Emissions reduction targets and emissions budgets in the New Zealand Emissions Trading Scheme

The Climate Change Response (Emission Trading Reform) Amendment Act (the Act) has now been passed into law. It makes a number of changes to the New Zealand Emissions Trading Scheme (NZ ETS). Read about changes related to emissions reduction targets and budgets.

The Government has announced it will set a cap in the NZ ETS guided by a provisional emissions budget

  • The Act enables a cap on emissions covered by the scheme. It will decline over time as our emissions budgets reduce in line with our targets.
  • The cap requires an emissions budget to be in place. The Climate Change Commission will advise on emission budgets later in 2021. The Government has set a provisional emissions budget to guide the cap in the interim. 
  • The Government has chosen a provisional emissions budget and a cap for the period 2021-2025. In line with our 2050 target.

New Zealand has emissions reduction targets to limit global temperature rise

New Zealand has several greenhouse gas emissions reduction targets.

We have set in legislation a 2050 domestic target to:

  • have net zero emissions of all greenhouse gases other than biogenic methane by 2050
  • reduce biogenic methane emissions by 24 to 47 per cent below 2017 by 2050, including 10 per cent below 2017 biogenic methane emissions by 2030.

Our international target under the Paris Agreement is to reduce greenhouse gas emissions by 30 per cent from 2005 levels by 2030. 

For more information about our emissions reduction targets see About New Zealand’s emissions reduction targets.

Aligning with emissions reduction targets

The Act supports the implementation of New Zealand’s reporting and emissions reduction targets under the Paris Agreement. 

This is in addition to the new domestic budgets and targets which were introduced through the Zero Carbon Amendment Act. 

Emissions budgets act as stepping stones to our 2050 target

Emissions budgets introduced through Zero Carbon Amendment Act, operate as stepping stones that keep us on track to meeting our long-term emissions reductions targets. Each emissions budget covers a period of five years. 

The first three emissions budgets will be recommended by the Climate Change Commission and set by the Government by the end of 2021.

Setting a provisional emissions budget

The Provisional Emissions Budget (PEB) is not set in regulation. The PEB has been set by the Government to help make initial decisions on NZ ETS unit supply and price control settings before the Climate Change Commission provides their emissions budgets advice in 2021

The Government has set a PEB for New Zealand’s total volume of net emissions for the period 2021-2025, of 354 million tonnes CO2 equivalent (tCO2-e).

The PEB is based around a straight-line trajectory towards the Zero Carbon Act 2050 target, with minor adjustments to compensate for the likely reduction in emissions in 2021 & 2022 due to COVID-19, shown in Table 1 and Figure 1 below. 

The PEB aims to provide an ambitious but feasible goal that would require strong action and immediate efforts across a range of sectors to scale up and deliver significant emissions reductions. 

The PEB, unit supply and price controls were consulted on as part of the proposals for NZ ETS settings.

To review the proposal see Reforming the New Zealand Emissions Trading Scheme: Proposed settings.

See also the Summary of submissions from the consultation.

Figure 1. Provisional emissions budget trajectory towards 2050 Zero Carbon Act target

Provisional emissions budget trajectory towards 2050 Zero Carbon Act target

The graph shows the five-year provisional emissions budget of 354 Mt CO2-e under the straight line trajectory from 2021 towards the 2050 combined gas target (22 Mt CO2-e). It also shows forecast target accounting emissions to 2050 and the required abatement to meet the provisional emissions budget of 15 Mt CO2-e.

Table 1 Annual provisional emissions budget volume

  2021 2022 2023 2024 2025 Total
Agreed PEB volume (Mt CO2-e) 71.8 71.8 71.8 70.0 68.1 353.6

Managing unit supply

The emissions budgets enable us to set a ‘cap’ in the NZ ETS. The cap on emissions in the scheme helps to manage the supply of New Zealand emission units to the market.

The Act requires the Government to set limits on the supply of units into the scheme on a five-year rolling basis. This process would set an overall cap on units supplied into the NZ ETS. As part of this process, the Government will agree on price controls to prevent unacceptably high or low unit prices in the NZ ETS. This is explained on the Price controls page.

Note: this will not put a limit on NZUs provided for emissions removals including from forestry.

The unit supply settings are reached by starting with the overall volume of the emissions budget.

Then a series of steps are taken to determine the final remaining volume that is available to be auctioned. 

  1. Emissions from outside of the scheme are removed from the NZ ETS cap.
  2. Any required technical or forestry related adjustments are made.
  3. Free allocation units are removed.
  4. An agreed volume of units is removed to drive stockpile reduction.
  5. A limit is set on international units. 
  6. The remaining volume is available to auction. 

Based on these steps and current emissions projections, the total units 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 cap

 Breakdown of the provisional emissions budget volume and NZ ETS cap

The graph shows the breakdown of how emissions fall within the PEB of 354 Mt CO2-e. The breakdown is made up of: • Emissions outside of the NZ ETS (194 Mt CO2-e) • Free allocation projections (43 Mt CO2-e) • Auction volume (90 Mt CO2-e) • Stockpile reduction (27 Mt CO2-e)

The breakdown is made up of:

  • Emissions outside of the NZ ETS, 194 Mt CO2-e
  • Free allocation projections, 43 Mt CO2-e
  • Auction volume, 90 Mt CO2-e)
  • 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

Limiting international units

The Government wishes to retain the flexibility to potentially reopen the NZ ETS to high-quality reputable international units in the future.

If the NZ ETS did reopen to international units, a limit would be placed on their use. The Government has agreed to a limit of zero for the years 2021, 2022, 2023, 2024 and 2025. This limit can be updated annually along with the rest of the NZ ETS settings, with the next update expected in September 2021.

For more information about international markets see New Zealand and International Carbon Markets.

Next steps

Regulations setting the unit supply arrangements are expected to be published later in 2020.

Reviewed:
02/06/20