The Climate Change Commission has warned the government that unless its Emissions Trading Scheme is adjusted, New Zealand is at risk of being out of step with its emissions budget and international requirements under the Paris Agreement to meet its predetermined targets.
Last year’s ETS settings meant increased NZ Units (NZU) would come onto the market only to add to the existing surplus, and with each unit’s surrendering in place of future emissions reductions, the country would be only drifting further from its intended target.
The Climate Change Commission (CCC) is required to provide the government with annual advice on unit limits and price control settings for the ETS across a five-year window.
Climate Change Commissioner Dr Rod Carr said it is critical NZ get its ETS settings right, and if the government chooses to accept the CCC’s recommendations for the ETS settings, it will enable the ETS to do the job it was set up to do.
“It will also bring the ETS settings back into step with Aotearoa NZ’s emissions budgets and targets,” he said.
“If the government declines the recommendations then it will need a much stronger policy approach to achieve emissions budgets than the one outlined in the emissions reduction plan.”
The commission is recommending reducing the limit on the number of units available for auction, and raising trigger prices for the cost containment reserve that is activated when all available units have already been traded.
“Our analysis is largely the same as last year, however this year there are further adjustments in unit limits to bring the scheme back in line with Aotearoa New Zealand’s emissions budgets and targets.
“We have also been more explicit that some of our recommendations are interconnected and should not be implemented in isolation,” Carr said.
Those recommendations include more than halving the supply of NZU available by auction between now and 2028.
The numbers would go from 24.8 million in 2024 to 15 million in 2026, 13 million in 2027 and 10.6 million in 2028.
The current reserve units held in cost containment would also be pulled back, from 7.7 million in 2024 to 7.1 million in 2025 and only 2.3 million in 2026, falling to 1.9 million by 2028.
Trigger prices to initiate the additional units would also take some big jumps, moving from $91.61 in 2024 up to $282 per unit by 2028. NZU are currently trading at $61.75 a unit.
The commission’s calls for adjustments have progressively gained stridency in the past two years.
Carr said the decisions the government makes now on the country’s ETS will have consequences for the future, and allowing the scheme to function properly will enable it to function as intended, helping NZ reduce emissions and meet the 2050 targets.
The commission outlines a clear choice for the government in its recommendations. It says the government needs to clarify its intentions for meeting emissions budgets, specifically whether it wants to reduce gross emissions or whether it wants to simply remove them, mainly through driving afforestation.
“If government wants to ensure gross emissions reductions occur, the NZ ETS must be amended to ensure forestry removals do not displace them,” it states.
There has been a long-held hope that if NZ cannot meet its targets it can simply purchase overseas credits from those countries that have, to offset them.
But the commission points out no overseas units have yet been approved from any other country’s ETS-equivalent scheme, and no clarity has been provided as to when or how it will access those overseas credits.
“The absence of information has created significant uncertainty for market participants and for the commission as we have prepared this advice,” it says.