System plans and cross-sector policies Ngā mahere pūnaha me ngā kaupapahere whakawhiti rāngai

Supporting a credible NZ ETS and broader market confidence

The New Zealand Emissions Trading Scheme (NZ ETS) raises the cost of emissions and reduces the cost of removals. To deliver a credible NZ ETS, market participants must trust that governments will remain committed to targets and choose NZ ETS settings and other policy accordingly. This is important to give businesses the confidence to make long-term investment decisions that reduce emissions.

Providing regulatory predictability is a priority for the Government. That is why one of the Government’s first actions was to end the review of the NZ ETS. It is also why we are committed to:

• no vintaging of New Zealand Units (NZUs) (ie, not placing an expiry date on NZUs)
• treating forestry NZUs in the same way as other units, recognising that one tonne of carbon dioxide removed from the atmosphere makes the same contribution to our targets as one tonne equivalent (CO2-e) of emissions reductions.

Strengthening market governance to manage risks of misconduct in the NZ ETS market is another important step to improve NZ ETS market credibility. This work will help to build a robust, efficient and credible NZ ETS, ensuring there is enough transparency of trading activity and enhancing participants’ understanding of how the market works.

Aligning the scheme with the second emissions budget

Decisions on NZ ETS settings

It is crucial that the role of the NZ ETS in achieving emissions budgets is clear, and that the scheme is managed in line with that role.

We have made decisions on the settings for 2025–29³ that recognise the NZ ETS market is currently over-supplied. The number of units at auction between 2025 and 2029 has been reduced from 45 million to 21 million, to encourage emitters to use the surplus units currently held in private accounts. These decisions provide medium-term regulatory predictability for participants, and support the credibility of the scheme, by:

• tightly aligning unit limits to budgets, so that the settings support confidence that net emissions from covered sectors will align with the budgets
• preserving existing price control settings to incentivise enough reductions to meet the budgets.

Future settings decisions may also need to consider net emissions reductions arising from any new complementary policies. This includes considering whether the NZ ETS cap (see below) should be tightened to lock in those emissions reductions and prevent those policies from disrupting market dynamics.

³ Ministry for the Environment. 2024. NZ ETS unit limits and price control settings for 2025–2029.

The NZ ETS cap for the second emissions budget

One aspect considered in the methodology for determining NZ ETS unit settings each year is apportioning the emissions budgets to sectors covered by the NZ ETS (the NZ ETS cap). Being clear on how the Government intends to distribute the emissions budget between NZ ETS sectors and non-NZ ETS sectors (mostly agriculture) will give the market greater regulatory certainty.

For the second emissions budget (EB2), we propose to align the cap with the projected emissions from NZ ETS sectors under the second emissions reduction plan (see the technical annex for details). We propose allocating 91 Mt CO2-e of EB2 to NZ ETS sectors. We will consult on this allocation as part of the NZ ETS settings process in 2025.

NZ ETS sectors are responsible for most of the net reductions required to meet EB2. The allocation to other sectors is in line with reaching the 2030 biogenic methane target.

Updating industrial allocation settings

Industrial allocation (IA) is the provision of NZUs to firms in emissions-intensive and trade-exposed industries. Its purpose is to manage the risk of emissions leakage⁴ by helping eligible firms meet some of their emissions costs. The Government has agreed to update some IA settings that were last set in 2010, including new baselines which are planned to affect allocations from 2024 onwards.

The Government is investigating the provision in the Climate Change Response Act 2002 that gives the Minister of Climate Change discretion to review IA baselines every 5 to 10 years. Several large firms have indicated this could create uncertainty and discourage investment in decarbonisation. It is important that we balance keeping the allocation up to date, managing leakage risk, providing investment certainty and managing the fiscal cost of IA.

⁴ Emissions leakage occurs when manufacturing is relocated to other countries with less stringent climate change policies, causing global emissions to rise.

Enabling emissions reductions through funding and finance

We need significant domestic investment in low-emissions activities and technologies to achieve our climate goals. Although we expect investment to come mainly from the private sector, the Government has a role in addressing barriers to investment and ensuring settings enable it.

Policies and initiatives

Increasing green investment and removing barriers

Green investment is beginning to pivot from mitigation to broader activities (eg, adaptation and resilience as well as indigenous biodiversity).

Voluntary carbon and biodiversity credits markets are emerging to meet this demand. However, we have heard that market participants, including investors and land owners, need greater certainty to increase investment.

There is an ongoing mismatch between some climate investment opportunities and the risk appetite of many mainstream investors. These constraints also increase the risk of misrepresented or misleading climate credentials – greenwashing – within the market.

As part of the second emissions reduction plan, our work includes:

• developing a sustainable finance strategy to provide clarity and certainty across New Zealand’s funding and financing landscape. This includes aligning New Zealand with global sustainability trends to increase investment in low-emissions ventures
• developing a sustainable finance taxonomy to give stakeholders, including capital market participants, clarity and confidence on which economic activities are green and transitional. The taxonomy:
  • will start with agriculture and forestry to show New Zealand’s leadership in sustainable practices and support investment in activities that will drive down emissions in these sectors
  • could expand to cover the sectors identified in this plan and the Climate Strategy, including energy, manufacturing, building and construction, and transport
• continuing to support credible, efficient and resilient markets. We will provide information and data to reduce information gaps and enable the integration of climate information into decision-making (eg, climate-related disclosures and open-source climate projections)
• investigating the potential of a biodiversity credits market as part of broader Ministry for the Environment work to catalyse private financing for nature
• cooperating with Australia to align the sustainable finance policy and regulatory landscape, and position the region as a robust green finance market. We are also engaging on emerging sustainable finance developments, including transition planning and investment product labelling
• engaging and sharing knowledge with international partners to reduce investment friction and compliance burdens, while supporting New Zealand firms and investors to access a wider pool of investment
• working with the finance sector to identify barriers and find solutions that support investment in green and transition activities. This includes:
  • partnering with Toitū Tahua: Centre for Sustainable Finance, for example, to develop New Zealand’s sustainable finance strategy and the taxonomy
  • establishing a sustainable finance reference group to give expert advice to the Minister of Climate Change and the Ministry for the Environment on priority actions for delivery between 2024 and 2026.

Other opportunities identified during consultation include:

• improving investor confidence in green investments by reducing real or perceived risks, such as supporting improved data and evidence, further transparency, market integrity via guidance and monitoring, capability building and technical assistance
• developing sector-based transition pathways by identifying and addressing barriers facing specific sectors
• exploring interventions that can mobilise additional private investment (ie, by reducing perceived investment or legal risk).

We will continue to work with the private sector on actions that will increase green investment and transition finance.

Enabling emissions reductions with technology and innovation

Innovation can fundamentally shift how we do things. Some advances, such as biofuels, can replace emissions-intensive products and create a climate-friendly future. New technologies such as smart chargers or other smart appliances can bring efficiencies and lower operating costs through energy savings. There are emerging technologies that can significantly reduce emissions across the economy. Simpler pathways will allow these tools to reach end users faster. The Government is focused on streamlining regulations and approval processes to enable the private sector to move quickly from prototype to commercialisation.

Providing technology for agriculture

Work underway for the agriculture sector (chapter 10) includes:

• ending the nearly 30-year effective ban on gene technology outside the laboratory (discussed below)
• supporting the development and use of emissions-reducing technologies, including agriculture
• incentivising the private sector to move from prototype to commercialisation.

Ending the ban on gene technology

The Government will establish an independent regulator in the Environmental Protection Authority to oversee applications to use gene technology. The aims are to allow New Zealand to benefit from these technologies and to protect our health, environment and biodiversity.

Gene technology allows scientists to examine and alter the genetic material of plants, animals, viruses or bacteria. This has helped scientists understand how we might edit genes to promote health, productivity and conservation, and even address climate issues.

Ending the effective ban on gene technology outside the laboratory will allow researchers and companies to develop and commercialise innovative products and create commercial opportunities. These technologies can help farmers and growers mitigate their emissions and raise productivity. For example, gene technologies could lead to sterile conifers that meet forestry needs but prevent the spread of wildings.

Enabling use of renewable energy  

Advances in energy storage (eg, batteries, grid management, demand flexibility, smart meters, fuel cells and new processes to develop industrial goods) can help balance electricity supply and demand. Such advances help manage intermittent wind- and solar-generated electricity and continue our energy decarbonisation. See chapter 7 for more detail.

Supporting emissions-reducing technology  

Sometimes there are challenges to early investment in new technology, such as the cost of trialling it in the New Zealand context.  

Initiatives such as the Low Emissions Heavy Vehicle Fund (LEHVF) can encourage early adoption of new technology. This fund aims to increase the number of zero- and low-emissions heavy vehicles, and therefore encourage manufacturers to supply more such vehicles to the market. The LEHVF offsets the capital costs of fleet conversion by funding either: 

• up to 25 per cent of the purchase price of a new low- or zero-emissions heavy vehicle, or  
• 25 per cent of the cost to convert an internal combustion engine heavy vehicle to approved clean energy.