ETS-News

New Zealand updates supply settings and auction price controls for 2023-2027

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© Tobias Keller / unsplash

On 15 December 2022, the New Zealand Government announced new regulatory settings for the New Zealand ETS (NZ ETS) for the period 2023-2027. The new settings, decided by Cabinet, tighten the overall cap on allowances and raise the auction floor price and cost containment reserve (CCR) trigger price in line with inflation. However, the Cabinet rejected recommendations from the Climate Change Commission to reduce the cap further and raise the trigger price more sharply, citing concerns about possible energy cost impacts for households. 

The Climate Change Response Act 2002, under the latest reforms of 2020,  requires the government once a year to update the annual unit supply and price control setting for auctions, and to announce these five years in advance on a rolling basis (for more on the NZ ETS system design, see the ICAP factsheet). The overall cap comprises allowances for auctioning, the CCR reserve volumes, and projected allowances for free allocation to industry. The supply settings take account of projected forestry removals and are also set lower than projected to meet emissions targets, in order to reduce the stockpile of banked allowances currently held by NZ ETS participants.

With the latest decision, the government has tightened the cap as compared to the previous settings. The adjustment brings the NZ ETS unit supply settings in line with New Zealand’s national emissions budgets, and the CCR no longer contains allowances outside of these budgets.

  • The overall cap for 2023 has been reduced to 32.3 million, down from 34.5 million previously. The quantity of units available for auctioning has been reduced to 17.9 million in 2023 (down from 18.6 million).
  • Auctioning volumes will also decline more sharply than planned, reaching 13.5 million in 2026 (down from 15.7 million).
  • The CCR quantity is set at 8 million units in 2023, higher than the previous 7 million and balancing the lower auctioning volume for 2023. However, the reserve will also decline more sharply, reaching 6.5 million in 2026, compared to 6.7 million.

The price settings for auctions have been raised slightly in line with higher-than-expected inflation, which is currently running at around 7%, the highest level since the 1990s. Over the last two years of auctioning, high demand has meant that the CCR has been consistently triggered and all allowances have been released.

  • The new auction reserve price, which acts as a price floor, will be NZD 33.06 (~USD 21) in 2023, rising to NZD 44.35 (~USD 28) in 2027 (an increase of approximately NZD 1 over previous settings).
  • The new CCR trigger price, at which the reserve units are released to the market, has been raised to NZD 80.64 (~USD 51) in 2023, rising to NZD 129.97 (~USD 81) in 2027 (approximately NZD 2-5 higher than before).

The changes decided by the government go against recommendations from the Climate Change Commission and the Minister for Climate Change, who were in favour of a tighter auctioning supply and much higher price settings. By law, the Commission must provide annual recommendations for unit supply settings and price controls in line with New Zealand’s emissions budgets and climate neutrality targets. In July 2022, the Commission published its advice, which would have set a lower auctioning volume and a new two-tier CCR trigger with an upper price starting at NZD 214 (~USD 135) from this year. The Cabinet, who must justify their decision if it goes against the Commission’s advice, noted that if the allowance price was to rise to the recommended trigger price, higher energy costs would impact households and the economy. They further noted that any actions to address the resulting distributional impacts would require additional resources and likely mean making trade-offs with ETS revenue spending under the newly established Climate Emergency Response Fund.

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