New Zealand updates cap and price control settings

On 23 August 2021, the New Zealand government announced new regulatory settings for the New Zealand ETS (NZ ETS) over the next five years, updating the overall cap on unit supply, setting auctioning volumes, and raising both the auction floor price and the cost containment reserve (CCR) trigger price.
 

Once a year, by the end of September, the reformed Climate Change Response Act 2002 requires the Ministry of Environment to update the NZ ETS regulations that set the overall unit supply (cap), auctioning volumes, and price control settings, 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 NZ ETS cap is the overall supply of units that the government can provide to the market, comprising the annual auction volume, cost containment reserve volume, projected free allocation volume, and any approved overseas units (not currently foreseen). The supply settings consider several factors, such as the banked surplus of allowances in circulation. However, the limits do not apply to removal units, generated mainly from forestry activities.

The new regulatory settings update the annual cap and auction volumes up to 2026. When compared to the previous settings, the changes see the NZ ETS cap in 2025 slightly tightened (from 31.1 to 29.6 million tonnes) and the auction share slightly increased (from 22.4 to 23.3 million tonnes). Anticipating strong price development over the next five years, the auction floor price is set to increase to NZD 30 (USD 20.87) in 2022 (previously NZD 20), then rise to more than NZD 39 (USD 27.13) in 2026. At the upper edge of the price corridor, the CCR trigger price is rising to NZD 70 (USD 48.70) in 2022 (previously NZD 51), then steadily increasing to more than NZD 110 (USD 76.53) in 2026.

The increases in the auction floor and CCR trigger prices are much steeper than the 2% rate originally foreseen to counter inflation. The CCR aims to reduce prices when they reach a certain point by injecting additional allowances at auctions. The new auction price settings will take effect from the first auction of 2022.

The CCR trigger price remains at NZD 51 (USD 35.50) for the two upcoming auctions in 2021. With secondary market allowance prices reaching a new record of more than NZD 50 (USD 34.80) this week, it is possible that the CCR will be triggered at the next auction, releasing up to 7 million allowances.

The more stringent settings are in line with recent recommendations from the independent Climate Change Commission to strengthen the NZ ETS to achieve New Zealand’s first three five-year emissions budgets to 2035. The new settings were decided after public consultation. Decisions also address technical updates to the Synthetic Greenhouse Gas Levy and default emissions factors, as well as plans to establish a NZ ETS auction monitor.