NZ ETS unit settings and annual regulatory updates 2026

As part of 2025 ETS settings decisions, the Government agreed to a second emissions budget (EB2) cap of 89.4 Mt CO₂e, based on second emissions reduction plan (ERP2) projections. Following that decision, we released the 2025 projections. Compared with ERP2 projections, these showed higher net emissions outside the New Zealand Emissions Trading Scheme (ETS) and lower net emissions within the ETS during the EB2 period.²⁴ In line with the Government’s efforts to strengthen its position for meeting EB2, we propose to align the EB2 cap with the 2025 projections. This results in a tighter EB2 cap of 81.9 Mt CO₂e. This aligns with He Pou a Rangi | Climate Change Commission’s (the Commission’s) approach.

The proposed approach reflects an increase in ambition and is a departure from what was outlined in the 2025 ETS settings consultation’s section on the EB2 cap, which suggested there would not be changes in response to projections or that shift the level of ambition. 

Future policy work building on the framework review found that changes to ETS caps, in response to changes in projections of non-ETS emissions, may be required in some cases to maintain accordance with emissions budgets. It also identified that it could be appropriate to tighten caps based on updated projections, where a tightened cap better supports efforts to reduce emissions without overly burdening ETS-covered sectors.

^{24 2025 projections have been used to inform emissions budget caps, the analytical model and market models. They reflect the latest economy-wide update on projected emissions. Any changes to expected emissions since 2025 will be reflected in 2026 projections and considered as part of 2027 ETS settings decisions.}

As part of 2025 ETS settings decisions, the Government agreed to a provisional third emissions budget (EB3) cap of 40.7 Mt CO₂e. As with EB2 emissions, 2025 projections showed higher net emissions outside the ETS and lower net emissions within the ETS during the EB3 period, when compared with ERP2 projections. Reflecting updated projections, we propose a provisional EB3 cap of 24.8 Mt CO₂e.

This figure is based on the ‘with existing measures’ (WEM) agricultural projections²⁵ and ‘with additional measures’ (WAM) projections for other non-ETS sectors. This differs from the Commission’s approach, which used the ‘with added measures’ agriculture scenario B (WAM B), based on its presentation as the central projection in the amended ERP2.

To determine the provisional EB3 cap and the Government-recommended auction volumes, we have taken a more conservative approach and used the WEM agriculture projection, as it reflects currently agreed policies. This does not reflect a view that the WAM B scenario will not eventuate. The cap is not final and can be adjusted in the future as policies or industry shifts impact projections.

^{25 The agriculture WEM projections used in our modelling include estimated impacts from the ERP2 afforestation on Crown land policy.}

Until last year, the central estimate of the surplus was a key factor in determining auction volumes. The decision in 2025 to retain the then status quo auction volumes implied a larger drawdown of the surplus than the central estimate. Furthermore, the ETS market is complex, and the relationship between the estimated surplus and observed market dynamics has not always been clear. As reflected in the updated analytical approach, this year, we explicitly acknowledge that a range of plausible surplus estimates could be used, and thus a range of plausible auction volumes.

Last year, the Government agreed to extend status quo volumes, reflecting the uncertainty in the surplus stockpile estimate and to best support accordance with domestic emissions reduction targets and proper functioning of the ETS. A different surplus estimate was not explicitly adopted, but the agreed auction volumes aligned with a higher than central surplus estimate drawdown – about 75 percent of the total surplus range. All else equal, a higher surplus drawdown results in lower auction volumes, and a lower surplus drawdown results in higher auction volumes.

We will use a similar approach this year. All options assume a higher surplus drawdown than the central estimate. A central estimate of the surplus resulted in a higher volume option that was considered but not formally included in consultation (see Option considered but not included).

The Commission has included small surplus reduction amounts after 2030 to account for expected decreases in hedging volumes and pre-1990²⁶ units over time. This decreases 2031 volumes by about 0.6 million units and decreases total EB3 volumes by about 2.2 million units.

We have not included this reduction in option 2 or option 3.

The ETS market model allows for ongoing stockpile drawdown throughout EB2 and into EB3 to reflect price expectations. This influences the modelling derived from that source, including the estimated impacts on overall emissions levels.

We will continue to consider this topic and seek your feedback on our current method. We will factor this into final ETS settings decisions following consultation.

^{26 Pre-1990 units are explained in step 3 of appendix 1.}

We have focused our discussion of the ETS settings analytical approach on the overall question on appropriate unit settings. We also addressed specific major decisions about surplus methodology.

However, we also invite any other feedback on the approach to any of the steps in the analytical model.

To enable this, we have provided more detail on each of analytical model steps in appendix 1.

In 2025, the Government agreed to move from annual ETS settings reviews to biennial ETS settings reviews. The intent was to give the market greater certainty by reducing the frequency of changes to auction volumes.

The undersupply risks raised by the Commission have highlighted that the move to biennial ETS settings comes with a trade-off of reducing responsiveness to risks that could appear between settings decisions, and possibly result in ETS settings that do not best match emerging market conditions.

We are keen to hear wider views on the benefits and trade-offs of the move to biennial ETS settings.