Climate News – Commission advises no change to NZ ETS settings but flags late-2020s risk

• The Climate Change Commission’s routine annual advice on NZ ETS auction settings, released today, recommends keeping auction volumes and price controls the same for now to limit the risk of further price instability and support confidence in the NZ ETS.
• This year’s analysis also points to a possible unit shortfall risk by the late 2020s. It’s uncertain if and when a shortfall could happen, but it would likely result in volatile price spikes. The Commission advises the Government to consider and consult on options to mitigate this risk.
• Auction settings shape expectations and market confidence, which matters for investment decisions, but they have limited reach – auctioned units are a small share of total units, and the NZ ETS covers less than half of domestic emissions.
• The NZ ETS will struggle to provide an investment signal by the mid-2030s. The Government needs to start a transparent and consultative process to determine how the NZ ETS can best evolve.

The Climate Change Commission’s regular annual advice on NZ ETS auction unit limits and price control settings recommends keeping settings the same for now, with minor adjustments for technical updates and inflation.

However, the analysis has identified a potential future unit shortfall that could happen as early as 2028, which could result in volatile price spikes that would have serious consequences. A shortfall would mean that more units might need to be auctioned in the future so the NZ ETS can function well, while remaining aligned with emissions targets, but this is uncertain.

“This annual advice is designed to help the Government make regular updates as needed. We’ve identified a potential future unit shortfall, which is concerning but uncertain. Our view is that the best option for now is to hold auction settings steady, get ready to act if needed, and reassess next year when better information is available,” says Jo Hendy, Chief Executive of the Climate Change Commission.

“These recommendations aim to avoid changes that could further unsettle the market, as market participants have told us that sentiment is low.

“While this advice is focused on making the NZ ETS work as well as it can given its existing architecture, bigger reforms are needed for the NZ ETS to be an effective tool in the 2030s. We advise the Government to start developing these reforms carefully and transparently, and with consultation,” says Hendy.

“For an ETS to support an orderly transition to meet emissions targets, the emissions price should rise steadily over time to encourage the shift to low-emissions options. In contrast, a unit shortfall could cause volatile price spikes – which could force emissions reductions through lower production or factory closures rather than from upgrading to lower emissions technologies and processes,” says Hendy.

“A shortfall could also put the Government under pressure to make ad hoc market interventions, which in the past has been bad for confidence. The Government can get ahead of that by publicly consulting on options to address a future shortfall.”

These recommendations are conditional on the next settings advice and update being in 2027, which the Government has recently confirmed will go ahead. (When the advice was prepared the Government had announced its intent to shift to settings decisions every two years, so the Commission’s advice includes an alternate option for the Government to consider if the next review were not until 2028.)

NZ ETS auction settings shape expectations and market confidence, which matters for investment decisions, but they have limited reach. Auctioned units are a small share of total units in the system, and the NZ ETS covers less than half of Aotearoa New Zealand’s emissions. This means settings are important, but not decisive on their own.

“Annual auction settings can’t solve the bigger design challenges with the NZ ETS. The scheme covers around 40% of domestic emissions, and that share is declining. Under the current architecture, by the mid-2030s the NZ ETS will struggle to provide an investment signal for either decarbonisation or forestry,” Hendy says.

“We’ve previously advised that the Government needs to start a transparent and consultative process to determine what an effective NZ ETS in the 2030s will look like.

“Investors need credible, well-signalled and consistent policies on the NZ ETS – and on climate change generally – to have confidence that investments in emissions reduction will generate returns.”

• The advice, a one-page summary, FAQs about the NZ ETS settings 2026 advice, and supporting technical information are available at: climatecommission.govt.nz/nz-ets-2027-2031
• Explainer: What is the NZ ETS? climatecommission.govt.nz/what-is-the-nz-ets

• Unit limits: Maintain the current NZ ETS 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.
• Price controls: Retain and extend to 2031 the current price control settings, with inflation adjustments from 2029.

The risk of a unit shortfall is because the surplus of units has reduced – and may continue to reduce – more quickly than expected. This is mainly due to no units being bought at auctions since late 2024.

This annual advice is about recommending NZ ETS unit limits and price control settings for the following five years. The volumes of NZUs available for auction, which this advice focuses on, are only a small proportion of the total units in the system.

Unlike the Commission’s other work, this advice is focused on making the NZ ETS work as well as it can given its existing architecture. This advice discusses some of the wider issues with the NZ ETS, but does not recommend specific policy reform, changes to the ambition of targets or to the Government’s climate strategy. The Commission provides other advice that addresses broader prospects for reducing emissions through the NZ ETS and other mechanisms, and monitors the country’s progress towards meeting emissions targets. The next annual emissions reduction progress report is due in July this year.

The Government will consider this advice and run a public consultation on proposals, led by the Ministry for the Environment on behalf of the Minister of Climate Change. The Commission expects that this will be in the second quarter of 2026.

The Government must make decisions on NZ ETS unit limits and price control settings by 30 September 2026. The new settings will come into force on 1 January 2027.

In 2025, the Government announced its intention to amend the Climate Change Response Act 2002. More information is available at: environment.govt.nz/what-government-is-doing/areas-of-work/climate-change/amending-the-climate-change-response-act