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Carbon and the ETS

Down, down and up….What this year means for the ETS and Carbon.

As part of our carbon market series, this article reviews the events of 2023 so far, with a particular focus on the involvement of agriculture and forestry in the Emissions Trading Scheme (ETS). The first nine months of the year have seen uncertainty and price volatility; however, the market looks to be closing the year on a stronger note. Before we look at what’s happened this year, it’s worth reflecting on the role of the ETS and why having an efficient ETS and market for carbon is vital for New Zealand and our climate ambitions.

Why is an effective Emissions Trading System Important?

The effective operation of New Zealand’s Emissions Trading Scheme (ETS) is seen by the Climate Change Commission and many others as essential to our efforts to reduce both gross and net carbon (CO2e)emissions. The ETS intermediates between the government, forest owners and emitters and creates a price for carbon dioxide emissions. This price is the value of a New Zealand Unit or NZU.

The over-arching theory of the ETS is that over the long-term, the price of NZUs should rise. This is due to the classic balance of supply and demand: there will be a reducing supply of carbon credits driven primarily by an ever-decreasing amount of units being released in government auctions, reflecting New Zealand’s commitment to the Paris Climate Accord and ambition to be net zero by 2050. The increasing cost of NZUs will, in turn, encourage emitters to hurry their transformation away from fossil fuels and activities that produce greenhouse gases, therefore avoiding ha ving to buy increasingly costly NZUs.

Public trust in how the ETS operates is vital to its ability to effectively and efficiently set NZU prices. The market is essentially a government construct, and without consistent policy settings, investors and other participants will stay away, creating uncertainty and volatile pricing. Emitters may also choose to trade on the volatility and the availability of cheap NZUs instead of deciding to invest in often-costly emissions reduction projects.

The year in review

To get a good understanding of what has happened this year, we have started in December 2022.

December 2022: The government announced price and volume settings for the ETS for the next 5 years. In making their decision, they ignored the Climate Change Commission’s (CCC) recommendations and selected more conservative price and volume settings for the ETS, citing cost of living concerns. This marked a deviation in previous government policy which had been more tightly linked to CCC recommendations. The spot price for NZUs, which had been rising, fell approximat ely $10 (11%) over the month.

February 2023: New Zealand experienced Cyclone Gabrielle. Although the data was debated, Niwa scientist, Sam Dean suggested that heavy rain is likely to be 30% more intense and is now four times as likely to occur because of man-made climate change. There were numerous reports of concern about the effect of forestry slash on waterways and infrastructure, leading to a renewed focus on the potential negative impact of an increase in forestry.

March: The first ETS auction of the year was declined because the reserve price was not met. Emitters, who need to secure ETS units to offset emissions, had bought up large quantities of NZUs over the previous years, including the cost containment reserve volume of NZUs, meaning there was already adequate supply of NZUs in the market, without needing those on offer in the government auction.

April: The CCC criticizes the government’s decision on the ETS settings, noting that the ETS needed to do the job it was set up to do, with appropriate settings for volume of units on offer and minimum and maximum price settings. They say that if the government is to decline CCC recommendations, then they will need to implement other much stronger policy settings (such as the clean car discount or the ‘ute tax’) to achieve gross emissions reduction targets. The CCC recommends a review of forestry’s role in the ETS on the basis that they worry that industry will plant trees rather than offsetting emissions if there is no limit or other legislation that could help to control the amount of offsets that forestry will provide.

June: The second ETS auction declined as the reserve price was not met. With ongoing price volatility, the government’s decision back in December on the ETS price and volume settings now seems more like an own goal. The consequence of auction failures could be a $1 billion hole in their climate response fund if all the year’s auctions decline. The Ministry for the Environment announces a consultation on the ETS, with a focus on trying to incentivise gross emissions reductions over removals via trees. During the consultation, MFE share their modelling which appears to forecast record forest plantings through the planning period, which industry says doesn’t make economic sense.

July: Lawyers for Climate Action win a judicial review requiring the Minister of the Environment, James Shaw, to reconsider unit and price settings for the ETS and more closely follow the original CCC recommendations. Shaw speedily announces that settings would revert to the original CCC recommendations, effective the fourth ETS auction of the year. This meant that the NZUS on offer at government auctions in 2024 will fall from 15 million NZUs in 2023 to 14.2 million NZUs in 2024, and the volume available for the cost containment reserve will fall from 8 million NZUs to 7.7 million NZUs. Importantly, the auction reserve price will increase to $64/NZU and the cost containment reserve lifts from $82 to $184/NZU, with and a further step to $230/NZU in 2024, in a two-tiered system. NZUs recover by $20 to $65 from a low of around $45.

August: Minister of Agriculture, Damien O’Connor, optimistically announces He Waka Eke Noa, a so-called partnership between government and industry, would proceed, with farmers liable to pay for emissions under a split gas approach by 2025. Industry notes a lack of mandate for the proposals and National announces it would repeal any regulatory steps taken by Labour if elected.

September: The third ETS auction of the year is declined with demand for just over half the volume available. If the final auction of the year in December declines, this will result in the supply of circa 15 million tonnes of carbon emissions being cancelled, which would be around 13% of the total supply in the market. Annual demand is 35 – 40 million NZUs and it is expected that the market will be short in 2024. MPI announces a new policy which doesn’t seem to acknowledge industry concerns and implements a new annual charge of $30.25 per ha on ETS-registered forests, regardless of forestry type, along with a further 22 new fees. At current prices, this is a tax of about 0.5 NZU per hectare of forest, which while not significant for a rapidly growing pine forest, penalizes native plantings. With much focus in the debate on forestry being focused around how to incentivize native plantings over exotic forestry, this announcement seems to go against this ambition.


In December last year, the NZU price was well over $80. Following repeated regulatory announcements that created uncertainty within the market, prices reached a low of around $38/NZU in July, before recovering to around $65/NZU at the time of writing. The government U-turn on the ETS settings was a key driver of this recovery, giving the market more confidence that decisions in the future would be consistent with the Climate Change Commission recommendations. In general, there are also whisperings that a potential change of Government may look to provide more regulatory consistency, and that the market is starting to price this in. 

This year shows that, just like any other market, it is vital that participants have trust and confidence in how the rules of the market will work. In the long-term, we believe the same trajectory will apply: climate change is a real threat, urgent action is needed, and there must be a higher price of carbon to incentivize emitters to move away from fossil fuels and greenhouse gases. We agree with Jarden’s Nigel Brunel that “we will look back and wonder how NZUs were so cheap”.  

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