NZU price jumps 8% after ETS auction volumes slashed by more than half over 2025-29

Platts New Zealand Unit prices shot up by 7.86% on Aug. 20 due to a buying spree in the secondary market after the government drastically cut emission units to be auctioned in the primary market by more than half starting 2025, under the country's Emissions Trading Scheme.

The government will reduce the ETS auction volumes from 45 million to 21 million over 2025-29, following advice from the Climate Change Commission, which had suggested a drastic reduction for the new surplus estimate of approximately 68 million units, an increase of approximately 19 million units on the 2022 estimates.

"There is an oversupply of units held by participants which has contributed to a depreciated price of carbon," Climate Change Minister Simon Watts said in a statement issued Aug 20. "This has led, in part, to the failure of recent auctions to clear, and poses a risk to achieving our climate targets and emissions budgets."

Following the release of settings, prices for NZU in the secondary market rose to a peak of NZ$61 per metric ton of CO2 equivalent during the trading day. Platts assessed the NZU price at NZ$60.40/tCO2e on Aug. 20, higher by NZ$4.40/tCO2e, with at least 750,000 metric tons of NZUs traded during the session, according to market sources. The price was last higher on March 19 at NZ$65/tCO2e.

"The announcement is certainly bullish for the market. It's a significant reduction," an Australia-based carbon trader dealing in NZUs said, adding that in the short term the price "is likely to hover around this level and it's very unlikely that it will cross the auction floor price [set at NZ$64/tCO2e for 2024]."

This reduction is for units provided by the government for industrial allocation and purchase at auction but does not limit the volume of units that are issued to those removing greenhouse gases from the environment, such as forest owners.

"We have been actively campaigning for this outcome and we are very happy that the new coalition government has listened to us," said Blair Jamieson, managing director of Tamata Hauha.

"The reality is the previous governments created the oversupply by flooding the markets with hot-air credits," he said. "This government is serious about correcting such problems and trusts the market to now correct itself."

Support for ETS

The government in a second Emission Reduction Plan consultation on July 17 had highlighted its commitment to supporting the ETS and ruled out either the introduction of vintages for NZUs or reducing the value of credits generated by forestry.

"The government are currently consulting on the ERP2 and have placed a clear emphasis on the NZ ETS being their core/key policy mechanism for meeting targets," said Kristen Green, director at Kapiti Climate Insights and a former government advisor.

"The reduced volumes will make it trickier to manage NZ ETS market conditions later in the decade, however, once the surplus starts to be drawn down towards zero given the aggressive approach."

The New Zealand Institute of Forestry welcomed the announcement as a crucial move in restoring confidence within the market and the forestry sector but said some uncertainty would still prevail for the forestry sector.

"It gives some confidence to the ETS but there are still many policies causing uncertainty for the forest industry, limiting new planting and ETS fees being two of them," said James Treadwell, president of the NZIF. "Until certainty is given around these policies then forestry will be nervous to invest."

NZU price trajectory

NZUs hit an all-time high and were nearing NZ$90/tCO2e in November, on expectations of a major policy reform by the end of 2022. But the market was running low on confidence, with prices falling to a near one-month low on July 23 at NZ$50.3/tCO2e due to weak market confidence amid a lack of clarity regarding policy direction from the ERP2.

The government had released a consultation on May 15 offering the option to lower auction floor prices. The uncertainty from the consultation pushed NZU down prices to an 11-month low of NZ$45/mtCO2e on May 23.

"It's very unlikely -- maybe at the end of 2025," an Auckland-based trader said on whether prices would cross 2022 levels. "Prices still around 30% lower than when Labour 'blinked' in 2022. And those levels were not forcing change. Thereby wasting two to three years."

One trader said: "This is a start, but they [government] have a long way to go to restore confidence in the market. There's still a large auction supply at $64/tCO2e this year. Over 20 million NZU traded at these depressed levels in 2024."