Commission chair Rod Carr says new evidence shows there are too many units in the NZ ETS for the Government to make best use of it to reduce emissions.
This excess number of units presents a high risk that emissions budgets won't be achieved. To address this risk, the commission advises the Government to urgently reduce auction volumes, Carr says. His comments were contained in the commission's latest advice to the Government.
Under the NZ ETS, certain companies and entities are required to hand in NZ units to government for their year's worth of emissions. Units can be issued by the government in several ways: they can be bought from government auctions, created by forestry, and in some circumstances a fixed number are available for free as industrial allocation.
For the sceme to work well, units available need to decline in line with the declining emissions reductions targets.
"We have expected for some time that there is a surplus of New Zealand Units (NZUs) already in the market and this represents oversupply," says Carr.
"Recent data and updated analysis suggest that the surplus is larger than we previously assessed and that the change in our assessment is material. The outcomes of all four government auctions in 2023, which were declined with no units sold, support this conclusion.
"This unit surplus will not self-correct. It is critical that the Government adjust the NZ ETS unit volume limits as soon as possible to draw the surplus down and bring the settings back into alignment with emissions reduction goals. There is scope to do this, while keeping the current price control setting essentially the same in real terms."
This step will help the NZ ETS reward investors, producers, and consumers for actions that contribute to meeting New Zealand's emissions reduction goals, says Carr.
Alongside having too many units already in the NZ ETS, uncertainty about the Government's priorities is affecting market and investor confidence in the scheme. This is also increasing the risk that the Government will not achieve its emissions reduction goals, the commission notes.
The commission reiterates previous advice that the Government make clear statements about its goals for reducing greenhouse gases at their source, its goals for using forestry to absorb some emissions, and the role of the NZ ETS in achieving the emissions reductions committed to in its first NDC.
"The NZ ETS covers less than 50% of our emissions as a nation as measured by internationally agreed measures. The way it currently operates allows action on gross emissions to be displaced by carbon storage by forests. As a country we need both and we'll be worse off if one ends up being substituted for the other," Carr says.
"Under its current structure, after the mid-2030s, the commission expects the NZ ETS will also no longer be able to deliver substantial incentives for the forests needed to balance difficult-to-reduce emissions. This will be an additional challenge to staying on the path to net zero long-lived emissions by 2050 and stayingat net zero in every subsequent calendar year."
