The New Zealand Emissions Trading Scheme is a tool to help meet the country’s climate goals. Its settings need to line-up with those goals and be guided by clear direction from the Government, He Pou a Rangi Climate Change Commission Chair Dr Rod Carr says.

The Minister of Climate Change today released the Commission’s latest advice on the New Zealand Emissions Trading Scheme (NZ ETS).

Under the Climate Change Response Act 2002, He Pou a Rangi Climate Change Commission provides independent evidence-based advice to the Government on the ETS unit and price control settings every year. The purpose of the advice is to help ensure the NZ ETS operates effectively and in line with Aotearoa New Zealand’s emissions reduction goals.

This latest report, covering 2025-2029, is the third time the Commission has delivered advice on NZ ETS unit limits and price control settings.

"The Government has choices available now that will bring opportunities that benefit New Zealanders and help avoid the worst consequences of a late response to climate change. This includes how to use the NZ ETS to meet emissions reduction goals," Dr Carr says.

"To fulfil its role, the NZ ETS needs to align with Aotearoa New Zealand's emissions budgets, the 2050 target, and the Nationally Determined Contribution (NDC) under the Paris Agreement, which successive governments have made a commitment to meeting."

"The NZ ETS is simply a tool. This advice seeks to make the best use of the tool as it is and within the legislated scope of our advice."

Draw-down of NZ Units advised

New evidence shows there are too many units in the NZ ETS for the Government to make best use of it to reduce emissions. This excess number of units presents a high risk that emissions budgets won't be achieved. To address this risk, the Commission advises the Government to reduce NZ ETS auction volumes as soon as possible, Dr Carr says.

Under the NZ ETS, certain companies and entities are required to hand in NZUs to the Government for their year's worth of emissions. Units can be issued by the Government in several ways - they can be bought from Government auctions, created by forestry, and in some circumstances a fixed number are available for free as industrial allocation.

For the scheme to work well, units available need to decline in line with the declining emissions reductions targets.

"We have expected for some time that there is a surplus of New Zealand Units (NZUs) already in the market and this represents oversupply. Recent data and updated analysis suggest that the surplus is larger than we previously assessed and that the change in our assessment is material. The outcomes of all four government auctions in 2023 - which were declined with no units sold - support this conclusion."

"This unit surplus will not self-correct. It is critical that the Government adjust the NZ ETS unit volume limits as soon as possible to draw the surplus down and bring the settings back into alignment with emissions reduction goals. There is scope to do this, while keeping the current price control settings essentially the same in real terms."

"This step will help the NZ ETS reward investors, producers, and consumers for actions that contribute to meeting Aotearoa New Zealand’s emissions reduction goals," Dr Carr says.

Clear goals will reduce uncertainty

Alongside having too many units already in the NZ ETS, uncertainty about the Government’s priorities is affecting market and investor confidence in the scheme. This is also increasing the risk that the Government will not achieve its emissions reduction goals.

The Commission reiterates previous advice that the Government make clear statements about its goals for reducing greenhouse gases at their source, its goals for using forestry to absorb some emissions, and the role of the NZ ETS in achieving the emissions reductions committed to in its first NDC.

"The NZ ETS covers less than 50% of our emissions as a nation as measured by internationally agreed measures. The way it currently operates allows action on gross emissions to be displaced by carbon storage by forests. As a country we need both and we’ll be worse off if one ends up being substituted for the other," Dr Carr says.

"Under its current structure, after the mid-2030s, the Commission expects the NZ ETS will also no longer be able to deliver substantial incentives for the forests needed to balance difficult-to-reduce emissions. This will be an additional challenge to staying on the path to net zero long-lived emissions by 2050 and staying at net zero in every subsequent calendar year."

"The Government has the option to use the NZ ETS together with other policies to help speed up emissions reductions in this country. This would reduce the need to pay for emissions reductions in other countries to meet the NDC," Dr Carr says.

The Commission also advises the Government to set out a plan for achieving the NDC. In addition to setting out how the NZ ETS should work with other policies to do more domestically, this will need to include how it will obtain emissions reductions from overseas and the role of the NZ ETS in that.

"We advise the Government to not delay action that will make the NZ ETS more capable of delivering the outcomes. The status quo will not create the stability needed by the market. Changes to the ETS now are essential to reduce uncertainty."

Read the full advice here: NZ ETS unit limits and price control settings for 2025-2029 » Climate Change Commission (climatecommission.govt.nz)

Read our frequently asked questions about this advice here: Excess units in NZ ETS pose a risk to meeting climate goals » Climate Change Commission (climatecommission.govt.nz)

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