How New Zealand emission units enter 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:

• Provided by government for industrial allocation
• NZUs sold by government auction
• Provided for activities that remove greenhouse gases from the atmosphere (emissions removals). These include NZUs received for the growth of forests
• Available in the secondary market (NZUs purchased from other participants)
• Directly purchase from the government is through the fixed price option (although this option will be removed in future)

The ways NZUs are supplied to the market is changing from January 2021, due to the recent NZ ETS reforms.

There is an overall limit on the number of NZUs supplied to the NZ ETS trading market.  This ensures the NZ ETS supports New Zealand to meet its emissions targets. The overall limit consists of:

• Free NZUs issued through industrial allocation and negotiated greenhouse gas agreements (NGA)
  • 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.
• NZUs sold by the Government at auction, which could include NZUs from the cost containment reserve
• Any approved overseas units
  • A 'Negotiated Greenhouse Agreement' is a legacy policy (pre NZ ETS) that provides a competitive at risk firm an exemption from greenhouse gas emissions costs, in exchange for a commitment to reduce emissions to world's best practice standard.

The cost containment reserve makes a specified number of additional NZUs available, if a price trigger level (currently set at $50) is reached during an auction.

NZUs issued from the cost containment reserve are part of the overall limit, however, if these units cause 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.

• Projections indicate that over 80 per cent of emissions removals units over the next five years will be earned by forests planted after 1989 (known as Post-1989 forestry or 'P-89').

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.

The fixed price option (FPO) allows participants to pay cash to the Crown rather than surrendering units, acting as a de facto price ceiling. The FPO has contributed to the stockpile increasing in recent years, as participants have held onto their units and met their emissions obligations with the FPO.

The FPO will be available for participants to meet their 2020 emissions obligations at a price of $35/ tonne CO₂-e. Following this, the FPO will be replaced with a new price control mechanism called the ‘cost containment reserve’ (CCR), used at government auctions of NZUs.