NZ carbon credits will be treated as ‘financial products’ under new government proposals unveiled last week, bringing traders, advisers and market operators into a tighter regulatory regime.
In the just-released consultation document, the Ministry of Environment (MOE) recommends corralling the NZ carbon trading system into the Financial Markets Conduct Act (FMC) as a safeguard against potential abuse.
Currently, NZ carbon markets are governed by disparate laws including the Crimes and Fair Trading Acts.
“A poorly governed New Zealand Emissions Trading Scheme (NZ ETS) could impact our ability to meet our domestic emissions budgets and undermine the robustness of the NZ ETS and its reputation internationally,” the MOE report says.
The preferred MOE option will see NZ Units (NZU) – the currency of the local ETS – deemed as financial products in line with other jurisdictions such as Australia, Europe and the UK.
Furthermore, the mooted carbon market shake-up includes:
- treating financial advice relating to NZUs as a financial advice service;
- treating market risks in the NZU market as financial risks;
- bringing the NZU market under existing financial frameworks legislation; and,
- appointing the Financial Markets Authority (FMA) to oversee and regulate the NZU market.
NZU trading venues would have to be licensed under the proposals. The FMA, of course, has plenty of other new responsibilities coming up including climate change reporting and the conduct of financial institutions licensing regime.
Among other risks, the MOE consultation says the current ETS governance arrangements leave NZ carbon markets open to insider trading and market manipulation.
“The FMC Act insider trading provision prohibits a person from buying or selling financial products that are ‘quoted’ (ie, listed for trading) on a licensed market if they hold material non-public information,” the consultation says.
However, the MOE says the insider trading rules for carbon markets will only apply to “material non-public information” concerning government policy.
“We propose that in the NZU secondary market there is a frontline monitor for insider trading and market manipulation who can gather information, from both over-the-counter trades and trades that could occur on the proposed optional centralised exchange…,” the consultation document says.
“… The Government intends to run a procurement process for the supply of market services for a trading platform to buy and sell NZUs, alongside the development of the NZ ETS market governance reform package. This would be subject to the terms and conditions of any RFI and RFP, the nature and extent of interest, and any offers received.”
According to the MOE, a government-authorised central exchange could improve the “liquidity and functioning” of the NZU market.
Submissions on the carbon trading proposals are due by December 15 with final decisions expected early next year.
Environment Minister David Parker said in 2020 that the government was reforming the ETS “to incentivise business and consumers to lower their emissions”.