NZ ETS Unit Settings and Annual Regulatory Updates 2024

We find that Option 2, "Minimum Adjustment," effectively aligns unit limits with the refined methodologies of the 2023 GHG Inventory, thus supporting better accuracy in emissions tracking against targets. However, we favor exploring a more aggressive approach similar to Option 3, "Further Adjustment," which could account for emissions reductions from non-ETS interventions more robustly and reduce dependence on offshore mitigation.

We suggest considering an option that dynamically adjusts limits based on real-time emissions data and market conditions to ensure tighter compliance with New Zealand’s climate goals.

Eligible reductions and removals should be clearly verifiable, permanent, and additional to what would have occurred under a business-as-usual scenario. Criteria should include the direct measurement of reductions, third-party verification, and alignment with broader environmental integrity guidelines to ensure that reductions contribute genuinely to national targets.

We agree with the calculation for allocating emissions budgets between NZ ETS and non-NZ ETS sectors as it stands, acknowledging the need to balance responsibilities across sectors. However, we recommend periodic reassessment of sector allocations to respond to actual emissions data and technological advancements in emissions reduction and capture.

The current approach to technical adjustments appears to be robust, reflecting necessary alignments with the GHG Inventory. We have no current evidence to suggest a different option but emphasise the importance of continuing to refine these adjustments as better data and methodologies become available.

The calculation for industrial allocation volumes seems appropriate given current production levels and emission intensities. However, we advocate for a review mechanism that adjusts allocations based on sector-specific advancements in emissions reduction technologies, thus ensuring that allocations do not inadvertently subsidise inefficiencies.

We support the Commission’s methodology for estimating the surplus of NZUs as it provides a clear, data-driven basis for understanding market dynamics. However, given the increasing surplus, we recommend more aggressive measures to decrease surplus volumes to tighten market supply and enhance the NZ ETS’s capability to drive emissions reductions.

Our preferred option is Option 3, which updates surplus reductions across all years (2025-2029) to reflect the new surplus estimate. This proactive approach will better align the NZ ETS with emissions budgets and reduce the risk of non-compliance with New Zealand’s climate targets.

We believe that the sale of pre-1990 units has likely increased, influenced by market expectations of regulatory changes and price fluctuations. Factors such as anticipation of policy tightening and speculative trading could be driving these dynamics. Regular market monitoring and transparency in unit trading could help in understanding these trends more clearly.

We support maintaining the current price control triggers (Option 1: Status quo extended), as it provides stability and predictability for market participants. Factors that should inform the setting of these prices include global carbon prices, domestic emission reduction progress, and economic impacts on key sectors and consumers.

Yes, a price corridor is crucial as it ensures that unit prices do not fall too low to incentivise emissions reductions, nor rise too high to cause undue economic hardship. It helps balance affordability with the imperative to reduce emissions, providing a predictable environment for investment in low-emission technologies.

We support maintaining the current CCR volume as proposed in Option 1, ensuring that the market has adequate units to manage price spikes without diluting the overarching goal of emissions reduction.

The impact analysis seems comprehensive, we appreciate the Ministry’s efforts in conducting a thorough impact analysis of the NZ ETS unit settings. While the analysis covers significant aspects of economic and social impacts, we believe it is also crucial to address the environmental implications of current afforestation practices, particularly the extensive monoculture planting of radiata pine.

Monoculture and Biodiversity: Monoculture forestry, especially the widespread planting of radiata pine, poses substantial risks to local biodiversity. This form of planting often leads to reduced habitat diversity, which can negatively affect native flora and fauna. The simplification of ecosystems, typical of monoculture forestry, can exacerbate vulnerability to diseases and pests, impacting forest health and longevity.

Impact on Farming Communities: The expansion of monoculture forestry has significant socio-economic implications for rural and farming communities. It can lead to changes in land use that may reduce land available for agriculture, impacting local food security and the economic stability of these communities. Additionally, the shift from diverse agricultural practices to forestry can alter rural employment patterns, often reducing jobs available in traditional farming while not offering equivalent new opportunities in forestry.

Suggestion to Consider Australian Market Practices: In light of these concerns, we suggest that the Ministry consider the Australian carbon credit market as a benchmark. Australia has developed a range of nature-based methodologies for carbon credit generation that integrate carbon projects with sustainable farming practices. These methodologies not only support carbon sequestration but also enhance biodiversity and maintain agricultural productivity.

By adopting similar diversified and integrated approaches, New Zealand can create a more resilient carbon market that supports environmental sustainability and economic health in rural areas. This approach would help mitigate the negative impacts of current afforestation practices and provide a more balanced pathway towards achieving our net zero targets.

We recommend that the Ministry initiates studies or pilots to explore integrated land-use strategies that balance carbon sequestration goals with the preservation of biodiversity and the well-being of farming communities.

Thank you for the opportunity to participate in this consultation process on the future of the NZ ETS settings.

At Kakariki Capital, we are deeply invested in the dynamics of carbon markets and the critical role the New Zealand Emissions Trading Scheme (NZ ETS) plays in regulating these markets. As stakeholders in New Zealand's financial sector, we understand that the effectiveness of the NZ ETS in creating a robust carbon market is essential for driving investments towards sustainable development. It is imperative that the Scheme provides the necessary regulatory certainty to support strategic investment decisions while pushing for ambitious pricing that aligns with our net zero targets.

We believe that enhancing the stringency of the NZ ETS settings and ensuring a robust price corridor will incentivise the adoption of low-emission technologies and practices, thereby promoting a sustainable economic environment conducive to reaching our national targets.

Our submission, which is enclosed, emphasizes the need for policy settings that offer clarity and certainty for investors and uphold higher price signals to meet New Zealand’s environmental and climate commitments. We advocate for stringent measures in the NZ ETS settings to ensure that they promote substantial emissions reductions and uphold the environmental integrity essential for achieving New Zealand's climate objectives.

We appreciate this opportunity to engage in the consultation process and contribute to shaping the NZ ETS. We look forward to the outcomes of this consultation and to ongoing dialogue on enhancing New Zealand’s carbon market framework.

Thank you for considering our views.