Setting unit limits in the NZ ETS

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.

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 

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.

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].

For unit limits and price control settings see Annual updates to emission unit limits and price control settings.