NZ ETS unit settings and annual regulatory updates 2025

Every year the Government is required to review settings for the New Zealand Emissions Trading Scheme (NZ ETS) auctions for the next five years. It must decide on the appropriate supply of New Zealand Units (NZUs or units) and price control settings that align with:

• emissions budgets 
• the 2050 target 
• Nationally Determined Contributions under the Paris Agreement. 

These are collectively referred to here as ‘emissions reduction targets’.

As part of this annual process, the Government must consider the advice and recommendations of the Climate Change Commission (the Commission).

The Commission’s advice is that the Government could auction a total of 30.5 million NZUs across the settings period 2026–30, while remaining aligned with emissions reduction targets.

This volume of units for auction would represent an increase of 13.6 million units compared with the projection in 2024 NZ ETS settings. The increase is driven by three factors:

• significant changes in the methodology 
• a smaller surplus estimate (using the updated methodology) than previously anticipated, in part because fewer units were sold at auction than previously forecast 
• industrial allocation forecasts being revised downwards.

The Government is keen to hear your feedback on both the option and the methodological changes that the Commission proposes.

Alongside the Commission’s option, we are consulting on an alternative option. This would maintain status quo unit settings, extended to 2030.

There are three main reasons why we’re consulting on this option:

1. Uncertainty about methodological changes. Even proportionally small refinements to some of the Commission’s changes this year could have a material impact on the number of units that are assessed as aligning with emissions reduction targets.
2. Delivering emissions reduction targets. Tighter unit settings would strengthen the likelihood of achieving emissions reduction targets. This is especially relevant for achieving the challenging third emissions budget, for 2031–35.
3. Recent market dynamics. Recent market pricing and the partial clearance of auctions in 2024 suggest that additional auction volumes may not be needed.

We welcome your feedback on this alternative option.

The Commission has recommended that there be no changes to price control settings. It advises that the current settings are consistent with the range of emissions prices we will likely need to meet our emissions reduction targets. We agree with this recommendation, and we now seek your feedback.

This consultation seeks your views on options for annual updates to New Zealand Emissions Trading Scheme unit limits and price control settings (NZ ETS settings) for 2026–30.

The NZ ETS is the key tool to help Aotearoa New Zealand meet its emissions budgets, Nationally Determined Contributions (NDCs) under the Paris Agreement and the 2050 target. Updating NZ ETS settings every year helps New Zealand stay on track to meet those emissions reduction targets.

This is the fifth year that these settings will be updated since 2020. NZ ETS settings must be updated by the end of September each year, after consultation.

The Climate Change Response Act 2002 (CCRA) establishes the process for updating NZ ETS settings. It requires that they accord with New Zealand’s emissions budgets, NDCs and the 2050 target. If settings do not strictly accord with the emissions budgets or NDCs, any departure must be justified with reference to the considerations listed in the CCRA (see Objectives – accordance test). Collectively, these are the ‘accordance test’.

The options presented here have been assessed against the accordance test, based on currently available evidence and information (see Accordance with emissions budgets)

The Ministry for the Environment is seeking your feedback on these options. We are also asking if you have other options, with supporting evidence, that meet the accordance test. 

Scope

This consultation focuses on options for NZ ETS unit limit and price control settings for 2026–30. 

We also seek input on a provisional NZ ETS cap for the third emissions budget.

The consultation does not:

• reassess New Zealand’s level of or commitment to our international obligations, emissions budgets, NDCs or 2050 target (which the proposed settings are intended to support)
• include any changes to the framework or purpose of the NZ ETS, as provided for in the CCRA
• include options for reforming the CCRA.

The options presented here are based on the information and decisions that are available at the time of writing, including the second emissions reduction plan (ERP2) and the 2024 greenhouse gas inventory. 

Structure

In this consultation document, we have elevated the major, overarching question on the appropriate auction unit limits and price controls. Below this, we highlight a number of important additional questions on methodology that will help inform this and future NZ ETS settings. The appendices support all these questions and decisions. They give more detail on how we reached decisions, as well as providing information that can support your feedback.

The role of the NZ ETS

The New Zealand Emissions Trading Scheme (NZ ETS) is the Government’s key tool to help Aotearoa New Zealand meet its:

• international obligations under the United Nations Framework Convention on Climate Change and its Paris Agreement, including Nationally Determined Contributions 
• 2050 target: net zero greenhouse gas emissions (except biogenic methane) and a 24 to 47 per cent reduction in biogenic methane
• emissions budgets: a set of interim targets towards the 2050 emissions reduction target. 

The NZ ETS supports net emissions reductions by:

• requiring businesses to measure and report on their greenhouse gas emissions
• pricing emissions and removals
• requiring businesses to surrender one ‘emissions unit’ – a New Zealand Unit (NZU or unit) – to the Government for each tonne of emissions they are responsible for under the NZ ETS
• limiting the number of units supplied into the NZ ETS through auctioning and industrial allocation.

Participants can access units from several sources:

• government auctions of units
• government allocation of units to agreed carbon-intensive and trade-exposed firms (industrial allocation)
• removal activities that generate units (mainly forestry)
• the stockpile of units – banked units that originated from the above sources and that can now be traded and ultimately surrendered by emitters. This includes ‘surplus’ units, which are not held for future surrender or other purposes, and thus may be sold freely into the market.

The Government sets the number of units supplied into the NZ ETS over time, through auctions and industrial allocation, and reduces the number over time. . This limits the total volume of net emissions for participants in the NZ ETS, in line with New Zealand’s emissions reduction targets.

Participants can buy and sell units among themselves. The unit price reflects supply and demand in the NZ ETS. This price signal allows businesses to make economically efficient choices about how and when to reduce emissions and increase removals.

Annual process for unit limits and price control settings

Under the Climate Change Response Act 2002 (CCRA), NZ ETS unit limits and price control settings for the next five years are made through an annual update process to the Climate Change (Auctions, Limits, and Price Controls for Units) Regulations 2020.

At present, the settings are informed by previous tests of accordance with emission targets, and are prescribed for only the next four years. The Government needs to decide on settings for the full five-year period by re-evaluating accordance against emissions reduction targets, and considering new information.

The unit settings must accord with New Zealand’s emissions budgets, Nationally Determined Contributions and the 2050 target.¹

Unit limits include:

• a limit on the units available by auction
• a limit on approved overseas units – currently zero
• an overall limit on units – which consists of units available by auction and industrial allocation, and approved overseas units.

The price control settings for units are the:

• auction price floor – the price below which the Government will not sell units at auction (the lower price floor)
• cost containment reserve (CCR) trigger prices – the prices at which additional units will be released if an auction’s interim clearing price reaches or exceeds this level (the upper price floor)
• CCR volumes – the number of units that will be released if the CCR trigger price is reached.

Unit limits help constrain the supply of units into the NZ ETS over time. This limits the quantity of net emissions that can occur, in line with New Zealand’s emissions reduction targets.

Price controls set a minimum price and a maximum price for auctions for the next five years, providing a forward-looking ‘price corridor’.

This five-year look-ahead period (as illustrated in Figure 1) provides regulatory certainty to NZ ETS participants. To increase certainty, these updates are generally intended to exclude changes to unit settings for the first two years (ie, 2026 and 2027, from this year). Changes can only be made in specified circumstances for these first two years – for example, if a change significantly affects one of the matters the Minister of Climate Change (the Minister) must consider when recommending changes to settings.²

^{1 The Government is currently considering advice on 2050 emissions targets. NZ ETS settings must accord with targets currently set in legislation, and have been evaluated accordingly here.}

^{2 See section 30GB(5) of the CCRA,which includes “(b) the Minister is satisfied that the amendment is justified by … (i) a change that has significantly affected any matter that the Minister was required to consider under section 30GC when recommending the limits and price control settings that are to be amended.”}

Figure 1: The five-year rolling process for unit limits and price control settings

The Climate Change Commission (the Commission) is required to give annual advice on NZ ETS unit settings. The Minister must consider the Commission’s advice when recommending updates to settings. If there are any differences between the recommendations of the Commission and those made by the Minister, the Minister must table a report in Parliament to explain the reasons for those differences.

The Commission’s advice on settings was published in April 2025³.  Its major recommendations this year are:

• 13.6 million more units could be auctioned across 2026–30 than the current settings allow 
• to make no changes to the unit limits for 2026–27, with higher auction volumes distributed flatly across 2028–30
• keep the auction price floor and CCR settings at current levels, adjusted only for inflation.

We are seeking feedback on options for NZ ETS settings. These options include the Commission’s recommended approach. 

^{3 He Pou a Rangi | Climate Change Commission. NZ ETS unit limits and price control settings for 2026–2030. Retrieved 23 April 2025.}

Objectives – accordance test

The Climate Change Response Act 2002 (CCRA) requires that New Zealand Emissions Trading Scheme (NZ ETS) settings must accord with Aotearoa New Zealand’s:

• 2050 target, which is:

  • net zero emissions of all greenhouse gas emissions other than biogenic methane by 2050

  • a 24 to 47 per cent reduction below 2017 biogenic methane emissions by 2050, including a 10 per cent reduction below 2017 biogenic methane emissions by 2030

• emissions budgets, which are stepping stones along the path to the 2050 target

• Nationally Determined Contributions (NDCs) under the Paris Agreement, which sets targets of a 50 per cent reduction of net emissions below the gross 2005 level by 2030 (NDC1), and a 51–55 per cent reduction by 2035 (NDC2).

We propose to align the NZ ETS cap for 2026–30 with the projected emissions from NZ ETS sectors under the second emissions reduction plan, reflecting both the second emissions budget and the domestic contribution to NDC1. NDC1 was set with the intention that it would be met, in part, by using offshore mitigation. This aligns with the approach followed in previous settings decisions and recommended by the Climate Change Commission.

NZ ETS settings must strictly accord with New Zealand’s 2050 target, meaning there is a very high probability that settings constrain emissions to levels necessary to meet the target.⁴

For emissions budgets and NDCs, the settings do not have to strictly accord⁵ if the discrepancy is justified after considering matters prescribed in the CCRA⁶.  Even if deviating from strict accordance, the settings must still accord, meaning there is a good probability that settings constrain emissions to the levels necessary to meet the targets.

^{4 Section 30GC(2)(b) of the CCRA.}

^{5 Section 30GC(3) of the CCRA.}

^{6 Sections 30GC(5) and 30GC(6) of the CCRA outline the criteria.}

Criteria

To assess the options, we used a set of criteria (table 1). These criteria align with the mandatory considerations for updating New Zealand Unit (NZU or unit) settings, as prescribed in the CCRA (see appendix 2 for how they align). They are identical to the criteria used last year.

The first two criteria apply to both unit limit and price control settings. The third and fourth criteria apply to price control settings only.

We have put more weighting on the criterion ‘likelihood of incentivising (net) emissions reductions’. This is because this criterion relates the most closely to the overarching objective.

Table 1: Criteria for assessing options for NZ ETS settings

We used two major approaches together to determine options for unit settings that would meet the accordance tests and goals of the New Zealand Emissions Trading Scheme (NZ ETS):

• seven steps methodology
• NZ ETS market model. 

Seven steps methodology

Developed in 2020, the seven steps methodology is an approach for calculating maximum annual auction volumes. The Government and the Climate Change Commission have used it every year since then.

The appropriate auction volumes are determined using seven calculations.

1. Align with emissions reduction targets.
2. Allocate the emissions budgets to NZ ETS and non-NZ ETS sectors.
3. Make technical adjustments.
4. Account for industrial allocation volumes.
5. Set the reduction volume to address the New Zealand Unit (NZU or unit) surplus.
6. Set the approved overseas unit limit.
7. Calculate the base auction volumes.

Working through these seven steps provides an estimate of the maximum number of units that could be auctioned while meeting our emissions reduction targets, given current circumstances and our best assumptions for other sources of units.

Steps 1 and 2 combined provide us with the ‘NZ ETS cap’. This is the total level of net emissions allowed under the NZ ETS for the settings period. Caps can also be determined for emissions budget periods – for example, the EB2 NZ ETS cap sets the total level of net emissions allowed under the NZ ETS for the EB2 period.

Appendix 1 shows the seven steps, and the underpinning methodology and assumptions.

Addressing the unit surplus stockpile

A large quantity of units is banked in private accounts. These provide liquidity to the market and help to reduce price volatility. However, the current number of banked units presents a risk to achieving emissions budgets.

Some of the banked NZUs are held to meet future surrender liabilities, or for other reasons. Others are estimated to be held for investment purposes and can be more readily sold when market price expectations change – these are considered ‘surplus’. Emitters’ use of these surplus units to meet increased NZ ETS obligations could cause challenges in meeting emissions budgets.

To reduce this risk, we need to manage the surplus. Last year, the Government agreed to set unit limits with the aim of reducing the surplus to zero by 2030. This is reflected in step 5 of the seven steps methodology. 

However, there is inherent uncertainty about the size of the surplus, as it is not a fixed number. Estimating the size of the surplus also requires making assumptions about how participants respond to changing market dynamics. In particular, the seven steps methodology assumes that the permanent (ie, non-surplus) stockpile is illiquid and will not become available in response to price changes.

NZ ETS market model

The NZ ETS market model estimates supply and demand for NZUs under different conditions, and can generate price projections based on supply and demand.^7,8

The model estimates emissions reductions and removals, and the flow of units in and out of the stockpile, internally (endogenously) in the model using equations that relate these changes to different prices. It sets an objective for the market (minimising the stockpile by 2050 while meeting demand every year) and uses price to optimise supply and demand relative to that objective.

2024 was the first year in which we have used this model to support decisions about settings. We are continuing to refine and improve the model, and how we use it to support analysis of the NZ ETS. For more detail and recent updates, see the technical annex.

The annex also includes further sensitivity analysis to supplement the modelling insights in this consultation document.

We appreciate the feedback on the model received to date and welcome any further input from participants.

^{7 Ministry for the Environment. 2023. Review of the New Zealand Emissions Trading Scheme: Summary of modelling. Wellington: Ministry for the Environment.}

^{8 Ministry for the Environment. 2025. Updates to the New Zealand Emissions Trading Scheme market model. Wellington: Ministry for the Environment.}

How we use both models together

The market model and seven steps are fundamentally different models, though with considerable overlap. Both provide insights into the NZ ETS.

The seven steps methodology is one approach for identifying the maximum volume of unit settings that satisfy the accordance tests. The Government may also explore settings that are tighter or looser than this estimated maximum.

The market model explores potential implications of different unit and price control settings, and informs impact analysis.

Using both models together can help overcome the shortcomings of each approach. It also provides a more robust overall assessment of the merits and trade-offs of each option considered here. As with all models that attempt to simplify complex real-world interactions, there is a high degree of uncertainty. The sensitivity analysis touches on some of this – see the technical annex.