NZ ETS unit settings and annual regulatory updates 2025

Analysis by the Climate Change Commission (the Commission), using the seven steps methodology, suggests that the Government could auction a total of 30.5 million New Zealand Units (NZUs or units) across 2026–30 and still align with the New Zealand Emissions Trading Scheme (NZ ETS) cap outlined in the second emissions reduction scheme (ERP2), and achieving Aotearoa New Zealand’s emissions reduction targets. The Commission’s approach also aligns with the objective of the 2024 NZ ETS settings decision to draw down the surplus stockpile to zero by 2030. The total auction volume of 30.5 million units is an increase of 13.6 million units compared with the projection in 2024 NZ ETS settings. This change was driven by the following developments.

Drivers decreasing unit limits

• 6.7 million fewer units from changes to the NZ ETS cap. This mainly stems from ERP2 clarifying expected emissions across ETS and non-ETS covered sectors between 2026 and 2030. ERP2 proposed an EB2 NZ ETS cap of 91 Mt CO2e. The changes to the NZ ETS cap also reflect methodological changes to New Zealand’s 2024 greenhouse gas inventory.
• Approximately 5 million fewer units (± 1 million) drawn down from the stockpile than projected (excluding impacts of methodological changes  and unsold units from 2024 auctions).

Drivers increasing unit limits

• 7.1 million more units as a result of the 2024 NZ ETS auctions not fully clearing. 
• Approximately 7 million more units (± 1 million) due to methodological changes decreasing the surplus stockpile. This is the net impact of much larger underlying changes that offset each other. Changes that decrease the size of the surplus equate to about 36 million units, while changes that increase the estimate total about 28 million units. 
• 4.4 million more units as a result of updated information and forecasts for industrial allocation levels, which mean we expect to allocate fewer units to industrial allocation over the settings period.
• 3.4 million more units because a technical adjustment is no longer required.
• 3.1 million more units due to changes in 2025 forecasts. Because 2025 auction volumes are fixed, these 3.1 million units instead increase unit limits for the 2026-30 period.⁹

Figure 3 illustrates our analysis of how these changes together increase the maximum possible auction volumes over the settings period. To quantify the impact of methodological changes, we compared estimates of the surplus stockpile using the Commission’s 2024 and 2025 methodologies.

Our approach differs from the Commission’s approach to describing these impacts. The Commission subtracts the unsold 2025 auction volume (7.1 million units) and the projected surplus reduction in 2024 (7.7 million units) from the estimate of the surplus made in 2024. It then attributes the remaining 2.9 million reduction to methodological and data changes.

Our analysis indicates that the surplus has reduced by less than expected after accounting for the unsold auction volume.¹⁰ This is shown in figure 3 as ‘projected 2024 surplus reduction which did not occur’. 

We would like to hear your views on possible reasons for this lower-than-forecast surplus reduction.

^{9 This is referred to as the ‘discrepancy adjustment’ within the seven-step methodology. It covers adjustments to things like updated forecasts of 2025 industrial allocation volumes and changes to the NZ ETS cap affecting 2025.}

^{10 This excludes the unanticipated reduction due to some auctions not clearing in 2024. When these are factored in, the surplus has reduced faster than expected.}

Figure 3: Drivers of changes in estimated auction volumes across 2026–30

^{Source: Ministry for the Environment analysis}

Option for tighter unit limits

Alongside the Commission’s option, we are consulting on an alternative option: to maintain the status quo unit settings, extended to 2030. The following are the three main reasons why we are consulting on this option.

1. Methodological change

A significant portion of possible additional units stems from methodological changes that, on net, have reduced the Commission’s estimate of the surplus stockpile. This includes a new ‘holding volume’ category of non-surplus units, which reduces the Commission’s estimate by 34 million units. However, other methodological changes largely offset this impact. 

Based on our preliminary assessment, these methodological changes are conceptually valid and likely to improve the accuracy of the surplus estimate. However, substantial uncertainty remains about the true size of the surplus stockpile. This is the first year of testing these methodological changes and there may be refinements to them in future years. Even proportionally small refinements to some of these changes could have a material impact on the number of units that are assessed to align with emissions reduction targets.

2. Delivering emissions budgets

Compared with the Commission’s recommendation, maintaining status quo volumes would strengthen the country’s position for achieving its domestic emissions budgets and international emissions targets, by allowing less supply into the market. This is likely to put greater upwards pressure on the secondary market price, and further incentivise gross emissions reductions and afforestation. It would also support a faster drawdown of the surplus stockpile, and reduce the risk posed by the stockpile to achieving both EB2 and the third emissions budget (EB3). We know that meeting EB3 is likely to be challenging, and there is a case for tighter settings in the short term in order to give us more options in the future.

3. Market dynamics

Recent market pricing and the partial clearance of 2024 auctions suggest that additional auction volumes may not be needed. Increasing volumes compared with the status quo appears to run counter to this market signal.
 

Unit limit options

We have presented two options: status quo settings (keeping existing unit settings and expanding to 2030 based on projections) and the Commission’s recommended settings. These options are not exhaustive and there are other packages that could be feasible for meeting accordance requirements. We invite your feedback on the options presented and other options you think are worth consideration.

Option 1: Status quo auction volumes

In option 1, auction volumes are unchanged from 2024 settings, which apply to 2025-29, and would be extended to 2030. 2030 auction volume is based on the same information used to determine 2024 settings, including industrial allocation forecasts and surplus drawdown volumes as estimated at the time, making it internally consistent with the settings currently in regulation.

Option 2: Commission-recommended auction volumes

In option 2, all changes to unit volumes would be reflected in auction volumes, resulting in an increase of 13.6 million units to be auctioned over 2028-30.

The Government has the choice, in certain circumstances, to change auction volumes for the first two years of settings (eg, 2026 and 2027). The Commission recommended not adjusting settings for the first two years, to maintain stability for participants.

The current market price suggests there is limited risk of undersupply in the near future. This again supports not changing the volumes in 2026 and 2027.

Currently auction volumes are distributed so they decline in line with the NZ ETS cap. The Commission recommended taking a different approach to the distribution of volume changes across years 2028–30. It recommended distributing volumes evenly across this period. This would mean relatively lower auction volumes in 2028 and higher auction volumes in 2029 and 2030, compared with the default approach. This would preserve more volume in later years that could be more easily changed in future.

Price controls

It is important that recommendations on auction volumes and price controls are considered together as a package of recommendations. Our proposed options on unit limits discussed in the previous section do not include changes to price control settings, beyond adjustment for inflation.

The role of price controls

Auction price controls provide the Government with additional tools to manage the supply of units. The settings do not set the NZU price, but can influence that price by withholding units from, or adding units to, the market.

Price controls act as a safety valve to prevent the auction price from going too low (which could lower the secondary market NZU price below what is needed for meeting emissions reduction targets) or too high (unnecessarily impacting on the cost of living and the economy). They also signal the price pathway likely to be needed to meet future emissions reduction targets. Price controls apply only to government auctions, and not the secondary market.

Auction price controls include the:

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

The auction price floor¹¹ (lower price floor) stays at a prescribed value for each auction within the year. It prevents additional units from being sold if the market is so well supplied that businesses are not willing to pay a price aligned with emissions reduction targets.

The confidential reserve price functions to prevent the sale of units at a price below prevailing secondary market prices. It can be different at each auction and is not revealed to the public. This price is not set alongside other NZ ETS settings and is not being consulted on.

The CCR exists to manage the risk from shocks and unforeseen events that may result in extremely high prices in the NZ ETS. It functions by releasing more NZUs into an auction where prescribed prices have been met. In 2023, the government adopted the Commission’s recommended two tier design for the CCR. This means there are two trigger prices – each with its own CCR.

Our auction price floor and CCR trigger prices should together set out a price corridor that allows units to enter the market at prices that accord with our emissions reduction targets. 

^{11 In its advice, the Commission refers to the auction price floor as the auction reserve price.}

Auction price floor and CCR trigger prices

The Commission has concluded that the auction price floor and CCR trigger prices remain fit for purpose. It recommended that they remain unchanged (apart from routine inflation adjustments to figures from 2028 onwards).

On the auction price floor, the Commission highlighted evidence suggesting that prices around or above the current auction price floor are needed to support emissions reductions necessary for meeting EB2 and EB3. Additionally, the Commission highlighted the risk of selling NZUs at prices below the cost of offshore mitigation.

We agree with the Commission’s assessment that the current price floor remains fit for purpose. Although current secondary market prices are below the current auction price floor, this could be a signal that the market is currently oversupplied. The auction price floor helps limit supply until the oversupply is addressed. Internal modelling suggests that pricing is likely to return to above the auction floor price for both options. Maintaining the auction price floor will also support the Government’s key objectives of supporting confidence in the NZ ETS and encouraging investment in decarbonisation activities.

For the CCR trigger prices, the Commission highlighted a risk that trigger prices may be too low to allow the high NZU prices needed to meet EB3 through additional gross emissions (if afforestation follows the trajectory projected in ERP2). However, additional afforestation in the next few years could help meet EB3 at a relatively lower price. It advised maintaining current CCR trigger prices (adjusted for inflation) until it is clearer whether current trigger prices are too low to allow the NZU prices needed to meet EB3. We agree with the Commission’s findings.

We present below potential adjustments to the auction price floor and CCR trigger price levels for inflation and extended to 2030. We consider that the rationale for maintaining current price controls holds for both the Commission-recommended option and the status quo unit volume option.

We seek your feedback on this approach.

Cost containment volumes

The CCR volumes need to be large enough for the CCR to perform its function of bringing down the auction price when it gets too high. Where prices are high, there is a risk that the cost will be passed on to consumers, potentially resulting in pressure on household budgets.

In its 2025 advice, the Commission recommended maintaining CCR volumes for 2026–29, plus an extension to 2030. It has recommended that changes to the surplus stockpile estimate do not justify a change to CCR volumes.

As with last year, there is no indication that changes to CCR volumes are necessary. We consider the current volumes to be sufficient for the CCR to perform its role without risking accordance with emissions budgets if the CCR is triggered. This applies for both the Commission-recommended option and the status quo unit volume option.

Summary of unit limits and price control settings

Tables 2 and 3 show the auction volumes and proposed price control settings for each option. 

Table 2:  Options for auction volumes, 2026–30

We have modelled a range of scenarios in the NZ ETS market model, based on the different options outlined above, and accounting for different starting points in 2025. This section presents some of the key insights from that modelling.

All models are subject to high levels of uncertainty, which typically increases the further out in time they attempt to model. They also rely on a range of model-specific and other assumptions. The results are not predictions – their purpose is to help explore the implications and trade-offs between the different options.

The market model has been aligned with ERP2 projections where relevant and with industrial allocation forecasts and surplus stockpile estimates as set out in this consultation document. For more detail on modelling assumptions and sensitivity analysis, see the technical annex.

Projected sources of NZU supply

Figure 4 shows the projected sources of NZU supply to meet compliance demand under option 1.

The broad outlook for supply is similar for both option 1 and option 2. Government supply, from industrial allocation and auctions, is projected to be a material but declining share of supply in the 2020s. The projections shown assume that all auctions clear and use the updated estimate of the surplus stockpile (50.2 million NZUs).

Forestry supply from ‘low-risk’ (or unencumbered) NZUs is projected to steadily increase over time.^12,13 However, forestry makes up a smaller share of supply in the near term, requiring the stockpile to be drawn down further in the interim. The ‘other stockpile’ (non-surplus stockpile) use reflects some additional stockpiled units coming to the market based on future price expectations. Notwithstanding this additional stockpile use, the total stockpile of units is projected to remain between 60 million and 90 million NZUs (more than double annual compliance demand) across the modelled period.

The surplus is drawn down faster under option 1 than under option 2. Therefore, faster reductions in emissions (reduced compliance demand) and some additional stockpile drawdown are needed, both of which require higher prices to incentivise.

Under option 2, higher auction volumes in 2028–30 mostly offset the need for additional stockpile drawdown in EB2, reducing the upwards pressure on prices.

^{12 Low-risk units are from permanent or average accounting forests that do not have a surrender liability. For modelling, these are assumed to become available to the market as they are earned.}

^{13 Forestry supply in figure 4 is based on ERP2 projections. It is consistent with the Government policy to restrict conversion of farmland to exotic forestry. If forestry is more responsive to price, additional low-risk supply is projected to displace most of this ongoing other stockpile drawdown post-2030. The technical annex has more detail.}

Figure 4: Projected sources of New Zealand Unit supply dynamics under option 1 (status quo) unit and price control settings, 2024–50

^{Source: Ministry for the Environment modelling}

Implications for projected prices

Figures 5 and 6 show a range of carbon price pathways based on different scenarios for options 1 and 2. The drivers of the ranges relate to assumptions about the starting point (the price in 2025 and whether auctions clear or not), and stockpile liquidity.

All else being equal, the option 1 settings are projected to lead to higher prices than option 2. Overall, the different options result in a similar price projection profile – rising in the near term to induce enough supply from auctions and the stockpile to meet compliance demand, while in the medium to long term forestry supply exerts downward pressure on prices. Option 1 prices typically peak at about $5 to $25 (in 2023 dollar terms) higher than option 2, although there is considerable uncertainty around the projected price pathways. The timing of the peak in prices has been imposed in this modelling, but there is a high degree of uncertainty over when and if prices might peak. An alternative, continuously rising price profile is explored in the technical annex.

The wider range of prices shown for option 1 also illustrates the risk of higher price volatility under this option. Given option 1 involves fewer auctioned units than under option 2, prices may become more sensitive to the liquidity of the stockpile.

Figure 5: Projected price paths under option 1, 2021–35

Figure 6: Projected price paths under option 2, 2021–35

^{Source: Ministry for the Environment modelling. Highest and lowest prices are derived from the scenario modelling. Ranges have been smoothed to simplify presentation.}

Implications for total net emissions projections

The market model was not designed to estimate total net emissions; its focus is on net emissions covered by the NZ ETS. However, we can combine the model outputs with other information to make high-level projections of total net emissions. These estimates are subject to high uncertainty. They are communicated within ranges constructed from sensitivity analysis based on the price responsiveness ranges.

Within these limitations, there is a very high probability that under both options, total net emissions will be within EB2 (figure 7). There is a risk to New Zealand meeting EB3 due to the ongoing potential for stockpiled units to become available to the market. A key factor that will influence EB3 net emissions will be how afforestation rates respond to price movements in the next few years and in particular the extent to which the Government’s policy to restrict farm conversions constrains aggregate exotic planting registered in the NZ ETS. Reflecting this uncertainty, the figure shows two alternative scenarios for the price-responsiveness of afforestation.

Figure 7 shows midpoint estimates for all options sitting above EB3. This is similar to modelling for ERP2, which included a comparable gap (about 9 Mt CO2e) between projected emissions and EB3. Decisions on 2025 NZ ETS settings do not cover the EB3 period but do need to enable future NZ ETS settings decisions, as well as the third emissions reduction plan (ERP3), to further reduce emissions, consistent with achieving EB3. This is primarily achieved through aiming to eliminate the surplus stockpile before EB3.

Figure 7: Projected total net emissions in the second and third emissions budgets

^{Source: Ministry for the Environment modelling}

^{Note: Horizontal lines represent the indicative central estimate, and vertical lines the high and low estimates.}

The NZ ETS works by placing a cost on emissions for businesses that have obligations under the NZ ETS. It incentivises greater reduction of gross emissions as businesses consider low-emissions alternatives that avoid that cost. The NZ ETS impacts on various sectors of the New Zealand economy differently. It adds higher costs to activities that are more emissions intensive, and provides an additional revenue stream for foresters who can earn NZUs.

Businesses may choose to offset this cost where they can, by investing in lower-emissions technologies or processes, by increasing their prices to consumers or by reducing their costs. Reducing their costs could include reducing their number of employees. Higher prices passed on to consumers contribute to inflation, and increase the cost of household essentials such as fuel, electricity and food. Households can look to substitute towards lower-emissions alternatives to offset some of these costs.

The Ministry for the Environment estimates that a $10 increase in the NZ ETS price adds about $90 per year to the average household’s expenditure, mostly through its impacts on fuel and electricity prices. For lowest-income households, a $10 increase amounts to an increase in expenditure of about $50–60 per year, while it represents an increase of $130–160 per year for highest-income households.

Changes in NZ ETS prices make modest contributions to consumer inflation. A $10 increase in the NZ ETS price is estimated to increase annual consumer price inflation by 0.12 percentage points, assuming businesses pass on the costs in full and swiftly to consumers.

The price of NZUs is projected to increase over time across both options presented here (figures 5 and 6). Option 1 is expected to have larger price increases than option 2 and correspondingly larger impacts on businesses and households. Similarly, option 1 is expected to increase returns to foresters from sequestering carbon by more than option 2. The impacts on consumer inflation are expected to be modest under both unit volume options, adding about 0.1 per cent per year to inflation.

Māori are affected by the NZ ETS in various ways. The following Māori interests are likely to be affected by NZU price and unit settings:

• income through plantation forestry on Māori land included in the NZ ETS
• costs related to obligations under the NZ ETS when considering land-use change
• business profits and jobs that rely on earnings from NZUs
• higher living costs that affect Māori households and whānau – particularly those who are disproportionately represented in lower-income groups.

For more detail on expected impacts on different groups, see appendix 3.

We acknowledge the possibility of gaps in our analysis, including on impacts specific to Māori.

As part of this consultation, we are interested in your views on our impact assessment, including views from different Māori groups. 

Accordance with emissions reduction targets

A full accordance assessment will be made based on the Government’s final NZ ETS settings decisions later this year. However, our preliminary current assessment and modelling suggest that both options included for consultation will meet the accordance requirements under the Climate Change Response Act 2002 (CCRA) when assessed.

Accordance with EB2

Ministry for the Environment modelling (see Implications for total net emissions projections)  shows both options have a very high probability of achieving EB2 across the scenarios tested. Therefore they are likely to meet the requirements set out in the CCRA.¹⁴

Accordance with EB3

Current modelling shows that both options will exceed EB3. For that reason, our current assessment is that both options are likely to accord, but not strictly accord, when formally assessed.

If an option accords, but does not strictly accord, the Minister of Climate Change must be confident that this deviation is justified after considering matters prescribed in the CCRA. We identify two major reasons justifying deviation.

• A plan to fully meet EB3 is not yet required. ERP3 will set out the Government’s full approach for meeting EB3, including any complementary policies that can further support accordance.
• Adopting 2025 NZ ETS settings that strictly accord with EB3 could run counter to the proper functioning of the NZ ETS, requiring significant reductions in unit volumes between 2026 to 2030 that could impede participants’ ability to obtain units to meet their compliance obligations, and is likely to lead to highly volatile prices.

Both options set unit limits to reduce the estimated surplus stockpile to zero before the start of the EB3 period (2031) and by keeping price controls high to ensure volumes do not enter the market at a price below what is needed to achieve EB3. This means that both options enable flexibility to meet EB3 through future changes to settings during the EB2 period.

Option 1 provides the strongest probability of meeting the requirements – it results in the greatest reduction in the risk the stockpile poses to achieving emissions budgets.¹⁵ Option 1 is also likely to lead to higher prices relative to option 2 (all else being equal), and therefore would provide greater incentives for emissions reductions and removals.

^{14 Emissions budgets set the total quantity of net emissions allowed to be released during an emissions budget period. Emissions budgets will act as stepping stones to the 2050 emissions reductions targets. For more information, see: Ministry for the Environment. Emissions budgets and the emissions reduction plan. Retrieved 16 May 2025.}

^{15 The surplus of NZUs poses a risk to the achievement of emissions budgets because emitters could choose to use these units to meet surrender obligations, rather than reduce emissions at source. This is a risk to the time-bound budgets.}

Accordance with Nationally Determined Contributions

The first Nationally Determined Contribution (NDC1) was set with the intention that it would be met, in part, by using offshore mitigation. Both options have a very high probability of meeting the expected domestic contribution to NDC1, but New Zealand will require offshore mitigation to meet NDC1. As a result, both options are likely to accord, but not strictly accord, with NDC1. Deviation from strict accordance would be justified (in part) by the proper functioning of the NZ ETS and impacts on households and the economy.

NDC2 is set at approximately the same level as EB3. Therefore the accordance of options will match the accordance with EB3.

Accordance with 2050 target

Both options for unit limits and price control settings are in line with what is needed to meet EB1 and EB2, and position us well to meet EB3. These emissions budgets act as interim targets towards the 2050 target. Additionally, both options are aligned with the NZ ETS cap set out through ERP2, which meets the 2050 target.

For these reasons, both options are likely to strictly accord with the 2050 target.

Assessing the options

Table 4 compares the two options against the assessment criteria. This is a preliminary assessment. The relative ranking of options relies heavily on the accuracy of methodological changes. Further analysis and consultation feedback on the changes will enable a more accurate assessment at the time of final settings decisions.

Table 4: Assessment of options

* These assessment criteria only apply to price controls. Because price controls are identical for both options, both are evaluated as the same.

Comment on predictability and certainty:  The purpose of this criterion is (in part) to allow ‘participants to form expectations about supply and demand’ to inform future investment decisions. Doing so requires predictable expectations about future auction volumes while recognising that expectations should change over time in light of new information. In this context, new information could include improvements in methodological approach.

Option 2 incorporates significant changes in methodology that may not have been expected by market participants. This consultation supports regulatory predictability by seeking feedback on these changes and the other relevant factors so that this can be incorporated into the Government’s final assessment of decisions.

Key for assessing options against the status quo