Annual updates to emission unit limits and price control settings

The Minister of Climate Change is required to update the overall limit, sub-limits, and price control settings every year. This is to ensure there is a five-year look ahead period, see Figure 1 below. For example, in July 2023 decisions were made to update the unit limits and price control settings to ensure they cover 2024-2028. Changes were also made to December 2023 auction settings, following a reconsideration of decisions made in 2022 after settlement of a judicial review.

The Climate Change Commission recommends NZ ETS unit limits and price control settings to the government every year.

If the Government adopts unit limits and price control settings that differ from the Climate Change Commission’s recommendations, it must publicly explain why.

The unit limits that must be prescribed in regulations are:

• a limit  on  the  total  number  of  NZUs  available  by  auction.  This is comprised of annual auction volume plus the volume available within the cost containment reserve (CCR) and is shown in the table below
• a limit  on  approved  overseas  units;  which, as New Zealand currently has no access to offshore mitigation, is zero
• an overall  limit  on  units, often  referred  to  as  the  NZ  ETS  cap. It consists of units available  by  auction, by  other  means (e.g. from industrial allocation)  and  approved   overseas   units.   This   excludes   consideration   of   units   transferred for removal activities

* The total number of NZUs available to be sold at auction includes the reserve amount of New Zealand units, see table above.

The five-year process means:

• announcing new unit limit volumes and price control settings for the fifth year
• considering whether new limits and price control settings should be recommended for years 3 and 4
• potentially prescribing new limits and price control settings for years 1 and 2, if the amendment is justified by special circumstances that require change.

The special circumstances which could justify a change include:

• a change that has significantly affected any matter that the Minister is required to consider under section 30GC of the Climate Change Response Act 2002 [New Zealand Legislation website]. For example, projected trends, proper functioning of the scheme.
• a change in the emissions budget, nationally determined contribution under the Paris Agreement or emission reduction targets that applies to the year in which the amendment is made
• if the cost containment reserve is released or units are auctioned at their minimum price
• a force majeure event (e.g., an unforeseeable circumstance)

There is a one-off exception to this rule. Once the Government has set the first emissions budget, the Minister must amend regulations to ensure they prescribe new limits and price control settings for each of the next 5 calendar years. This includes prescribing new limits and price control settings for years 1 and or 2.