The New Zealand government raised the country's 2023 Emissions Trading Scheme (ETS) carbon allowance price and volume settings on December 15 to levels significantly below those advised by its national climate body.
Under the New Zealand Emissions Trading Scheme (NZ ETS), the government distributes allowances that represent emission entitlement of every metric tonne of carbon dioxide equivalent through a mix of free allocations and auctions.
The allowances, known as New Zealand Units (NZUs), are auctioned quarterly and can be traded on the secondary market by ETS participants before being surrendered to the government by the end of the compliance year.
The Climate Change Commission (CCC), an independent body advising the government on climate policy, had recommended in July raising carbon auction price settings by a large margin to align with the country's climate goals.
According to the cabinet minutes, New Zealand's Minister for Climate Change James Shaw leaned toward CCC recommendations, while offering alternative options such as maintaining status quo by following the current price trajectory with adjustments for inflation.
The cost containment reserve (CCR) trigger price was increased to NZ$80.64/mtCO2e from NZ$70/mtCO2e, significantly lower than the two-tier price structure of NZ$171/mtCO2e and NZ$214/mtCO2e recommended by the CCC. This will result in the release of additional units to balance prices, with an extra 2.9 million units released at NZ$171/mtCO2e and an extra 5.1 million units released by the breaching of NZ$214/mtCO2e.
The government also reduced the volume of NZUs available for auction in 2023 to 17.9 million units from 19.3 million units, still above 16.3 million units recommended by the CCC to draw down the NZU stockpile on the market.
The current surplus of NZUs in the market would be used for trading and speculation rather than for fulfilling climate obligations, which could pose significant challenges in achieving emission targets.
The latest decision comes after the NZU price touched a record high of NZ$88.50/mtCO2e in November before a steady decline due to uncertainty over the government's decision on price settings, with the clearing price for the last 2022 auction in December hitting a new low of NZ$79/mtCO2e, compared to previous auctions.
The minister added that the impact of the price setting recommended by the CCC on the fuel prices and inflation is expected to be minimal, despite the potential impacts on emissions-intensive and trade-exposed industries such as oil, gas and metals.
"If NZU prices reach high enough levels, there is a possibility that some industries in New Zealand will close and required goods will need to be imported instead," the cabinet minutes said.