated way at prices significantly below the secondary market price. And so what this bill does is introduce a mechanism for New Zealand units to be held back from sale if, at the end of an auction, the clearing price for units is lower than the reserve price.
Now, it is necessary to note that this is different to a price floor. The price floor supports long-term investment decision-making by setting a level below which the price of a New Zealand unit will never fall. The confidential reserve price, on the other hand, is set for each auction to ensure units are sold at a price that reflects the prevailing market activity. Put simply, if the clearing price were to fall below the confidential reserve price, units would not be sold in that auction. The bill will ensure that this does not jeopardise the predictability of units to be auctioned, because if the reserve price is triggered, unsold units will be rolled over automatically into a later auction. Instead, the reserve price would simply restrict the supply of units at a particular auction and support the stability of the secondary market price, which is where the bulk of ETS trades take place and where market forces combine to help determine the cost of pollution.
The methodology for calculating the confidential reserve price will be set ahead of each auction by the Minister of Climate Change in consultation with the Minister of Finance and any auction monitor. So whilst the auction operator—which in this case will be the New Zealand Stock Exchange and the European Energy Exchange—will be required to use the methodology that Ministers agree, no Minister, now or in the future, will be able to set the actual price themselves. That will be influenced by the market itself.
It has been accepted for decades that a well-designed system for pricing emissions needs to be a central part of any Government’s climate change policy framework. Together with the changes that we introduced last year, this bill will help to ensure that we have a clear, transparent, and predictable set of rules for emissions pricing which will drive investment into low-carbon solutions and cut pollution.
Nō reira, tēnā koutou, tēnā koutou, tēnā tātou katoa.
DEPUTY SPEAKER: The question is that the motion be agreed to.
STUART SMITH (National—Kaikōura): Thank you, Mr Speaker. It is a pleasure to speak on the Climate Change Response (Auction Price) Amendment Bill in this second reading. I said at the time when we moved into urgency for the first reading that we on this side of the House don’t think this should have come to the House under urgency. The Minister was advised in plenty of time last year to put a bill up and get it through first reading prior to Christmas, allowing adequate time for industry and interested parties to put well-thought-out submissions together on the bill and give the select committee adequate time to consider those. Unfortunately, that hasn't happened, and we're here again under urgency going through the second reading and through to the end of this process.
This is probably one of the most complex things this Government or, in fact, any Government does is to run an emissions trading scheme (ETS). It has far-reaching consequences, it’s complex in nature, and there are lots of opportunities for mistakes—mistakes that we will do our best to try and rectify before they happen through the legislative process, but, given the short period of time, we can’t fully be confident that we have ironed
