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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
34.5 MtCO2e (2022)
GHGs covered
CO2, CH4, N2O, SF6, HFCs, and PFCs
Average auction price (2021)
NZD 50.95 (USD 36.04)
Average secondary market price (2021)
NZD 49.41 (USD 34.95)
Total revenue since beginning
3.02 billion (USD 2.14 billion)
Total revenue (2021)
2.38 billion (USD 1.6 billion)
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General Information

The NZ ETS was launched in 2008 and is a central policy for climate change mitigation in New Zealand. It has broad sectoral coverage, including forestry having emissions surrender obligations and the opportunity to earn units for emissions removals. Currently, biological emissions from agriculture have reporting obligations without surrender obligations. The “Climate Change Response Act 2002” sets the legislative framework for the NZ ETS and incorporates all of New Zealand’s key climate legislation under one Act.

After an extensive process of review and public consultation, in 2020 the government enacted sweeping legislative reforms of the NZ ETS to improve its design and operation and enable it to better support New Zealand’s international and domestic emissions reduction obligations.  

2021 was a year of major reforms for the NZ ETS, following on from the passing of the “Climate Change Response (Emissions Trading Reform) Amendment Act 2020”.   The reforms include a new cap on unit supply and the introduction of an auctioning mechanism. The cap represents an annual limit on units that may be supplied into the NZ ETS by the government. Under the Act, the government is required to announce the annual cap over time, which should be aligned with the economy-wide, five-yearly emissions budgets set by the government with advice from the independent Climate Change Commission. The latest update in August 2021 set unit supply volumes for the period 2022-2026.

Auctioning began in March 2021. Throughout 2021, auctions consistently sold out and the clearing price rose significantly. With auctioning underway, the fixed price option, which previously acted as a price ceiling, was withdrawn after 2020. It was replaced with a cost containment reserve (CCR). The CCR was triggered during the September auction and all available reserve allowances for 2021 were released for sale. Price control settings (including both the CCR trigger and auction reserve price floor) were also updated in August and are set to increase over the next five years.

Forestry
Waste
Domestic Aviation
Transport
Buildings
Industry
Power

Emissions & Targets

82.3

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

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

NZD 30.83 (USD 19.99) (average secondary market price in 2020; updated prices available here)

Size & Phases

40.30MtCO2e
CO2, CH4, N2O, SF6, HFCs, and PFCs

The NZ ETS has no fixed trading periods or phases.

 34.5 MtCO2e (2022)

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 August 2021, setting the annual cap for the years 2022-2026. 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 units from removal activities.

There is no limit on New Zealand Units (NZUs) generated from removal activities. These are forecast to be 16.3 million units in 2022, 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 in 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 pricing mechanism, including the development of on-farm accounting and reporting systems for GHG sources and sinks. However, if this partnership has not made enough progress by 2022, agricultural emissions can be brought directly into the NZ ETS as early as 2023, with livestock emissions priced at the processor level (e.g., milk processors and abattoirs). GHG emissions from fertilizer would be covered upstream under the NZ ETS at the importer/manufacturer level.

The point of obligation is generally placed 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.

2,475 entities registered, of which 2,398 have surrender obligations:

  • 200 entities with mandatory reporting and surrender obligations;
  • 2,189 entities with voluntary reporting and surrender obligations, most of which are for post-1989 forestry activities; and,
  • 77 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 of revenue [1,600 tCO2e per USD 707.3 thousand]) receive 90% free allocation. Moderately emissions-intensive activities (over 800 tCO2e per NZD 1 million of revenue [USD 707.3 thousand]) receive 60% free allocation. An activity is deemed to be trade-exposed if there is transoceanic trade in the good produced.

7.1 million NZUs were allocated for industrial EITE activities in the 2020/2021 reporting year (1 July 2020 to 30 June 2021).

Industrial free allocation will be phased down. A minimum annual phase-down rate of 1% across all industrial activities will apply 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’). The annual quantity is split between the quarterly auctions. In 2021, 19 million allowances were made available for 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’). 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, and if the participant chooses to deregister from the scheme, NZUs equivalent to the number received must be returned. 6.3 million NZUs were issued for forest removal activities for the 2020/2021 reporting year.

The forestry sector is undergoing reforms due to come into force in 2023, including simplified accounting measures for new entrants (a transition from “stock-change” to “averaging” accounting methodology).

Other Removal Activities: 2.3 million allowances were granted for other removal activities for the 2020/2021 reporting year.

 

* Under the new “averaging” method for post-1989 forests, allowances are granted only up to the long-term average carbon stock, but therefore do not need to be surrendered at harvest.

  • NZD 3.02 billion (USD 2.14 billion) since the beginning of the program
  • NZD 2.38 billion (USD 1.69 billion collected in 2021)*

* Comprises auction revenues for 2021 of NZD 1.32 billion (USD 0.94 billion) and money paid to meet surrender obligations under the “fixed price option” for the reporting year 2020/2021.

Currently, NZ ETS revenues are assigned to the general budget, as managed by the New Zealand Treasury. From 2022, NZ ETS revenues will be ringfenced for further emissions reductions, in line with New Zealand’s forthcoming national Emissions Reduction Plan.

Flexibility & Linking

Banking is allowed, except for those units that were purchased under the fixed price option (see ‘Market Stability Provisions’ 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 similar to ETSs 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 end March to submit an Annual Emissions Return (emissions report).

VERIFICATION: Self-reporting supplemented by a program of official audits. Participants must seek third-party verification if they apply for the use of a unique emissions 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 16,976) 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 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 35,365) 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 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. 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 consulted in 2021 on options to improve governance, and work on this is ongoing.

FIXED PRICE OPTION (repealed): A Fixed Price Option of NZD 25 (USD 17,68) per tCO2e, which acted as a form of price ceiling, was introduced in 2009 and raised to NZD 35 (USD 24,76) 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 35,37) in 2021 and scheduled to rise by 2% per year in line with projected inflation. Based on advice from the Climate Change Commission, the CCR trigger price was updated to NZD 70 (USD 49,51) for auctions in 2022, rising to ~NZD 110 (USD 77,8) in 2026, a rate of increase higher than projected inflation.

In 2021, the volume of the CCR was set at 7 million allowances. These were released to the market and sold during the third quarterly auction in September 2021 after the CCR was triggered. The volume of the reserve, in the years 2022-2026, is currently set at 7 million per year until 2024, dropping to 6.7 million in 2026.

The reserve is comprised of allowances from two sources:

1) units which are to be withheld from auctioning in order to reduce the stockpile of units in circulation (5.4 million per year); and,

2) an additional volume equal to 5% of the total volume of the NZ ETS (~1.6 million per year).  These volumes must be “backed” by equivalent removals procured by the government, e.g., from international markets or through government funding of other domestic mitigation activities.     

PRICE FLOOR: With the start of auctioning, the government introduced a price floor of NZD 20 (USD 14,15) 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. Based on advice from the Climate Change Commission, the price floor was updated to NZD 30 (USD 21,22) in 2022, rising to ~NZD 39 (USD 27,59) by 2026, a rate of increase higher than projected inflation.  

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
Environmental Protection Authority
Ministry for Primary Industries
NZX and EEX auctioning platform

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 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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