Technical Annex 1: Unit limit settings

This technical annex provides further information on the data, methodology, and key assumptions we have taken to reach our final unit limit settings recommendations. This document should be read alongside this report's Part 3: Te Herenga utu – Unit limits.

Downloads: PDF version [.PDF, 1.05 MB]; Microsoft Word version [.DOCX, 725 KB]

Technical Annex 2: Price control settings

This technical annex provides further information on the modelling used in our analysis on the price control settings. This document should be read alongside Part 4: Te ritenga taura-utu – Price controls of this report.

Downloads: PDF version [.PDF, 579 KB]; Microsoft Word version [.DOCX, 334 KB]

Technical Annex 3: Assessment of accordance

This technical annex sets out in detail our assessment of how our recommendations comply with the accordance requirements in section 30GC of the Climate Change Response Act 2002, which stipulate that recommended NZ ETS settings are in accordance withy emissions budgets, the nationally determined contribution (NDC), and the 2050 target.

Downloads: PDF version [.PDF, 606 KB]; Microsoft Word version [.DOCX, 396 KB]

Supporting spreadsheet: 2025 NZ ETS settings advice

This supporting spreadsheet provides the data, analysis and calculations that informed our advice. It includes data for the charts and tables that appear in this report and in Technical Annex 1.

Download: Supporting spreadsheet [.XLSX, 548 KB]

Correspondence with the Minister of Climate Change

This report was delivered to the Minister on 17 April 2025, a delivery date that enabled the Commission to consider the NZ ETS implications of the Government's second emissions reduction plan (released in December 2024). For more information, see the exchange of letters between the Minister of Climate Change and the Chair of the Commission about the delivery date for this advice:

• Minister's letter to the Commission (13 November 2024) [PDF, 77 KB]
• Chair's response to the Minister (4 December 2024) [PDF, 340 KB]

Executive summary

The information below is adapted from the Executive Summary of our report, Advice on NZ ETS unit limits and price control settings for 2026–2030 (April 2025).

Download the full report: PDF version [.PDF, 2.02 MB]; Microsoft Word version [.DOCX, 1.39 MB]

Table of contents

• Overview
• The NZ ETS's contribution to emissions reduction targets
• Key points for decision makers 
• Context for this advice
• Advice on unit limits
• Advice on price control settings
• Alignment of the recommended settings with emissions reduction targets
• What happens next for NZ ETS settings?
• Recommendations and proposed auction volumes

This is our annual advice to the Government on unit limits and price control settings for the New Zealand Emissions Trading Scheme.

The New Zealand Emissions Trading Scheme (NZ ETS) is the Government’s key policy tool for reducing domestic greenhouse gas emissions.

He Pou a Rangi Climate Change Commission provides annual advice on the scheme’s unit limits and price control settings (NZ ETS settings), and on any adjustments needed to support emissions reduction targets.[1]

This is the fourth year the Commission has provided advice on NZ ETS settings. This advice covers the settings for 2026–2030.

The NZ ETS’s contribution to emissions reduction targets

The NZ ETS is a market mechanism created to incentivise reductions in greenhouse gas emissions. The scheme applies to emissions from every sector of Aotearoa New Zealand’s economy except for agriculture.[2] The scheme covers about half of the country’s emissions.

By limiting the volume of allowed emissions the scheme imposes a cost on emissions, which creates financial incentives for businesses, investors, landowners and consumers to pursue lower emissions options.

Under the scheme, market participants acquire units (known as ‘New Zealand Units’), with each unit allowing them to emit one tonne of CO2e. The Government supplies units into the market in several ways. It makes a limited number of units available through auctions. It allocates units for activities (in particular forestry) that remove and store carbon. It also allocates units to some industries (‘industrial free allocation’).

Once emissions units are in the market, participants can buy and sell among themselves. In this way, the Government determines the volume of units available to market participants, but the market determines the emissions price and how emissions will be reduced.

Auction volumes and price controls are designed to ensure that NZ ETS settings align with emissions budgets, the 2050 target, and nationally determined contributions under the Paris Agreement.[3]

Key points for decision-makers

Context for our advice

• Since our 2024 advice the number of surplus units in the market has reduced more quickly than previously forecast.
• The second emissions reduction plan emphasised the Government’s commitment to a credible NZ ETS as the main tool for reducing domestic emissions.
• Market confidence in the NZ ETS has improved but remains fragile. This advice aims to support a credible, predictable and stable market.
• Some areas of uncertainty remain, particularly about how the country will meet emissions reduction targets for 2031–2035.
• Our advice is aimed at ensuring that unit limits and price control settings, taken as a package, align with the Government’s emissions reduction targets.

Advice on unit limits

• The earlier reduction in surplus means more units can be made available for auction than previously forecast, while remaining aligned with emissions reduction targets.
• We recommend that there be no change to 2026 and 2027 auction volumes. In our assessment, changes to the 2026 and 2027 settings are not justified.
• Additional volumes could be offered in the years 2028–2030, subject to adequate price guardrails. Deferring the additional volumes until then would provide flexibility to adjust to any future changes in the forecast surplus or in emissions.

Advice on price controls

• We recommend that the auction reserve price (ARP) and the cost containment reserve (CCR) price triggers remain at current levels, adjusted only for inflation.
• The current settings are consistent with the Government’s emissions reduction targets, based on the evidence available now. Stability is critical while confidence in the NZ ETS remains fragile.
• We see no case for reducing the ARP, either now or in future. Lowering the ARP would undermine existing investments and those needed to meet the second emissions budget.
• It is possible that price control settings will need to increase in the future, depending on the mix of actions taken to reduce emissions in coming years. We will continue to monitor and analyse the currently highly uncertain evidence about what might be needed to meet the third emissions budget, in our annual advice.

Context for this advice

Since our 2024 advice there have been changes in Government policy and market conditions affecting the operation of the NZ ETS.

Reduction in NZ ETS surplus units since our 2024 advice

For the NZ ETS to effectively support reductions in greenhouse gas emissions, the number of units available for use in the scheme needs to decline in line with emissions budgets.

In 2024 we advised that the number of units available in the market had grown significantly in the preceding year, creating risks to the achievement of emissions budgets. Between mid-2022 and September 2023 that ‘surplus’ had grown to 68 million units, mainly due to a large increase in units allocated for forests registered in the NZ ETS.

We advised the Government that the only means of reducing this surplus was to reduce the volume of units available through NZ ETS auctions. The Government responded by reducing the volume of units available for auction over the period 2025–2029.

Since we provided that advice, the surplus has reduced more quickly than anticipated and is now estimated to be just over 50 million units. There are several reasons for this. Fewer units were sold at auction than previously forecast.[4] Industrial free allocation is also expected to be lower than previously forecast.[5]  We have also revised a technical adjustment and made refinements to our methodology for estimating the surplus.

We explain these changes in more detail in Part 3: Te herenga utu – Unit limits.

Policy changes since our 2024 advice

In recent years, we have heard enduring themes around the NZ ETS. This includes the effects of policy uncertainty on market confidence in the scheme, adding to barriers to investing in planting new forests. We have also heard concerns around the impacts of afforestation on rural communities, and that the NZ ETS may not be effective at incentivising the uptake of low emissions technologies at pace and scale.

The Government's second emissions reduction plan has reduced some uncertainty by signalling an approach to emissions reductions that is strongly centred on the NZ ETS and emphasising the Government’s commitment to restoring the credibility of, and confidence in, the scheme.

At this stage, some uncertainty remains around the impacts of a proposed change to NZ ETS policy aimed at reducing conversion of farmland to forest, and about how the country will meet its 2021–2030 nationally determined contribution and its third (2031–2035) emissions budget.

We discuss policy changes since our 2024 advice, and some structural issues still to be resolved, in Part 2: Te hanga me te haepapa o NZ ETS – Current state and role of the NZ ETS of this advice.

The international context

The year 2024 was the hottest on record, with the global mean surface temperature for the first time exceeding 1.5˚C above pre-industrial levels. The years 2015–2024 are the ten warmest years on record.[i]

Globally, emissions pricing policies continue to be important and now cover 24% of the world’s greenhouse gas emissions (including China, the European Union and several of the largest states in the United States).

Through the Paris Agreement, Aotearoa New Zealand has legal obligations to pursue domestic efforts to reduce emissions. Export customers and trading partners increasingly expect to see robust measures in place to reduce emissions.

Engagement

Our advice is informed by engagement with a selection of iwi/Māori, market participants and stakeholders interested in the NZ ETS. Market participants told us that confidence was recovering, but remained vulnerable to any signs of uncertainty in policies or conditions affecting the scheme. Through our engagement with iwi/Māori groups, we heard that significant economic opportunities are available through forestry in the NZ ETS. We also heard that there were challenges to benefiting from the scheme, due to a combination of uncertain and conflicting policies, the scheme’s complexity, and the characteristics of collectively owned Māori land. Part 2: Te hanga me te haepapa o NZ ETS – Current state and role of the NZ ETS provides more detail on key themes from our engagement.

The auction reserve price (ARP) is a floor below which units cannot be sold at auction. The cost containment reserve (CCR) is a price ceiling which, if reached at auction, triggers the release of additional units. These price guardrails are important for creating and maintaining confidence in the NZ ETS and for ensuring that the scheme aligns with the Government’s emissions reduction targets.

Our advice is that, for now, the ARP and CCR prices should remain at current levels, adjusted only for inflation. Stability is also critical at a time when confidence in the emissions market remains fragile. It may be necessary in future years to raise the ARP and CCR, depending on the scale of gross emissions reductions needed to meet the third emissions budget. In some scenarios, unit prices may need to be significantly higher to support the necessary investment in reducing gross emissions. We will closely monitor relevant indicators in coming years, to consider whether the ARP and CCR price levels continue to align with the third emissions budget and the second nationally determined contribution (2031–2035).

We can see no case for reducing the ARP, either now or in the future. We have heard from market participants that, during 2024, signals that the Government might lower the ARP contributed to volatile and low unit prices, and to declined NZ ETS auctions. Any new signal that the ARP might be lowered would be likely to further damage market confidence. Lowering the ARP would undermine investments in emissions reductions, and put achievement of the Government’s climate targets at risk.

See Part 4: Te ritenga taura-utu – Price control settings for our full analysis.

Alignment of the recommended settings with emissions reduction targets

The Climate Change Response Act 2002 requires that the recommended unit limits and price control settings accord with emissions budgets, nationally determined contributions (NDCs), and the 2050 target. In this respect our recommendations are presented as a package. Our unit limit recommendations are contingent on the current price control settings also being maintained. Changes to the price control settings could have implications for unit limit settings, and vice versa. The settings are inter-related and need to be considered together.

Our recommended settings accord with the 2050 target, the second and third emissions budgets, and the first and second NDCs. Government forecasts show that meeting the first NDC will require an 84–89 MtCO2e contribution from offshore mitigation. The Government has stated its intention to prioritise domestic emissions reductions, but also to acquire the offshore mitigation needed to bridge the gap between emissions budgets and the first NDC. Our recommendations in this advice are conditional on the Government doing that.

Technical Annex 3: Assessment of accordance, published separately on our website, provides more information about how our advice accords with emissions budgets, nationally determined contributions and the 2050 target.

What happens next for NZ ETS settings?

This advice is one step within a wider process for updating the NZ ETS settings.

The Government will consider our advice and run a public consultation on proposals, which we understand will be led by the Ministry for the Environment on behalf of the Minister of Climate Change in the second quarter of 2025. The Government must make decisions on NZ ETS unit limits and price control settings in time for the regulations to be updated by 30 September 2025. The new settings will come into force on 1 January 2026.

We expect to provide our next advice on this topic, relating to the period 2027–2031, in the first quarter of 2026.

[1] ‘Emissions reduction targets’ in this advice refers to emissions budgets, the 2050 target, and nationally determined contributions under the Paris Agreement.

[2] The NZ ETS does not include biological emissions from agriculture. Energy and transport emissions from agricultural activities remain within the scheme.

[3] In 2024 the Commission recommended amendments to the 2050 target. This NZ ETS settings advice relates to the current 2050 target as set out in the Climate Change Response Act 2002.

[4] Of 14.2 million units available at auction during 2024, 7.1 million did not sell.

[5] Industrial free allocation was 4.4 million units less than forecast for the period 2026–2030. This is due to a combination of plant closures, reduced production, and changes to the industrial free allocation regulations.

[i] World Meteorological Organisation. (2025). WMO confirms 2024 as warmest year on record at about 1.55°C above pre-industrial level. https://wmo.int/news/media-centre/wmo-confirms-2024-warmest-year-record-about-155degc-above-pre-industrial-level

[6] The ‘emissions cap’ is a targeted level of emissions for sectors covered by the NZ ETS. The cap declines over time to reflect emissions reduction targets. It is likely to reduce to zero in the 2030s.