Businesses in the New Zealand Emissions Trading Scheme (NZ ETS) are required to buy units to cover their emissions. Units are supplied to the market in several ways for businesses to buy and trade. This page explains how units are supplied to the market.
The NZ ETS establishes a trading market of New Zealand emission units (NZUs). Businesses that carry out activities covered by the NZ ETS are required to buy and surrender to the Government, one NZU for every one tonne of carbon dioxide equivalent (CO2-e) emissions they produce.
NZUs can be traded among businesses participating in the NZ ETS. Supply and demand for NZUs is a key driver of the NZU price.
It is important that businesses in the NZ ETS understand the different ways that NZUs are supplied to the market. This enables them to make informed decisions about how to meet their compliance obligations.
NZUs are supplied to the market in a number of ways.
These include NZUs which are:
There is an overall limit on the number of NZUs supplied to the NZ ETS trading market, excluding units transferred for removal activities such as forestry. This ensures the NZ ETS supports New Zealand to meet its emissions targets. The overall limit consists of:
The cost containment reserve makes a specified number of additional NZUs available for sale at auction, if a price trigger level is reached during an auction.
NZUs issued from the cost containment reserve are part of the overall limit, however, if the sale of these units causes the emissions budget to be exceeded, they need to be ‘backed’ by some form of equivalent emissions removal.
The limit for approved overseas units is currently set at zero, and there are no types of overseas units which are eligible to use in the NZ ETS.
Businesses participating in the NZ ETS can earn NZUs from activities that remove greenhouse gases from the atmosphere.
Emissions removals support New Zealand to meet its emissions budgets and are not part of the overall limit set in the NZ ETS. Business that earn these NZUs can use them to meet their emissions obligations, or sell them into the secondary market.
The majority of NZUs earned for emissions removals are for carbon sequestered (carbon removed from the atmosphere) by trees as they grow.
NZUs are also earned for removals from activities such as exporting synthetic greenhouse gases.
Businesses participating in the NZ ETS can buy and sell NZUs with each other. This buying and selling occurs on the secondary market. The secondary market is an important part of the NZ ETS because it ensures that trading gives companies a strong incentive to save money by cutting emissions in the most cost-effective ways.
The NZ ETS currently has a large supply of NZUs available in the secondary market, known as the ‘stockpile’. This 'stockpile' refers to NZUs which accumulated in the past when the NZ ETS was fully open to international markets under the Kyoto Protocol. This allowed participants to purchase and surrender cheaper overseas units and hold on to NZUs.
Although stockpiled NZUs in the secondary market are still available for use by businesses in the NZ ETS, their use does not contribute towards meeting New Zealand's emissions reduction targets because they represent emissions reductions that occurred prior to 2021.
The Government is managing this stockpile by reducing the overall limit on new units that will be supplied into the scheme. This will allow a portion of demand to be met with NZUs from the stockpile without those units breaching the emissions budget and ensure the stockpile volume drops over time.
The EPA provide a breakdown of the account holder categories and the types of units that make up the current NZ ETS stockpile.