What is the NZ Emissions Trading Scheme (NZ ETS)?
A quick introduction to the NZ ETS and how it helps reduce greenhouse gas emissions in New Zealand.
What is the New Zealand Emissions Trading Scheme (NZ ETS)?
The NZ ETS is one of the Government’s tools for reducing greenhouse gas emissions. Its purpose is to help meet international obligations under the Paris Agreement, and the 2050 target and emissions budgets for Aotearoa.
The Government sets and reduces the number of units supplied into the scheme over time through the NZ ETS settings regulations. This limits the quantity that businesses participating in the NZ ETS can emit.
These limits are informed by the total emissions allowed by emissions budgets, so that the NZ ETS will support New Zealand to meet its targets. The budgets also inform the price control settings in the NZ ETS.
How does the ETS work?
The Emissions Trading Scheme is a tool for sending price signals to producers, consumers and investors. It puts a price on emissions, by charging certain sectors of the economy for the greenhouse gases they emit.
In Aotearoa, it covers the following sectors:
- Liquid fossil fuels, (mainly petrol, diesel and aviation fuel used in domestic transport)
- Stationary energy, (mainly fossil fuels used for heat and electricity generation)
- Industrial processes (such as making steel, or aluminium)
- Waste (operating landfills)
- Synthetic gases (fluorinated gases used as refrigerants or in electrical switchgear)
These industries must measure and report on their greenhouse gas emissions and surrender a tradeable return to the government an ‘emissions unit’ (known as NZUs) for each one tonne of emissions they emit. These NZUs can be bought and sold by participants in the scheme.
The Government sets and reduces the number of units supplied into the scheme over time. This limits the quantity of units in line with New Zealand’s emission reduction targets. This cost to certain industries gets passed along the supply chain and has the effect of raising the cost of higher-emissions goods and services and incentivising lower-emissions behaviour.
Are there different types of units in the ETS?
No, but people sometimes call them different things – so it can be a bit confusing.
New Zealand units (NZUs): these represent one metric tonne of carbon dioxide, or the equivalent of any other greenhouse gas, from industries covered by the NZ ETS. Businesses participating in the NZ ETS must give the government one NZU for each tonne of emissions they produce.
Carbon credits: these are financial instruments – things that can be bought and sold – that represent a unit of carbon dioxide equivalent or CO2e. One carbon credit is equal to 1 tonne of CO2e. Carbon credits are awarded for projects that store, avoid or reduce greenhouse gas (GHG) emissions in the atmosphere.
Where the government creates carbon credits under the ETS, they are NZUs. At a very basic level – NZUs are carbon credits, but not all carbon credits are NZUs – which is why it can get so confusing.
How is the NZU price set?
The price of New Zealand emissions units (NZUs) in the New Zealand Emissions Trading Scheme (NZ ETS) market is based on supply and demand. The Ministry for the Environment provides more information on its website: ETS Auctions and how to buy New Zealand Emissions Units (NZUs)
How is our ETS different from what other countries are doing?
The NZ ETS is one of many emissions trading schemes in operation around the world. Globally (as at April 2022), there are 25 emissions trading systems in force, 14 under consideration, and nine under development. The New Zealand Scheme operates on a national scale. In other countries, these schemes operate at a range of levels including Supra-national, Country, State & Province, and City levels. They also vary in the number of sectors the scheme covers and settings.
All sectors of New Zealand’s economy, apart from agriculture, pay for their emissions through the Scheme. Its emissions price applies to around half of all emissions in Aotearoa.
You can find more information about the NZ ETS and how it works on the Ministry for the Environment website.