Overview of industrial allocation

Industrial allocation recognises that NZ ETS costs might affect the competitiveness of some businesses.

Those that meet the criteria prescribed in the Climate Change Response Act 2002 [New Zealand Legislation website] may be eligible to receive an industrial allocation of NZUs at no cost.

Industrial allocation is targeted at activities (production processes) that are both emission-intensive and trade-exposed.

An emission-intensive production process has significant fuel and energy use or process emissions, when compared with the overall revenue generated from what is produced.

The Climate Change Response (Late Penalties and Industrial Allocation) Amendment Act 2023 which enables reforms to industrial allocation (IA) in the NZ ETS was passed by the House of Representatives on 16 August 2023.

The changes follow both the:

• public consultation in 2021 on a range of options to improve IA policy
• Select Committee consultation in 2023.

Summary of proposed changes

This Act improves the way the NZ ETS functions. It does so by updating industrial allocation settings to address current over-allocation. It also tightens the eligibility criteria for new activities seeking to receive free emission units.

Updating allocative baselines to address over-allocation

• Allocative baselines (the emissions intensity of production) will be updated using recent data to reflect changes in emissions profiles over the last decade.
• The Minister of Climate Change can review activity-specific allocative baselines after five years following their most recent update.
• Allocative baselines will be updated if the allocation is more than 90 per cent of the emissions costs for highly emissions-intensive activities, and 60 per cent of the emissions costs for moderately emissions-intensive activities.
• The Minister of Climate Change will be required to review allocative baselines at least every 10 years following their most recent review.

Allocative baselines are the rates at which an activity receives an allocation for the products it manufactures. Each allocative baseline represents the emissions per unit of product made. For example, a rate or allocative baseline of 1.5 means that there are 1.5 tonnes of CO₂-e associated with every 1 tonne of product made.

New data for updating allocative baselines

• Allocative baselines will use data from the financial years 2016/17, 2017/18, 2018/19, 2019/20 and 2020/21.
• Firms carrying out an EITE activity have been required to provide data for these years. To help smooth distortions due to COVID-19, firms have had the option to nominate data from either 2019/20 or 2020/21 to be excluded from the allocative baseline calculations.

A clarified framework for assessing if a new activity is an eligible industrial activity

• In addition to considering a new activity’s trade exposure and emissions intensity, the Minister of Climate Change must consider additional matters when granting eligibility for a new activity.
• The Minister would need to be satisfied that granting the new industrial activity eligibility is likely to:
  • contribute to achieving New Zealand’s emissions budgets and targets, as well as meeting our nationally determined contributions under the Paris Agreement
  • result in a reduced cost to government when compared with the cost of the current allocation.

Eligibility for existing industrial activities will not be retested as part of the upcoming allocative baseline updates

• There will be no changes to the emissions intensity (eligibility) thresholds or the trade-exposure test.
• The eligibility for existing activities will not be retested in the upcoming update of allocative baselines.
• Any industries assessed in future that are determined to be 'less emissions intensive' and drop down an eligibility category would have two years from the date the relevant regulations are published before changes take effect; this is a change from the previous five-year delay. The two-year delay will ensure eligibility categories are realigned as soon as possible, while still providing forward notice to firms.

Technical changes to improve industrial allocation policy

• Ability for firms to use projected data to inform industrial allocation settings.
  • Firms carrying out new industrial activities will be able to use projected data to inform a provisional eligibility assessment and allocative baseline. This can be corrected in the future once actual data has been collected. This accommodates the lack of historical data for these activities that do not currently operate in New Zealand. 
  • Firms may also use projected data for new products or updated allocative baselines for existing eligible industrial activities, when actual data is not available, to set the relevant allocative baseline/s.
• Allocative baselines can be updated using previously submitted data if there are changes to NZ ETS emissions factors, the electricity allocation factor, or NZ ETS exemption thresholds.
• The Environmental Protection Authority will be required to share information submitted in industrial allocation applications with the Climate Change Commission and the Ministry for Environment on request, to enable better access to data and aid the monitoring of industrial allocation policy.
• The electricity allocation factor (EAF) used in allocative baseline calculations will be based on a three-year rolling average of an annually updated EAF. This will be first calculated by the Electricity Authority in July 2024.
• Emissions from combusting used tyres and consuming CO₂ feedstock covered by the NZ ETS will be counted in industrial allocation settings.

Timeline for implementation of the Act

• The government has completed a data collection exercise to inform updates to allocative baselines. Changes to the Climate Change (Eligible Industrial Activities) Regulations 2010 will then follow.
• Late 2024 is the earliest date the updated regulations would be published.

Related information

• Cabinet paper: Reform of industrial allocation in the NZ ETS
• Cabinet minute: Reform of industrial allocation in the NZ ETS
• Regulatory Impact Statement: Reform of industrial allocation policy in the NZ ETS
• Proactive release package: Climate Change Response (Late Payment Penalties and Industrial Allocation) Amendment Bill
• For information on the consultation including submissions [Citizen Space]
• Climate Change Response (Late Payment Penalties and Industrial Allocation) Amendment Bill [New Zealand Parliament]

Trade-exposure is when NZ ETS costs are unable to be passed on to consumers.

This happens when the goods produced face competition from those produced in countries that do not have similar emissions costs.

Industrial allocation aims to reduce competitiveness issues for New Zealand businesses impacted by NZ ETS costs in the global marketplace. These trade-exposed businesses are unable to pass on increased costs to consumers because they are competing with businesses in other countries.

Reducing carbon leakage

This competition could lead to businesses relocating to countries which do not have equivalent climate policies that price emissions. Relocation would see a loss in production in New Zealand and may also increase global emissions – this is called carbon leakage.

Businesses receiving industrial allocation are still incentivised to reduce their emissions. Businesses still face NZ ETS costs for a proportion of the emissions stemming from the activity.

• For example; in 2024, highly emissions intensive firms face NZ ETS costs of 14% of their emissions, and moderately emissions intensive firms face 36% of NZ ETS costs.

By reducing their emissions they may be able to benefit from selling NZUs allocated to them. The allocation of NZUs is calculated on production levels, so if a business reduces its emissions while maintaining production levels it will have extra NZUs which it can sell.

Those who receive allocated NZUs can use them to meet any NZ ETS obligations they may have. Allocated NZUs can also be sold or traded which helps increase the liquidity of the NZ ETS market.

If you would like further information about how to apply for an industrial allocation, see Industrial allocations [Environmental Protection Authority website].

In addition to industrial allocation there are a couple of other types of allocation to be aware of.

One-off allocations

The Government provided one-off free allocations to compensate for the loss of asset value resulting from the NZ ETS for fishing and forestry.

• Fishing

Fishing quota owners were given some NZUs in a one-off allocation in 2010 to compensate for the effect of increased fuel costs from the NZ ETS on the value of their fishing quota.

• Forestry

Allocation was provided to owners of pre-1990 forests to help offset the decrease in land value which was caused by less flexibility in terms of how land could be used. This is because owners of pre-1990 forest land face obligations under the NZ ETS if the land use is changed from forestry (deforested).

As industrial allocation is targeted at emission-intensive and trade-exposed activities, only a minority of New Zealand emitters receive industrial allocation.

For information about the allocations made to specific firms, see Allocation decisions [Environment Protection Authority website].

Some of these firms received free allocation for only one or two activities out of several emitting activities for which they have to surrender units, because not all their activities meet the eligibility criteria.

The remaining industrial allocation recipients were firms that do not participate directly in the NZ ETS but receive units because they are affected by costs that are passed through from their use of fuel or electricity. Many of these firms are small horticultural producers (growers of cut roses, cucumbers, capsicums and tomatoes).

To be eligible to receive industrial allocation, an activity must meet two tests provided in the Climate Change Response Act 2002 [New Zealand Legislation website].

The tests are:

• An emissions intensity test, showing that the activity produces a large amount of emissions in relation to the revenue it generates.
• A trade exposure test, which considers whether there is international trade of the activity’s output and if importing/exporting the output is viable.

There are currently 26 eligible activities. See the full list eligibility list here [Environmental Protection Authority website].

There are two allocation tiers which depend on the emissions intensity of the activity:

• Highly emissions intensive activities (emissions intensity greater than 1,600 tCO₂-e / NZ$ 1 million of revenue) receive industrial allocation that covers 90% of the emissions for the activity.
• Moderately emissions intensive activities (emissions are greater than 800 tCO₂-e / NZ$ 1 million of revenue) receive industrial allocation that covers 60% of the emissions for the activity.

Eligibility for all firms carrying out a currently eligible activity is based on historical emissions across the sector, generally using emission levels from the 2006-2008 period. As described above, a new process has been developed for determining the eligibility of any new activity.

Individual firms must apply to receive industrial allocation

Individual firms must apply to receive industrial allocation. The exact number of NZUs provided each year is adjusted for production. This means when firms increase or decrease their output, the amount of assistance that they receive correspondingly rises or falls. This allows for the allocations to be based on actual, current production.

If you would like information on how to apply for an industrial allocation, see Industrial allocations [Environmental Protection Authority website].