The Climate Change Commission has given its latest recommendation for Emissions Trading Scheme settings and warned the Government not to ignore its advice for a second time.
Cabinet’s decision to disregard the Commission’s advice last December resulted in a failed carbon auction this February and a dramatic decline in the market price for NZ units.
Rod Carr, Chairman of the Climate Change Commission, said the ETS was the main tool available to reduce emissions but current price settings meant it wasn’t functioning effectively.
Advice released on Wednesday for ETS settings between 2024 and 2028 recommended reducing the number of units available for sale, lifting reserve prices, and introducing a two-tier cost containment reserve.
Settings for the Emissions Trading Scheme are updated annually and cover a five-year period on a rolling basis. Each year, the Climate Change Commission extends its recommendations by a further year and reviews existing regulated settings.
Much of this advice is the same as what the Commission gave in July last year, but was ultimately not accepted by the Labour government — then led by Jacinda Ardern.
Carr said the analysis was largely the same as last year, although this year’s advice reflects new data and the market reaction to the December cabinet decision.
If the Government chooses to accept the recommendations, then it will enable the scheme to do the job it was set up to do and bring settings back in line with emissions budgets and targets.
“If the Government declines the recommendations, then it will need a much stronger policy approach to achieve emissions budgets than the one outlined in the emissions reduction plan,” he said.
Climate Change Minister James Shaw welcomed the Climate Change Commission’s latest advice and said officials will now provide further advice to ministers.
“The Commission’s advice, together with public feedback, will inform a Cabinet decision on future unit limits and price settings for the Emissions Trading Scheme,” he said in a statement.
Shaw is a ‘minister outside of cabinet’, meaning he will not be at the table or have a say when a final decision is taken on whether or not to accept the advice.
Legislation only allows for the next two years of settings to be changed under very specific circumstances and the Commission does not think these have occurred.
This means the new advice would only be implemented from 2026, although it recommended updating settings for 2024 and 2025 if conditions all.
For example, if units from the cost containment reserve were sold at the June NZ ETS auction.
ETS carbon credits, called NZ Units, last traded at $59.50 according to Jarden’s Commtrade website but traded at over $85 during 2022.
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