What is the NZ Emissions Trading Scheme (NZ ETS)?

The NZ ETS is one of the Government’s tools for reducing domestic greenhouse gas emissions. It places a price on emissions from certain sectors of the economy for the greenhouse gases they emit. Its purpose is to help meet international obligations under the Paris Agreement, and the country’s climate targets: the emissions budgets and 2050 target.

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 unit limits, and the price control settings, are informed by the total emissions allowed by emissions budgets and the emissions expected from other sectors outside the NZ ETS (i.e. agriculture).

The purpose of the NZ ETS is set out in the Climate Change Response Act 2002, with the requirements for unit limits and price control settings discussed in section 30GC of the Act.

How does the NZ ETS work?

The NZ ETS is a form of emissions pricing.Its purpose is to incentivise lower-emissions practices and products by gradually raising the pricing of climate pollution. This incremental increase gets passed along the supply chain, and so slowly raises the cost of higher-emissions goods and services relative to low-emissions alternatives over time.

The NZ ETS puts a price on around 40% of Aotearoa New Zealand's domestic climate pollution, by charging all sectors of the economy – except agriculture – for the greenhouse gases they emit.

The NZ ETS covers:

• 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)
• Forestry

These industries must measure and report on their greenhouse gas emissions and surrender an 'emissions unit' (known as NZU) for each one tonne of emissions they emit. In the case of forestry, they can also earn NZU as trees absorb carbon from the atmosphere.

All these NZU can be bought and sold by participants in the scheme.

Which government agencies are involved in the NZ ETS?

Our advice on NZ ETS unit limit and price control settings is only a small part of the work that happens on the NZ ETS by the Commission and by other government agencies.  

Other government agencies are responsible for administering the NZ ETS and reviewing, developing and implementing NZ ETS policy, as follows:  

• The Ministry for the Environment is the lead government agency for NZ ETS policy. 
• The Ministry for Primary Industries (MPI) administers the elements of the NZ ETS related to the forestry sector and works with MfE on NZ ETS policy. 
• The Environmental Protection Authority manages the administration of the NZ ETS including compliance, reporting and market information and operates the New Zealand Emissions Trading Register. 

What is the 'emissions cap'?

Emissions budgets can be achieved by emissions reductions by sectors both inside and outside the NZ ETS. The NZ ETS emissions cap is the share of the emissions budget allocated to sectors in the NZ ETS.

The cap declines over time to reflect the country's emissions reduction targets.

Units in the NZ ETS

Are there different types of units in the NZ ETS?

No, there is only one type of unit: New Zealand Units (NZU). NZU are a type of 'carbon credit', so this is what people sometimes call them.

Essentially: NZU are carbon credits, but not all carbon credits are NZU.

New Zealand Units (NZU) represent one metric tonne of carbon dioxide (or the equivalent in any other greenhouse gas), specifically 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. Foresters can earn NZU from the Government for carbon dioxide removed from the atmosphere by their forests.

Carbon credits are financial instruments – things that can be bought and sold – that represent a unit of carbon dioxide equivalent (CO₂e). One carbon credit is equal to 1 tonne of CO₂e). Carbon credits are awarded for projects that store, avoid or reduce greenhouse gas emissions in the atmosphere.

When the Government creates carbon credits under the NZ ETS, they are NZU.

Where do NZU come from?

There are several sources of NZU. The exact proportion varies year-to-year.

• Forestry units – Foresters can earn NZU as their forests grow and sequester carbon. They can sell these NZU to emitters who need to cover their obligations, but also may need to surrender NZU if they harvest their forests.
• Industrial allocation – Free NZU provided to firms whose activities are emissions intensive and trade exposed. This reduces the cost of the NZ ETS for these firms and is intended to reduce the risk of 'emissions leakage' (where production shifts to other countries without emissions pricing).
• Auction volumes – NZU that the Government offers for sale at quarterly auctions. The Commission makes annual recommendations in its NZ ETS settings advice.
• Surplus – There is a stockpile of units held by participants in the NZ ETS. Most of these are likely needed for future uses (such as emitters' and foresters' surrender obligations). Some participants have more than they need, so can trade them with those who need units now to cover their gross emissions.

Not all NZU are auctioned – in fact only a small proportion are.

How is the NZU auction price set?

The price of NZU in the NZ ETS market is based on supply and demand. The Ministry for the Environment provides more information on its website:

The Ministry for the Environment provides more information about this on its website.

Are NZU from declined auctions cancelled?

Technically, yes... but in practical terms, not necessarily.

In 2024, for the first time, all four quarterly NZU auctions declined – meaning that none of the 7 million NZU available for purchase that year were sold. There was a general misunderstanding about what that meant for auction volumes in the following years.

Some people thought that those 7 million NZU would be automatically cancelled out of the NZ ETS rather than being rolled over to increase the volume available in future years. This is technically correct, but in practical terms it is misleading.

The specific serial numbers of any unsold auction NZU are automatically cancelled at the end of each year – but the auction outcomes are just one factor affecting what the Government can offer at auction in the next five years. This decision is also affected by:

• analysis of the volume of NZU already in the market
• The latest net emissions projections
• forecasts of the various sources of NZU in the system over the next five years
• assessing the state of the market

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, emissions pricing is an increasingly important tool for reducing greenhouse gas emissions.

By 2025, there were 37 emissions trading schemes and 43 carbon taxes operating around the world, covering 28% of the world's greenhouse gas emissions (including China, the European Union and several of the largest states in the United States).

The NZ ETS 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 Aotearoa New Zealand's economy, apart from agriculture, pay for their emissions through the NZ ETS. Its emissions price currently applies to around 40% of all domestic emissions, and this proportion is reducing.

The NZ ETS is unusual in allowing unlimited use of carbon sequestration by forestry to 'offset' greenhouse gas emissions.

You can find more information about the NZ ETS and how it works on the Ministry for the Environment website:

ETS auctions and how to buy New Zealand Emissions Units (NZUs)

Videos about our work on the NZ ETS

Below is a playlist of our webinars about our annual advice on the NZ ETS. More videos are available on our YouTube channel: Climate Change Commission | YouTube