The New Zealand Emissions Trading Scheme needs to be as effective as possible to reduce the country’s greenhouse gas emissions and contribute to the global effort to reduce the impact of climate change, Climate Change Commission Chair Rod Carr says.

Minister of Climate Change James Shaw today released the first advice from the Climate Change Commission on updating the NZ ETS unit limits and price control settings for the next five years. You can access the report on the Commission's website.

The advice on updating NZ ETS settings will now be delivered annually to the Minister by the Commission.

"The NZ ETS can be a powerful tool to drive emissions reductions. Confidence in the stability and predictability of the NZ ETS is key to making it effective. It needs to be kept up-to-date, so that it aligns with the country’s emissions reductions targets," Dr Carr says.

"Aligning NZ ETS settings up with our emissions reduction targets will make it easier and cheaper to achieve those goals, and guide us towards a thriving, low emissions, climate resilient economy." "We need a strong NZ ETS to incentivise the changes needed in investment and production, and support consumer choices. In addition, a package of well-designed complementary policies is also needed to drive efficiency, foster a sustainable transition, and tackle the market failures blocking action," Dr Carr says.

Updates to unit limits and price settings recommended Compared to current settings, the Commission recommends:

• Reducing the limit on the number of units available for auction
• Raising the trigger prices for the cost containment reserve and auction reserve price
• Changing to a two-tier cost containment reserve from 2023

"The unit limits aim to cap the emissions allowed by the scheme, in line with the country’s emissions reduction targets. The price control settings are guardrails to provide stability to the NZ ETS, while also enabling it to operate as an effective tool to reward low emissions choices. "High emissions activities will become more expensive and low emissions options more cost effective as the world prices the damaging effects of greenhouse gas emissions," Dr Carr says.

The Commission’s advice has been developed in line with the intent of the Government’s emissions budgets and its Emissions Reduction Plan, and taking into account evidence about the emissions prices needed to meet our targets. "In this advice, we also emphasise that our recommendations are not a forecast of likely market prices," Dr Carr says.

"Our advice has been informed by our engagement with a range of market participants and other NZ ETS stakeholders, which has enabled us to test ideas and enhance our understanding of the market. We have also drawn on the evidence we collected though analysis and engagement to prepare Ināia Tonu Nei."

Changes needed to get to net zero

"Beyond the unit limits and price control settings, there are some other pressing issues that the Government must address to make the NZ ETS as effective as possible," Dr Carr says.

"The NZ ETS needs to be fit to reduce gross emissions to reach net zero long lived gas emissions sustainably. The Government has not yet said how it intends to do this.

"For example, the NZ ETS currently does not distinguish between carbon removals by trees or reducing emissions. Unless this is addressed, the NZ ETS is likely to deliver mostly new plantation forestry rather than gross emission reductions. This would ultimately put our economy at a competitive disadvantage relative to a decarbonised global economy and shift cost burdens on to future generations," Dr Carr says.

"Another pressing issue is the need for the Government to clarify what role the NZ ETS will have, if any, in delivering the offshore mitigation that is needed to meet the NDC. It is essential that the Government secure access to sources of offshore mitigation as soon as possible, and decide how this will affect the NZ ETS. This is not a matter that can be left until later this decade."

"As it addresses these issues, the Government must ensure its approach complies with Te Tiriti o Waitangi and does not compound historic grievances and further disadvantage Iwi/Māori.

"Policies that complement the NZ ETS will be critical if the Government is to deliver on the commitment of a fair, inclusive and equitable transition. These policies need to strengthen the capability of the country to adjust over time, while ensuring strong incentives to transition towards a low emissions economy," Dr Carr says.

The Commission will hold an open Zoom session from 12-1pm on Tuesday, 2 August for anyone who would like to find out more about this advice. If you’d like to attend, please register to attend here.

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