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NZ ETS: no price jolt yet, but major reforms are underway
Several recent policy developments are set to affect the New Zealand Emissions Trading Scheme (ETS). They signal a shift towards more formal market governance, more targeted ETS administration, and greater integration of climate adaptation planning into local government decision-making.
In the short term, these developments are unlikely to create a new incentive to invest in lower-emissions technologies. Over the longer term however, the cost of emissions is likely to rise as a declining ETS cap constrains supply and the physical impacts of climate change increase the need for mitigation and adaptation.
Organisations should continue to monitor ETS policy settings, proposed market governance obligations, and adaptation planning requirements.
Government outlines ETS settings through to 2031
The Government recently announced its decisions on NZ ETS unit settings and price controls for 2027–2031, along with a number of technical amendments to ETS regulations.
Key settings decisions include:
Auction volumes for 2027–2030 were largely maintained (aligning with the Climate Change Commission’s recommendations). 1.1 million NZUs will be available for auction in 2031 (lower than the Commission recommended).
Existing price controls (including the auction reserve floor) are to be extended through to 2031, with inflation adjustments.
The ETS cap for the second emissions budget period was adjusted down by 7.5 Mt CO₂-e and the provisional cap for the third emissions budget was adjusted down by 15.9 Mt CO₂-e. The impact of this should be neutral, in that it reflects projections showing higher net emissions outside of those covered under the ETS and a lower net emissions inside the ETS during the relevant emissions budget period.
Proposed market governance reforms move closer
One of the most significant structural reforms currently underway is the development of a formal governance framework for the secondary NZU market. The Climate Change Response Amendment Bill (Bill) will affect certain trading platforms as “unit product markets”. They will also affect people involved in trading, advising on, or brokering NZUs or related derivative products as “unit market participants”. Compliance advice and forestry advice are not intended to be captured. Trading facilities that only facilitate bilateral off-screen transactions with no broad price and volume discoverability will not be unit product markets, although they could be unit market participants.
The reforms reflect increasing concern about:
market transparency and access to reliable market information
informed participation
market integrity.
The proposed framework can be grouped into four main areas:
Trading platforms would need to report daily price and volume information to the Ministry for Cities, Environment, Regions and Transport (MCERT) and maintain 7 years of executed trade history, which must be provided to MCERT on request.
MCERT would be able to request and assess trading information from NZU market participants and share information with related agencies.
Market conduct obligations would prohibit price manipulation and false, unsubstantiated or misleading conduct, with enforcement by the Financial Markets Authority.
All market participants would need to record additional trading information in the Emissions Trading Register.
Reporting obligations will not begin until the necessary Emissions Trading Register functionality has been developed. Once register reporting starts, aggregated trading information would be published periodically to support market transparency.
Unit market participants whose transactions are required to be reported will be required to have a holding account, which will affect those who are trading through nominee arrangements.
Climate Change Commission changes
The Bill proposes changes to the role and operation of the Climate Change Commission, including reducing its size, removing its statutory role in advising on emissions reduction plans, changing the timing of certain advice and reporting functions, and removing some consultation requirements. The Commission would retain its core functions: advising on emissions budgets, reviewing the 2050 target, monitoring progress, reporting on adaptation planning, and advising on NZ ETS settings. The Bill would also allow the Minister to direct the Commission to have regard to Government policy.
These amendments shift the Commission's role away from involvement in developing government climate policy and towards a more focused monitoring and advisory function. While the Commission would remain an important source of independent advice, it no longer has a role in providing advice on the policy direction needed in emissions reduction plans. At the same time, the Government will no longer be required to include sector-specific policies and strategies in the plan, and will be able to amend the emissions reduction plan and national adaptation plan more readily.
Other reforms to watch
Other changes to be made by the Bill include:
Requiring territorial authorities to prepare 30-year climate change and hazard risk adaptation plans for priority locations identified in regional spatial plans (see our article about this here).
Amending the climate policy framework purpose to also refer to "efficient and effective" policies.
Removing the Paris Agreement 1.5°C warming reference from the emissions budgets purpose (while retaining the 2050 target).
Adjusting industrial allocation settings to reduce disincentives for emissions-reduction investment.
Changes to ETS mandatory and voluntary activities, including:
a new carbon removal activities category for non-forestry removals;
a power to add further mandatory activities (excluding agriculture-sector biogenic methane, nitrous oxide, and CO₂); and
adding CO₂ importing as a mandatory activity where a prescribed threshold is met.
Changes to penalties, no-fault defences, interest, amended returns, deadline extensions, and publication of non-compliance.
Empowering the Environmental Protection Authority to extend deadlines for emissions returns and other administrative processes in the case of a significant disruption event such as a national or local state of emergency.
The Government has subsequently announced it will retain an annual settings process for auction units, price controls, and emissions budgets, rather than the biennial cycle proposed in the Bill as introduced.
What organisations should do now
These developments do not immediately strengthen the NZU price signal. Their significance is more structural than immediate: they maintain a gradual approach to unit supply, while progressing reforms intended to improve transparency, market integrity, and the administration of the ETS.
Although this may not materially change short-term investment incentives, it reinforces the need for organisations to monitor both ETS settings and the broader climate policy framework.
If you would like to better understand how these changes affect you, please get in touch.
