Setting unit limits in the NZ ETS

The Government is required to set an overall limit, known as a 'cap', on NZUs supplied to the market for each of the next five years. This is also known as the five year rolling period.

The overall limit and price control settings are guided by an emissions budget.

Coverage of the overall limit

The Government is required to set an overall limit (also known as a 'cap') on NZUs supplied to the market for each of the next five years.

The overall limit is based on sub-limits, which consist of:

  • free units issued through industrial allocation and negotiated greenhouse gas agreements
  • any approved overseas units
  • the number of units sold at auction
  • a reserve number of units available only if a trigger price is reached at auction.

The overall limit does not limit NZUs provided for emissions removals, including from forestry.

Emissions budgets guides overall limit and price control settings

The Government sets emissions budgets to keep New Zealand on track towards the 2050 target. The emissions budgets inform the number of NZUs that can be supplied into the NZ ETS. The emission budgets limit the quantity of emissions that businesses participating in the NZ ETS can emit.

The Climate Change Commission provided its advice on the first three emissions budgets in May 2021. Before this, the Government used a provisional emissions budget to help guide the current overall limit and price control settings in the NZ ETS. The provisional emissions budget has been replaced with full emissions budgets, which were set by the Government in May 2022.

See the Climate Change Commission’s advice 

Calculating NZUs available at NZ ETS auctions

The overall limits are reached by following a series of steps to determine the total number of NZUs that will be available for sale at NZ ETS auctions.

We start with the total volume of the emissions budgets, then:

  1. Forecast emissions from outside of the scheme are removed to calculate the NZ ETS overall limit.
  2. Any required technical or forestry-related adjustments are made.
  3. An agreed volume of units is removed to drive stockpile reduction.
  4. The number of units projected to be freely allocated, or provided through negotiated greenhouse gas agreements are removed.
  5. A limit is set on international units
  6. The remaining volume is available to auction.

Emissions budgets breakdown

Emissions budget breakdown

Minister considerations when determining limits

The Minister must consider the following, along with other things when setting the overall limit and sub-limits

  • Projected emission trends
  • How the NZ ETS is functioning
  • International obligations and possible access to overseas mitigation
  • Estimates of domestic abatement (emission reduction) costs
  • Recommendations of the Climate Change Commission.

See Section 30GC of the Climate Change Response Act 2002 [New Zealand Legislation website].

The number of NZUs available for auction over 2023-2027

Based on the steps described above, the total NZUs available to be auctioned over the five-year period is 75.5 million as shown in the graph and table below.

Breakdown of the provisional emissions budgets volume and NZ ETS limit

ETS graph 2 0

The graph shows the breakdown of how emissions fall within the five year emissions budget of 346 Mt CO2-e.

The breakdown is made up of:

1. Emissions outside of the NZ ETS, 204 Mt CO2-e
2. Free allocation projections, 31 Mt CO2-e
3. Auction volume, 76 Mt CO2-e
4. Stockpile reduction 35 Mt CO2-e

Annual NZU auction volumes

  2023 2024 2025 2026 2027 Total
NZU millions 17.9 17.1 15.3 13.5  11.7  75.5

The annual auction volumes shown is the total number of NZUs expected to be available for auction in a normal year. The volume does not include any reserve amount of NZUs that would become available through the cost containment reserve if the trigger price is reached (refer to the price controls page for more information).