NZ ETS unit settings and annual regulatory updates 2026

Every year, the Government is required to review settings for the New Zealand Emissions Trading Scheme (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 New Zealand’s emissions budgets and 2050 target.

As part of this annual process, the Government must consider the advice and recommendations of He Pou a Rangi | Climate Change Commission (the Commission). The Commission’s advice is that the Government should offer 14.7 million units over the 2027–31 settings period. This is based on maintaining status quo auction volumes for the second emissions budget (EB2) period and setting 2031 auction volumes on the basis that the surplus of units in the market has been depleted by then.

The Commission highlighted that, although auction volumes could be increased in line with the Government’s emissions budgets, offering those volumes in the current circumstances might undermine market confidence. It also highlighted the risk of an NZU shortfall towards the end of the 2020s, which could result in rapidly rising and volatile NZU prices.

Alongside the Commission’s option, we are consulting on two additional options.

We seek your feedback on all three options for auction volumes.

The Commission has recommended making no change to price control settings, other than for routine inflation adjustments. It advises that they are consistent with the range of emissions prices we will likely need to meet New Zealand’s domestic 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 the New Zealand Emissions Trading Scheme unit limits and price control settings (ETS settings) for 2027–31.

The ETS is the key tool to help New Zealand meet its emissions budgets and the 2050 target. Updating ETS settings regularly helps New Zealand stay on track to meet those domestic emissions reduction targets.

This is the sixth year of updating the settings, since 2020. They must be updated by the end of September each year, after consultation.¹

The Climate Change Response Act 2002 (CCRA) establishes the process for updating ETS settings. It requires that they accord with New Zealand’s emissions budgets and the 2050 target. If the settings do not strictly accord with the emissions budgets, 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.

^{1 This reflects the current legal requirement. However, the Government is proposing to shift to biennial ETS settings.} 

Scope

This consultation focuses on options for ETS unit limits and price control settings for 2027–31.

The consultation does not:

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

The options presented are based on the information and decisions that are available at the time of writing, including the amended second emissions reduction plan (ERP2) and the 2025 Greenhouse Gas Inventory.

Structure

In this consultation document, we have elevated the major, overarching question on the appropriate auction unit settings and price controls. Below this, we highlight other important questions on methodology that will help inform this and future ETS settings decisions. The appendices support these questions and decisions. They give more details on how we reached decisions and information that can support your feedback.

A separate technical annex has more details on the modelling used to inform ETS settings decisions.

How to have your say

The Government welcomes your comments on this consultation. The questions throughout the document are a guide only, and all comments are welcome. See the Consultation questions for the full list. (link)

You do not have to answer them all. To ensure your point of view is clearly understood, you should explain the reasons for your views and give supporting evidence if needed.

The role of the ETS

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

• international obligations under the United Nations Framework Convention on Climate Change and its Paris Agreement
• 2050 target: net zero greenhouse gas emissions (except biogenic methane) and a 14 percent to 24 percent reduction in biogenic methane²
• emissions budgets: a set of interim targets to reach the 2050 emissions reduction target. Emissions budgets set the total quantity of net emissions allowed to be released during an emissions budget period³

The ETS supports emissions reductions by:

• requiring businesses to measure and report on their greenhouse gas emissions
• pricing emissions and removals to financially incentivise emissions reductions 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 ETS
• rewarding removal activities (mainly forestry) with one unit for each tonne of emissions removed from the atmosphere
• limiting the number of units supplied into the ETS through auctioning and industrial allocation.

ETS participants can access units from several sources:

• government auctions of units
• government allocation of units to agreed emissions-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 and reduces the number supplied into the ETS over time, through auctions and industrial allocation. This limits the total volume of net emissions for ETS participants, in line with New Zealand’s domestic emissions reduction targets.

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

^{2  More specifically, a 14 percent to 24 percent reduction below 2017 biogenic methane emissions by 2050, including a 10 percent reduction below 2017 biogenic methane emissions by 2030. The 2050 biogenic methane target was changed from a 24 percent to 47 percent reduction in December 2025, as part of the Climate Change Response (2050 Target and Other Matters) Amendment Act 2025.}

^{3 For more information, see: Ministry for the Environment. Emissions budgets and the emissions reduction plan. Retrieved 15 May 2026.}

Annual process for unit limits and price control settings

Under the Climate Change Response Act 2002 (CCRA), ETS unit limits and price control settings (ETS 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. ⁴

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 domestic emissions reduction targets and considering new information. 

The unit settings must accord with New Zealand’s emissions budgets and the 2050 target. ⁵

Unit limits include:

• a limit on the units available by auction (auction volumes)
• 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
• 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
• CCR volumes – the number of units that will be released if the trigger price is reached.

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

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

This five-year look-ahead period (figure 1) provides regulatory certainty to ETS participants, supporting investment decisions and market stability. To increase certainty, these updates are generally intended to exclude changes to unit settings for the first two years (ie, 2027 and 2028, 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.⁶

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

^{4 This reflects the current legal requirement. However, the Government is proposing to shift to biennial ETS settings. The current legal requirement is reflected throughout this document.}

^{5 Unit settings were also previously required to accord with New Zealand’s nationally determined contributions. This requirement was removed as part of the Climate Change Response (2050 Target and Other Matters) Amendment Act 2025.}

^{6 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”.}

Framework review

In late 2025, the Ministry for the Environment (the Ministry) led a targeted review of the frameworks and analytical tools used to develop advice on ETS settings.⁷  This was done with the close participation of He Pou a Rangi | Climate Change Commission (the Commission).

The review found the overall advisory and analytical frameworks for ETS settings were fit for purpose, but identified several opportunities for improvement for the Ministry and the Commission. These have been incorporated into the Commission’s advice and the Ministry’s settings process, and include:

1. Enhancing communication of key judgements and assumptions, helping decision-makers understand their options and the trade-offs.
2. Improving clarity in how market conditions have been considered and addressing potential sources of confusion.
3. Managing surplus uncertainty and addressing risk.
4. Continually improving analytical tools and approaches.

^{7 Ministry for the Environment. Opportunities to Improve New Zealand Emissions Trading Scheme Advisory Frameworks and Tools. Retrieved 21 May 2026.}

Recent secondary market price dynamics

Following Government announcements in November 2025 of changes to the CCRA, there was a material decline in the NZU price and an increase in volatility. Market commentators have attributed the market reaction to reduced market confidence, following several government climate decisions, particularly the change to the 2050 biogenic methane target, removal of plans to price agricultural emissions, and the removal of the requirement for ETS settings to accord with New Zealand’s nationally determined contributions. Although there has been a recovery recently, the NZU price currently remains well below the auction price floor. 

The current gap between the NZU price and the auction price floor, and the fact that no 2025 ETS auctions, or 2026 auctions to date, have cleared, suggests that the market remains well supplied in the short term. Market commentators have pointed to a disconnect between current prices and long-term supply and demand fundamentals. They have noted that recent dynamics could indicate the market is more sentiment driven and focused on short-term factors.

Figure 2: NZU secondary market spot price and auction price floors, January 2022 to May 2026

^{Source: Jarden, Ministry for the Environment}

Commission advice on ETS settings

The Commission is required to give annual advice on ETS settings. The Minister must consider the Commission’s advice when recommending updates to settings. If there are any differences between the Commission’s recommendations 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 ETS settings was published in April 2026.⁸ The Commission highlighted that, although it could be possible to increase auction volumes in line with the Government’s emissions budgets, offering those volumes at a time of low market sentiment might further undermine market confidence. It also highlighted the risk of an NZU shortfall towards the end of the 2020s, which could result in rapidly rising and volatile NZU prices. It noted that, if this eventuates, it could unintentionally drive emissions reductions through plant closures and reduced production, rather than by incentivising investments in lower emissions technologies. However, the Commission did also acknowledge uncertainty in the likelihood and possible timing of any shortfall.

Its major recommendations this year are that the Government should:

• maintain the current auction volumes through to 2030, and set 2031 auction volumes on the basis that the surplus of units in the market has been depleted by then 
• offer 14.7 million units over the 2027–31 settings period
• prepare to address the risk of a unit shortfall in future years
• extend current price control settings to 2031, with inflation adjustments from 2029.

The Commission also recommended that, if there is no ETS settings update in 2027 because of a shift to biennial settings decisions, the Government should consider adding a new temporary lower CCR tier to mitigate the risk of a shortfall in 2028. The Government has recently announced that the planned shift to biennial ETS settings will take place after the ETS settings update in 2027. For that reason, this recommendation has not been considered.

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

^{8 He Pou a Rangi | Climate Change Commission. NZ ETS unit limits and price control settings for 2027–2031. Retrieved 24 April 2026.}

Market advisory group

In advance of public consultation, the Government sought insights from a market advisory group, consisting of a small number of ETS market stakeholders that the Ministry engaged with individually.

The Ministry gave members a range of potential ETS settings scenarios without indicating any preference. The group provided views on ETS market perspectives, and potential impacts and reactions to different scenarios. This helped inform the options included in the consultation.

The Ministry did not provide members with any summary of their feedback or information about how their views were used.

Objectives – accordance test

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

• 2050 target, which is:
  • net zero emissions of all greenhouse gas emissions other than biogenic methane by 2050
  • a 14 percent to 24 percent reduction below 2017 biogenic methane emissions by 2050,⁹  including a 10 percent reduction below 2017 biogenic methane emissions by 2030
• emissions budgets, which are stepping stones along the path to the 2050 target.

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.

For emissions budgets, the settings do not have to strictly accord if the discrepancy is justified after considering matters prescribed in the CCRA.¹⁰  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. 

A key part of assessing accordance is considering the role of the ETS in achieving the 2050 target and emissions budgets.

Following the passing of the Climate Change Response (2050 Target and Other Matters) Amendment Act 2025, ETS settings are no longer required to accord with New Zealand’s nationally determined contributions under the Paris Agreement.

^{9 This was changed from a 24 percent to 47 percent reduction in December 2025, as part of the Climate Change Response (2050 Target and Other Matters) Amendment Act 2025.}

^{10 See section 30GC(5) of the CCRA.}

Criteria

To assess the options, we used a set of criteria (table 1). These 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 limits and price control settings. The third and fourth apply to price control settings only.

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

Table 1: Criteria for assessing options for 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 (ETS):

• ETS settings analytical model
• ETS market model.

ETS settings analytical model

The analytical model applies a series of steps to determine possible packages of auction volumes and price controls that align with New Zealand’s emissions budgets and 2050 target. It further refines the ‘seven steps methodology’ that the Government and He Pou a Rangi | Climate Change Commission (the Commission) used between 2020 and 2025 to determine appropriate unit limits.

The analytical model is not a fundamental reworking of the seven steps. It is more focused on better communicating the calculations and judgements applied through the process to determine auction volumes and price controls. Figure 3 provides an overview.

Figure 3: Analytical approach to developing ETS unit limits and price control settings

^{Source: He Pou a Rangi | Climate Change Commission}

The starting point of the analytical model is determining the emissions cap or ‘ETS cap’ for the settings period. The ‘ETS cap’ is the total level of net emissions allowed under the ETS for the settings period, aligned with New Zealand’s emissions budgets and taking into account emissions in non-ETS sectors. It is needed to inform both auction volumes and price controls. Caps can also be determined for emissions budget periods, for example, the second emissions budget (EB2) cap sets the total level of net emissions allowed under the ETS for the EB2 period.

Based on the emissions cap, we determined appropriate auction volumes using five steps.

1. Make technical adjustments – converting and aligning emissions and units.
2. Account for industrial allocation volumes.
3. Estimate the New Zealand Unit (NZU or unit) surplus.
4. Set the approved overseas unit limit.
5. Determine the range of possible auction volumes.

We also:

• evaluated price controls through modelling and other analysis, to ensure they remain consistent with emissions budgets
• assessed the overall settings package of auction volumes and price controls, to ensure it accords with emissions budgets and the 2050 target.

Appendix 1 shows more detail on the analytical approach, methodology and assumptions.

Addressing the unit surplus stockpile

A large quantity of units – around 136 million as at December 2025 – 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 current and future surrender liabilities, or for other reasons (eg, hedging against future market price increases). 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 could use surplus units to emit more greenhouse gases than would otherwise be permitted under the ETS cap. This could cause challenges in meeting emissions budgets.

To reduce this risk, we need to manage the surplus. The Government has agreed to set unit limits, with the aim of reducing the surplus to zero by 2030. All recent ETS settings decisions have reflected this decision. This is reflected in steps 3 and 5 of the ETS settings analytical model. 

As in previous years, significant uncertainty remains about the size of the surplus, largely driven by limited robust empirical evidence. To account for the uncertain size and dynamic nature of the surplus, the analytical approach now allows for a range of possible surplus estimates.

Managing the surplus stockpile through steps 3 and 5 does not address any risks that the remaining stockpile could pose to achieving emissions budgets. Although the surplus is considered the most liquid component of the stockpile, and poses the most risk to achieving emissions budgets, parts of the non-surplus stockpile are also expected to have some liquidity and could become available in response to price signals.

ETS market model

The ETS market model estimates supply and demand for NZUs under different conditions, and can generate price projections based on supply and demand.^{11, 12}  

The model estimates emissions reductions and removals, and the flow of units in and out of the stockpile, by endogenously relating 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 we 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 ETS. For more details 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.

^{11 For the original documentation on the market model, see: Ministry for the Environment. 2023. Review of the New Zealand Emissions Trading Scheme: Summary of modelling. Wellington: Ministry for the Environment.}

^{12 The latest documentation on the market model is in the technical annex.}

How we use both models together

The market model and analytical model are fundamentally different, although with considerable overlap. Both provide insights into the ETS.

• The analytical model is one way to identify unit settings that satisfy the accordance tests.
• 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. It also provides a more robust overall assessment of the merits and trade-offs of the three options in this consultation. 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. For more details, see the technical annex.