A surprise proposal to reform the Emissions Trading Scheme (ETS) has sent the carbon price tumbling and drawn rebukes from market traders and climate advocates.
The Coalition Government quietly announced the changes to the scheme and wider climate policies at 8pm on Tuesday.
They include restricting the Climate Change Commission to monitoring, rather than advising on, emissions-reduction plans, and removing the requirement for ETS settings to align with New Zealand’s Paris Agreement targets.
Carbon market participants appeared spooked by the proposals, with the price of NZ units plunging when trading reopened on Wednesday morning.
Investment bank Jarden told clients a 10% drop reflected “negative sentiment following the government’s announcement, which was viewed as unsupportive of a credible ETS,” according to Bloomberg.
Backlash broadens
Nigel Brunel, managing director of trading platform operator Marex NZ, said on Wednesday the reforms were unexpected and would weaken the carbon price.
“It opens the door for short-term political or economic considerations to outweigh longer-term climate commitments when setting ETS parameters.”
“This change will hardly inspire confidence. For a market built on trust, credibility is currency, and today’s move appears to have devalued it. Anyone trading NZUs [New Zealand Emissions Units] today will be recalibrating their long-term assumptions after this announcement.”
Brunel said the move was “part of a broader trend”, with the Government reducing methane targets, avoiding adding agriculture to the scheme, and lowering the mandatory emissions reporting threshold.
“Together, these signal policy drift rather than discipline … It also appears inconsistent with the Government’s pre-election promise to leave the ETS alone and let it do its work,” he said.
Climate Minister Simon Watts said he disagreed with Nigel Brunel, Jarden, and other critics who saw the reforms as a negative signal for prices and credibility.
“Look, I don't agree with that. The changes that we're announcing and making are to make sure that the act is working as it was intended,” he told reporters.
He declined to comment on the market reaction, saying: “As you know, any market, including equity markets, has different changes, and not all of that is a result of a specific decision.”
Biggest step backward
Lawyers for Climate Action NZ said delinking ETS settings from the Nationally Determined Contribution (a Paris target) showed the Government lacked a plan to meet its commitments.
“If the Government had any credible plan and was genuinely committed to achieving our NDC, there would be no need to amend the statute designed to ensure ETS settings align with our international obligations.”
Green Party co-leader Chlöe Swarbrick said the proposed changes were “the most significant step backward” on climate the Government had taken this term.
“The Prime Minister needs to be honest with people about the fact that he is making an intentional choice for us to spend billions of dollars for other countries to reduce their emissions, because he's refusing to make that investment here at home.”
She said that if the Government doesn’t plan to pay other countries to reduce emissions, it needs to strengthen, not weaken, New Zealand's domestic reduction targets.
Benefits not quantified
A Cabinet paper by Simon Watts warned that New Zealand could struggle to secure enough overseas carbon credits to meet its Paris Agreement targets. If that happened, domestic ETS units might have to be reduced to close the gap, driving up prices.
Ministry for the Environment analysts said removing the requirement to align ETS settings with those targets would help lower unit prices, strengthen market confidence, and spare the Crown a possible fiscal hit.
A regulatory impact statement released with the paper acknowledged analysts had not quantified any of the policy’s potential benefits or costs.
The National Party campaigned in 2023 on using the ETS as its “main tool” for meeting New Zealand’s climate targets, saying it was “absolutely committed” to doing so.
It accused the Labour Government of destabilising the scheme with reforms and said restoring stability and confidence was “essential to build credibility."
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