New Zealand's government should reduce auction volumes under the local Emissions Trading Scheme (ETS) "as soon as possible" to address increasing oversupply and meet emissions reduction targets, the country's Climate Change Commission (CCC) has advised.
The government should also address wider issues if it wants to align current regulations with emissions reduction targets, especially after the mid-2030s, as the New Zealand ETS currently risks encouraging high rates of forest planting, which would in turn allow companies to reduce emissions less, the CCC said in its annual advice report to the climate change minister, covering the 2025-29 period.
The commission now estimates there is a surplus of between 51mn-84mn New Zealand Units (NZUs) in the scheme, or a central estimate of around 68mn as of the end of September 2023, which is 19mn higher than its previous estimate of 49mn in mid-2022. This is mostly because of recent data showing a large increase in NZUs allocated for forests registered in the country's ETS. The commission has also assessed that several million units allocated to pre-1990 forests are now more likely to be retired over the next few years, rather than held in the long term by those that acquired them.
All the four quarterly auctions of 2023 have also failed to sell any NZUs, and a total of 23mn unsold units were cancelled as a result, with the commission saying this outcome supports its conclusion. Additionally, the estimate of total unit holdings in private accounts increased to 161mn in September 2023 from 144mn in the middle of 2022 despite the lack of auction sales last year, it noted, as there are also other avenues to acquire NZUs.
"This unit surplus will not self-correct," the commission said. "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."
It is recommending auction volumes be reduced by around 20mn over 2025-28.
The government will need to consider the advice and conduct public consultation in the second quarter, led by the environment ministry on behalf of the climate change minister. The government will then need to make decisions in time for the regulations to be updated by 30 September this year, and subsequently come into force on 1 January 2025.
Addressing wider ETS issues
The government may also decide to address wider issues affecting the New Zealand ETS structure. These include the purchase of carbon credits from other countries to meet New Zealand's nationally determined contribution, as well as reaching a balance between cutting emissions as much as possible while encouraging forest-planting, to get to net zero emissions by 2050 and every subsequent year, the commission noted. These changes would need to be proposed in New Zealand's next plan to reduce its greenhouse gas emissions, which is due in December this year for the 2026-30 period.
The climate change minister last week changed the methodology used to calculate the confidential reserve price in the quarterly auctions. The change came less than two weeks ahead of the next auction, which will take place on 20 March.
