The New Zealand Emissions Trading Scheme (NZ ETS) is the Government’s main tool for meeting domestic and international climate change targets. The scheme aims to encourage people to reduce greenhouse gas emissions.
How the NZ ETS works
The NZ ETS puts a price on greenhouse gas emissions.
It creates a financial incentive for:
- businesses to reduce their emissions
- landowners to earn money by planting forests that absorb carbon dioxide as the trees grow.
One emission unit, the New Zealand Unit, represents one metric tonne of carbon dioxide or carbon dioxide equivalent (ie, the amount of another greenhouse gas that does as much damage as one tonne of carbon dioxide).
The Government gives eligible foresters units for carbon dioxide that is absorbed by their trees. The foresters can sell these units on the NZ ETS market. Businesses with surrender obligations (legal obligations to hand over units) must purchase enough units to cover their emissions. These units are then surrendered to the Government.
For example, a business emitting 2,000 tonnes of greenhouse gases would need to purchase 2,000 emission units on the NZ ETS market. If the emitter reduced their emissions by 500 tonnes of greenhouse gases they would only need to purchase and surrender 1,500 units.
It is up to the emitter to decide whether they wish to reduce their emissions or purchase units. The price which the emitter pays for units, sometimes called the carbon price, is set by supply and demand. Where demand for units increases and supply remains constant, the price of units will generally increase. The price will decrease where there is an abundant supply of units.
How NZU trading can take place
This video provides a short explanation of how the New Zealand Emissions Trading Scheme works.
Sectors and gases covered by the NZ ETS
All sectors of the economy must report to the Government on their annual greenhouse gas emissions. These sectors are: forestry, agriculture, waste, synthetic gases, industrial processes (including manufacturers of iron and steel), liquid fossil fuels (including petrol and diesel suppliers), and stationary energy (such as electricity generation and industrial heating).
All sectors apart from agriculture have surrender obligations as well as reporting obligations. Just over 50 per cent of New Zealand’s greenhouse gas emissions are covered by surrender obligations.
The agriculture sector was responsible for around 48 per cent of emissions in 2017. The Government has consulted on options to reduce agricultural emissions and made decisions in late 2019, see Action on agricultural emissions: our proposals, your views.
Impact on individuals and businesses
Individuals in New Zealand are not required to surrender units. However, they may pay a higher price for some goods and services if businesses pass on the costs of emissions to their customers.
The point of obligation where emissions are priced is generally set as far up the supply chain as possible. This limits administrative costs as it means that most businesses in New Zealand do not have NZ ETS obligations.
For example, the obligation for liquid fossil fuels (such as petrol, diesel and aviation fuel) is placed on the companies importing the fuel, rather than on the drivers of fossil-fuelled vehicles. This makes it possible to put a price on emissions from the transport sector without directly involving the millions of people who own cars.
Building a more effective emissions trading scheme
The NZ ETS is one of 28 emissions trading schemes in operation around the world. Emissions trading schemes are also known as ’cap and trade’ schemes. They are designed so that the quantity of units supplied into the scheme can be restricted by a cap or limit. The lower the level at which the cap is set, the fewer the emission units that are available in the market and the stronger the financial incentive to reduce emissions.
The NZ ETS did not previously have a domestic cap, as it was originally designed to operate within a broader global cap set by the Kyoto Protocol. A review of the NZ ETS carried out by Ministry for the Environment in 2015/16 found that the Government did not have the tools required to adequately control the supply of units into the scheme. This limited the scheme’s ability to reduce New Zealand’s emissions.
In 2017, as a result of that review, the Government agreed in principle to changes that would enable it to better manage the supply of units. See Outcomes from Stage Two of the NZ ETS Review 2015/16.
After consulting with the public in August and September 2018, the Government decided to make a number of changes to improve the NZ ETS. One of the most significant changes is to introduce a cap on the number of units in the scheme. This cap is intended to reduce over time in line with the emission budgets expected to be set under the Zero Carbon Bill.
The Government also consulted on proposals for NZ ETS settings, including unit supply and price controls. Decisions were announced in June 2020 and regulations were gazetted later in 2020. The intention is to align the NZ ETS with New Zealand’s emissions reduction targets. To review the proposals see Reforming the New Zealand Emissions Trading Scheme: Proposed settings.
Find out more
For further information about how the NZ ETS is designed and how it operates see A guide to the New Zealand Emissions Trading Scheme.
For how the NZ ETS fits within the wider climate change work programme see New Zealand’s climate change work programme.
To find out more about the Kyoto Protocol and the United Nations Framework Convention on Climate Change see New Zealand and the United Nations Framework Convention on Climate Change.