Overview of industrial allocation

The Government provides allocations of emission units to industry for activities that are both emission-intensive and trade-exposed (EITE). This is called industrial allocation. It recognises that NZ ETS costs might affect the international competitiveness of some businesses.

Reforming industrial allocation in the NZ ETS

From 8 July to 17 September 2021, we consulted on a range of options to improve industrial allocation (IA) policy in the New Zealand Emissions Trading Scheme (NZ ETS). Following consultation, the Government announced on 21 July 2022 plans to introduce changes to industrial allocation policy in the NZ ETS. The Bill enabling these reforms has now been introduced into the House.

Summary of proposed changes

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 will have the ability to review and update activity-specific allocative baselines after five years following their most recent review, and where there is evidence of over-allocation.
  • All allocative baselines will be reviewed every ten years following their most recent review.

Reassessing eligibility to ensure appropriate levels of support to at-risk industries

  • Eligibility will be reassessed using recent data to reflect changes in emissions profiles and therefore competitiveness risks. This will be a one-off reassessment.
  • The emissions intensity eligibility thresholds, used to determine eligibility, will be updated to account for the increase in the emissions price. This will better reflect the increased costs to emitting businesses and, therefore, increased risk of emissions leakage.
  • There will be no changes to the trade-exposure test.
  • Industries that are assessed to be 'less emissions intensive' and drop down an eligibility category would have two years from the date of publication of the amendment regulations before changes take effect; this is a change from the current five-year delay. The two-year delay will ensure eligibility categories are realigned as soon as possible, while still providing forward notice to firms.

New data for updating allocative baselines and reassessing eligibility

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

Technical changes to improve industrial allocation policy

  • A clarified process for activities that have not previously been eligible for industrial allocation
    • The current emissions intensity and trade exposure tests are retained to contribute to the eligibility assessment, and to assign a level of assistance, for activities that have not previously been eligible.
    • Additional criteria have been introduced (from section 84C(3) of the CCRA) to ensure eligibility for industrial allocation is weighed against both the risk of emissions leakage and the ability to meet New Zealand’s broader climate goals. They will provide a more rigorous test for prospective activities.
    • Firms carrying out a these activities will be able to use projected data to inform a provisional eligibility assessment and allocative baseline which 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. 
  • 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.
  • When requested, the Environmental Protection Authority will be required to provide the Ministry for the Environment or the Climate Change Commission data submitted for industrial allocation applications.

Resetting the electricity allocation factor using a new methodology

  • The electricity allocation factor (EAF) used in allocative baselines will be based on a three-year rolling average of an annually updated EAF. This will be calculated by the Electricity Authority.
  • The EAF methodology will be derived from an electricity market model that is publicly and freely available, including all input data.
  • EAF modelling assumptions will be set in regulations and the Minister of Climate Change can recommend amendments to improve accuracy.

Timeline for changes and opportunity for public input

  • The public will have an opportunity to comment on policy decisions during the Select Committee stage of the Bill.
  • Subject to changes to the CCRA, the government will undertake a data collection exercise to inform updates to allocative baselines and retesting of eligibility. Changes to the Climate Change (Eligible Industrial Activities) Regulations 2010 will then follow.
  • The earliest the changes could be implemented is 2024. This means that the earliest any downward shifts in eligibility could come into effect would be 2026.

Cabinet paper

Cabinet minute

Regulatory impact statement

For information on the consultation including submissions 

Climate Change Response (Late Payment Penalties and Industrial Allocation) Amendment Bill [New Zealand Parliament]

Introduction to industrial allocation

Industrial allocation recognises that NZ ETS costs might affect the international 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.

Trade-exposure and competitiveness

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.

Reducing emissions with industrial allocation

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; highly emissions intensive firms face NZ ETS costs of 10% of their emissions, and moderately emissions intensive firms face 40% 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].

Other types of allocation

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).

Scale of industrial allocation in New Zealand

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

In 2019, 77 firms received industrial allocated units. Fewer than 15 of these firms were NZ ETS participants, compared to about 275 total NZ ETS mandatory participants (excluding the over 2000 voluntary NZ ETS participants from the forestry sector).

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).

Industrial allocation contributes to unit supply in the NZ ETS

Industrial allocation is a relatively small proportion of unit supply in the NZ ETS. In 2016, the total number of units provided through industrial allocation in the NZ ETS was 4.3 million.

The total number of units surrendered from sectors other than forestry was 19.5 million (i.e. industrial allocation amounted to about 22 per cent of annual unit demand).

Eligibility criteria for industrial allocation

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 an activity is based on historical emissions across the sector, generally using emission levels from the 2006-2008 period.

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].

Method for calculating an allocation

Actual allocation = baseline x output x allocation level *Either 0.6 or 0.9