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New Zealand Emissions Trading Scheme

Compare ETS
ETS Status
in force
Jurisdictions
New Zealand
Start of operation (year)
2008
Sectoral coverage
Forestry
Waste
Domestic Aviation
Transport
Buildings
Industry
Power
Allocation
Free allocation (Benchmarking); Auctioning; Allowances granted for forestry and other removal activities
Offsets and credits
None
Cap
32.2 MtCO2e (2023)
GHGs covered
CO2, CH4, N2O, SF6, HFCs, and PFCs
Average auction price (2022)
NZD 75.88 (USD 48.11)
Average secondary market price (2022)
NZD 78.97 (USD 50.07)
Total revenue since beginning
5.1 billion (USD 3.4 billion)
Total revenue (2022)
2 billion (USD 1.3 billion)
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General Information

The New Zealand Emissions Trading Scheme (NZ ETS) was launched in 2008 and is a central policy for climate change mitigation in the country. It covers roughly half of New Zealand’s GHG emissions. The “Climate Change Response Act 2002” sets the legislative framework for the NZ ETS and incorporates all New Zealand’s key climate legislation under one Act.

The NZ ETS has broad sectoral coverage, including forestry, stationary energy, industrial processing, liquid fossil fuels, waste, and synthetic GHGs. Free allocation is granted only for emissions-intensive and trade-exposed (EITE) activities and is based on output- and intensity-based benchmarks. Auctioning of allowances began in March 2021. Uniquely to the NZ ETS, the forestry sector has both emissions surrender obligations and the opportunity to earn units for emissions removals. Currently, biological emissions from agriculture have reporting obligations without surrender obligations. A carbon price will be levied on agricultural emissions by 2025, either through the NZ ETS or a separate pricing mechanism.

Extensive legislative reforms of the NZ ETS were implemented in 2020 to improve its design and operation and enable it to better support New Zealand’s international and domestic emissions reduction obligations.

After the major reforms of the previous years, in 2022 the New Zealand government continued to make incremental improvements to the operation of the NZ ETS. Changes coming into effect for the forestry sector in 2023 include a shift to averaging accounting and a new “permanent forest” category. Decisions were taken to tighten the eligibility and accounting rules for industrial allocation, while consultations on an improved market governance framework are ongoing.

2022 was the second year for auctioning under the NZ ETS. The cost containment reserve (CCR) was triggered during the first two quarterly auctions and the full reserve quantity was released. In May, the Climate Emergency Response Fund (CERF) was established to administer NZ ETS revenues with an initial funding of NZD 4.5 billion (USD 2.9 billion). Revenues will be used to finance immediate and future mitigation and adaptation efforts as per New Zealand’s National Emissions Reduction Plan and National Adaptation Plan.

Throughout last year, the government and agricultural sector stakeholders have consulted on a carbon pricing mechanism for biogenic emissions from agriculture. A decision on the mechanism is expected in early 2023. Public debate has also centered on the NZ ETS forestry provisions, perceived as incentivizing the encroachment of exotic forests onto agricultural land. Following public consultation, further changes for forestry are also expected in 2023.   

Forestry
Waste
Domestic Aviation
Transport
Buildings
Industry
Power

Emissions & Targets

78.8

BY 2030: 50% reduction of net emissions below gross 2005 levels (NDC); 10% reduction of biogenic methane emissions below 2017 levels (Climate Change Response (Zero Carbon) Amendment Act 2019)


BY 2050: Reduce net emissions of all GHGs (except biogenic methane) to zero; reduce biogenic methane emissions to 24-47% below 2017 levels (Climate Change Response (Zero Carbon) Amendment Act 2019)

NZD 75.88 (USD 48.11) (average auction price in 2022)

NZD 78.97 (USD 50.07) (average secondary market price in 2022; updated prices available here)

Size & Phases

39.00MtCO2e
CO2, CH4, N2O, SF6, HFCs, and PFCs

The NZ ETS has no fixed trading periods or phases.

 32.2 MtCO2e (2023)

The “Climate Change Response (Emissions Trading Reform) Amendment Act” requires the government to set a cap on emissions covered by the NZ ETS, based on the five-yearly emissions budgets mandated by the “Zero Carbon Act” and announced over a rolling five-year period with annual updates.

The government updated regulations for unit supply settings in December 2022, setting the annual cap for the years 2023-2027. The cap limits the number of allowances that can be released to the market from auctioning, industrial allocation, and the CCR, as well as from any international units (not currently allowed). In setting supply limits, the government also considers the stockpile of banked allowances already in circulation and projected unit supply from removal activities.

There is no limit on New Zealand Units (NZUs) generated from removal activities. These are forecast to be 19 million units in 2023, mainly generated in the forestry sector.

The NZ ETS was originally designed to operate without a specific domestic cap, as this accommodated carbon sequestration from forestry activities and a full link to the international Kyoto Protocol carbon markets. Allowance supply was restricted to NZUs in 2015. Potential future access to international units will be subject to quantitative limits.

Sectors were gradually phased in between 2008 and 2013. Thresholds for participation are typically low.

  • Forestry (mandatory: deforesting pre-1990 forest land; voluntary: post-1989 forest land)
  • Stationary energy (various thresholds)
  • Industrial processing (various thresholds)
  • Liquid fossil fuels (various thresholds)
  • Waste (except for small and remote landfills)
  • Synthetic GHGs (various thresholds); synthetic GHGs not covered by the NZ ETS are subject to an equivalent levy

Biological emissions from agriculture must be reported at the processor level but face no surrender obligations at present. Under the current legislation, a carbon price will be levied on agricultural emissions by 2025, either through the NZ ETS or a separate pricing scheme.

A partnership between the government and the agricultural sector, called “He Waka Eke Noa”, has been established to prepare for this new pricing mechanism, including the development of on-farm accounting and reporting systems for GHG sources and sinks. Final decisions on the design of the mechanism are expected by Cabinet in early 2023.

Upstream (power, aviation, buildings, forestry, transport); point source (industry, waste).

For all fossil fuels, the point of obligation is generally upstream. Some large businesses that purchase fossil fuels directly from mandatory NZ ETS participants can choose to opt into the NZ ETS rather than have the costs passed down from their suppliers.

2,887 entities registered, of which 2,809 have surrender obligations:

  • 281 entities with mandatory reporting and surrender obligations;
  • 2,606 entities with voluntary reporting and surrender obligations, most of which are for post-1989 forestry activities; and,
  • 78 entities with mandatory reporting without surrender obligations, all of which are for agricultural processing activities.

Allowance Allocation & Revenue

FREE ALLOCATION:
Leakage protection/Industrial free allocation: Free allocation is provided, based on output and intensity-based benchmarks, for 26 eligible industrial activities. Activities are deemed eligible if both EITE criteria are met. Highly emissions-intensive activities (over 1,600 tCO2e per NZD 1 million [USD 634,000] of revenue) receive 90% free allocation. Moderately emissions-intensive activities (over 800 tCO2e per NZD 1 million [USD 634,000] of revenue) receive 60% free allocation. An activity is deemed to be trade-exposed if there is transoceanic trade in the good produced.

5.8 million NZUs were allocated for industrial EITE activities in the 2021/2022 reporting year (1 July 2021 to 30 June 2022).

Industrial free allocation is being phased down. A minimum annual phase-down rate of 1% across all industrial activities applies from 2021-2030. That rate will increase to 2% for the years 2031-2040, and to 3% for 2041-2050. The minimum phase-down rate will be complemented by further phase-down rates for activities that are considered at lower risk of carbon leakage.



AUCTIONING: Auctioning was introduced in 2021. The volume of NZUs made available for auctioning is set on an annual basis, five years in advance (see ‘Cap’ section). The annual quantity is split between the quarterly auctions. In 2022, 19.3 million allowances were made available through auctioning, plus an additional 7 million allowances that were released from the CCR.

Auctions follow a sealed-bid, single-round format. The clearing price is set at the lowest successful bid and NZUs are sold to all successful bidders at this price, providing it is not below the confidential reserve price (see ‘Market Stability Provisions’ section). Otherwise, the auction fails and all allowances on offer are rolled forward to the next auction within the same calendar year or cancelled if it is the last auction of that year.


ALLOWANCES GRANTED FOR REMOVALS:
Post-1989 forestry sector and other removal activities: NZUs are granted to participants that voluntarily register in the scheme for removal activities.

Forestry removal activities: 

Participants are entitled to receive one NZU per tCO2 removed for registered post-1989 forest land. If the forest is harvested or deforested, units must be surrendered to account for the emissions. If the participant chooses to deregister from the scheme, NZUs equivalent to the number received must be returned. 7.9 million NZUs were issued for forest removal activities for the 2021/2022 reporting year.


Other removal activities: 3.1 million allowances were granted for other removal activities, such as producing a product with embedded GHGs, for the 2021/2022 reporting year.

  • NZD 5.1 billion (USD 3.4 billion) since the beginning of the program
  • NZD 2 billion (USD 1.3 billion)  in 2022*

* Comprises auction revenues of NZD 2 billion (USD 1.3 billion) and money paid to meet surrender obligations under the “fixed price option” in 2022.

NZ ETS revenues are to be administered via the newly established CERF, which was founded in May 2022 with an initial funding of NZD 4.5 billion (USD 2.9 billion). The fund shall be used to support immediate emissions reductions, lay the foundations for future reductions and removals, and support climate change adaptation. Planned activities are outlined in New Zealand’s first National Emissions Reduction Plan and National Adaptation Plan, which were published in 2022.

Flexibility & Linking

Banking is allowed, except for those units that were purchased under the fixed price option (see ‘Market Stability Provisions’ section below).

Borrowing is not allowed.

Currently no offsets.

Units from Kyoto Protocol flexible mechanisms were eligible for use in the system with no restrictions until June 2015. As of June 2015, international units became ineligible for surrender in the NZ ETS. Access to high-integrity international carbon markets is likely to form part of New Zealand’s strategy for meeting its 2030 target. The government can decide to allow international units as part of the annual unit supply-setting process. However, only units from government-approved sources and those meeting environmental integrity standards would be eligible and would be subject to quantitative limits.

Until June 2015, the NZ ETS was indirectly linked to other systems (e.g., the EU ETS) via the international Kyoto Protocol flexible mechanisms. Since then, the NZ ETS has been a domestic-only system.

The recent reforms make the NZ ETS more like systems in other countries, making it more compatible for limited international linking in the future.

Compliance

For most sectors, the NZ ETS has annual surrender obligations. For post-1989 forestry participants, annual reporting of emissions and removals is optional, with five-year mandatory reporting periods. As a result, unit allocations and surrenders for these participants occur in the year they choose to report their emissions.

REPORTING FREQUENCY:  Most sectors are required to report annually; the deadline is the end of March to submit an Annual Emissions Return (emissions report).


VERIFICATION: MRV follows a system of self-reporting supplemented by a program of official government audits. Each year a sample of NZ ETS participants are selected for compliance review. Third-party verification is not typically required for emissions reports. However, participants must seek third-party verification if they apply for the use of a unique emissions factor, as opposed to using the default factors supplied by the government.

An entity that fails to submit an emissions report by the due date must pay a fine equal to the number of units involved, multiplied by the current unit price and a “culpability factor”.

An entity that fails to surrender or repay emissions units when required must surrender the units and pay a cash penalty of three times the current market price for each unit that was not surrendered by the due date. Entities can be fined up to NZD 24,000 (USD 15,200) on conviction for failure to collect emissions data or other required information, calculate emissions and/or removals, keep records, register as a participant, submit an Annual Emissions Return when required, or notify the administering agency or provide information when required to do so.

Entities can also be fined up to NZD 50,000 (USD 31,700) on conviction for knowingly altering, falsifying, or providing incomplete or misleading information about any obligations under the scheme, including in the Annual Emissions Return report. This penalty and/or imprisonment of up to five years also applies to entities that deliberately lie about obligations under the NZ ETS to gain financial benefit or avoid financial loss.

Market Regulation

MARKET PARTICIPATION: Any individual or organization can own and trade NZUs, if they hold an account with the NZ ETS Registry.

MARKET TYPES:
Primary: Auctions are operated jointly by NZX (New Zealand Exchange) and the European Energy Exchange (EEX) and are held four times a year. Any NZ ETS Register Account Holder can participate in the auctions.

Secondary: Most NZUs are traded on the secondary market. Trades can take place directly between companies (OTC) or via a trading platform, such as the NZX. Trades can be on a spot basis or through forward contract.

LEGAL STATUS OF ALLOWANCES: Allowances are considered commodities in New Zealand. There is currently no single integrated market governance framework that would manage risks of misconduct in the NZ ETS. The government continued consultations in 2022 on options to improve governance, and work on this is ongoing.

FIXED PRICE OPTION (repealed): A Fixed Price Option of NZD 25 (USD 15.82) per tCO2e, which acted as a form of price ceiling, was introduced in 2009 and raised to NZD 35 (USD 22.15) for emissions that occurred in 2020. It was replaced with a CCR in the transition to auctioning in 2021.

COST CONTAINMENT RESERVE: 

If a predetermined trigger price is reached at auction, a specified number of allowances from the CCR is additionally released for sale. The trigger price was originally set at NZD 50 (USD 31.65) in 2021 and scheduled to rise by 2% per year in line with projected inflation. Based on advice from the Climate Change Commission, each year the government updates the CCR trigger price, together with other auction supply settings (see ‘Cap’ section). The latest update made in December 2022, for the years 2023-2027, raised the CCR trigger price to NZD 80.64 (USD 51.13) for auctions in 2023, and to NZD 129.97 (USD 82.42) in 2027.

In 2022, the volume of the CCR was set at 7 million allowances. These were released to the market and sold during the first and second quarterly auctions in March and June 2022 after the CCR was triggered. Currently, the annual volume of the reserve is set at 8 million in 2023, dropping annually to 5.9 million in 2027.

PRICE FLOOR: With the start of auctioning, the government introduced a price floor of NZD 20 (USD 12.68) for 2021-2025, scheduled to rise at 2% per year in line with inflation. The price floor operates through a reserve price or minimum accepted bid at auction. At the latest update, the price floor was set at NZD 33.06 (USD 20.96) for 2023, rising to NZD 44.35 (USD 28.12) by 2027. 

In addition to the hard auction reserve price floor, the government has introduced a confidential reserve price. This is set by referencing prices from the secondary market and uses a confidential methodology to determine a reserve price below which units cannot be sold. If it is set higher than the hard auction reserve price, then it becomes the new reserve price floor for that auction.

Other Information

Ministry for the Environment: Responsible for establishing the regulatory framework of the NZ ETS
Environmental Protection Authority: Competent authority responsible for the registry and compliance
Ministry for Primary Industries: Responsible for the forestry sector under the NZ ETS

The “Climate Change Response Act 2002” includes provisions for statutory independent reviews of the operation and effectiveness of the NZ ETS. These reviews were originally required every five years, but the timing is now discretionary. The first statutory review took place in 2011-2012, and the second review took place in 2015-2017.

Public consultation on proposed amendments to the “Climate Change Response Act” was undertaken in 2018 following the second review.

Climate Change Response Act 2002—Part 4 New Zealand greenhouse gas emissions trading scheme

Note: to keep New Zealand’s key climate change legislation under one act, the Climate Change Response Act incorporates both the “Climate Change Response (Emissions Trading Reform) Amendment Act 2020”, and the “Climate Change Response (Zero Carbon) Amendment Act 2019”. The “Zero Carbon Act” details domestic targets to 2050, establishes the Climate Change Commission, and mandates a process of setting and meeting five-year national emission budgets. 

 

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