The Climate Change Commission says there are too many units in the New Zealand Emissions Trading Scheme for the government to make the best use of it to reduce emissions – and there’s a high risk that emissions budgets won’t be achieved.
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 on government auctions or created by forestry, and in some circumstances a fixed number are available for free as industrial allocation.
The latest advice from the Climate Change Commission (CCC) on the ETS advises the government to reduce NZ ETS auction volumes as soon as possible.
CCC chair Dr Rod Carr said that 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 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,” Carr said.
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 CCC 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 Nationally Determined Contribution (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,” Carr said.
“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,” Carr said.
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,” Carr said.
Climate Change Minister Simon Watts said the government will consider the advice and make decisions on it later this year.
