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 budget 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 will provide its advice on the first three emissions budgets by May 2021. Before this, the Government has used a provisional emissions budget to help guide the current overall limit and price control settings in the NZ ETS. The provisional emissions budget will be replaced with full emissions budgets, which will be set by the Government before the end of 2021.

Provisional emissions budget for 2021-2025

The Government has agreed a provisional emissions budget for New Zealand’s total volume of net emissions for the period 2021-2025 of 354 million tonnes of carbon dioxide equivalent (Mt CO2-e).

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 budget, then:

  1. Forecast emissions from outside of the scheme are removed to calculate the NZ ETS overall limt.
  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.

Figure 1. Emissions budget 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 30 GC of the Climate Change Response Act 2002 [New Zealand Legislation website].

The number of NZUs available for auction over 2021-2025

Based on the steps described above, the total NZUs available to be auctioned over the five-year period is 90 million as shown in Figure 2 and allocated annually in table 2.

Figure 2. Breakdown of the provisional emissions budget volume and NZ ETS limit

ETS graph 2 0
The graph shows the breakdown of how emissions fall within the provisional emissions budget of 354 Mt CO2-e. The breakdown is made up of: 1. Emissions outside of the NZ ETS, 194 Mt CO2-e 2. Free allocation projections, 43 Mt CO2-e 3. Auction volume, 90 Mt CO2-e 4. Stockpile reduction 27 Mt CO2-e

Table 2. Annual NZU auction volumes

2021 2022 2023 2024 2025 TOTAL 
Annual auction volumes (NZU millions) 19.0 19.3 18.6 17.2 15.5 89.6

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).