Vinay Karanam By Vinay Karanam | NZB News
New Zealand’s Emissions Trading Scheme faces a deepening crisis as carbon auctions continue to fail, with the first New Zealand ETS auction for 2025 failing to clear, with no one showing up to bid, followed by the second quarterly auction in June 2025 also receiving no bids at or above the reserve price. This ongoing pattern of auction failures reflects systemic problems within the country’s primary climate policy mechanism, raising serious questions about New Zealand’s ability to meet its international climate commitments whilst maintaining market confidence in carbon pricing.
A Market in Distress
The New Zealand Emissions Trading Scheme, established as one of the world’s longest-running emissions trading systems, has encountered unprecedented challenges that threaten its effectiveness as a climate policy tool. The first failed auction happened in March 2023. Not one tonne of carbon sold. The same thing happened in June, September and December 2023 – a whole year without a sale. The pattern has continued into 2025, with both quarterly auctions this year failing to attract any bids.
The auction featured a floor price of $68.00 per NZU. Given the prevailing secondary market price of $59.00/mtCOâ‚‚e and a three-month simple average of $54.85/mtCOâ‚‚e, the market widely anticipated an unsuccessful outcome. This significant gap between auction floor prices and secondary market values illustrates the fundamental disconnect that has developed within New Zealand’s carbon market.
The scale of the problem becomes apparent when considering the cumulative impact of these failed auctions. Fifteen million New Zealand emission units were made available in 2023 but have remained unsold in successive quarterly auctions. The financial implications are substantial, with the unsold units worth $900m at the floor price of $60, or about $1.3 billion at the market price of $75.25 at the time of the final 2023 auction.
Understanding the Auction Mechanism
The New Zealand Emissions Trading Scheme operates through a sophisticated but inflexible auction system that has contributed to its current predicament. Four auctions were undertaken in 2024, with 14.1 million units for sale, as well as another 7.7 million units available from the CCR. Two of the auctions cleared, with 3 million units sold in March 2024 and 4 million in December 2024, all at the floor price of NZD 64.
The auction structure requires all units to be sold for the auction to clear, creating an all-or-nothing scenario that has proven problematic in current market conditions. Salt Funds managing director Paul Harrison said all bids needed to clear at above the reserve price for the auction to be successful. “It’s a quirk in the way that the thing has been set up, but it means that anybody who thought they were going to get units in the auction today have not got them”.
In line with the NZ ETS auctioning regulations, any units that were unsold after the last auction of 2024 are not available for sale at any subsequent auction. This mechanism means that unsold units are effectively removed from circulation, which theoretically should tighten supply and support prices, though this effect has yet to materialise significantly.
The Oversupply Problem
At the heart of the auction failures lies a fundamental oversupply of New Zealand Units in the market. The commission has also recommended that price control settings — the auction reserve price, or floor, and the cost containment reserve, or ceiling — remain as they are, only adjusting for inflation, but these measures have proven insufficient to address the underlying supply-demand imbalance.
The volume of NZUs available at auction must be dramatically reduced to cut a surplus in New Zealand’s ETS that threatens to undermine its effectiveness, the country’s Climate Change Commission (CCC) said. The commission’s analysis revealed the extent of the oversupply problem, with significant implications for the scheme’s effectiveness.
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. This dramatic reduction represents more than a 50% cut in planned auction volumes, demonstrating the severity of the oversupply situation.
The Climate Change Commission’s analysis provides crucial context for understanding the magnitude of the problem. The CCC estimates 30.5mn New Zealand Units (NZUs) could be available for auctions over 2026-30, 13.6mn more than previously forecast, with the difference mainly because the 2024 auctions did not sell all units available, and to lower industrial allocation forecasts because of plant closures, lower production and updated baselines.
Market Dynamics and Price Impacts
The oversupply situation has created a complex set of market dynamics that continue to depress carbon prices. NZU spot prices in the secondary market have been hovering just above NZ$50 in recent days, far below the 2025 auction price floor. This significant price differential has made auction participation economically unattractive for market participants.
Because these could land on the secondary market any time, they can make the price more volatile and unpredictable – and push it down, if lots of them are released at once. The existence of large stockpiles held by companies creates ongoing uncertainty about future supply, making price discovery more difficult and potentially depressing current valuations.
The market’s response to government policy changes has been particularly pronounced. 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 when the government announced the significant reduction in auction volumes.
However, this price improvement has proven temporary and insufficient to bridge the gap between secondary market prices and auction floor prices. The persistent price weakness reflects deeper structural issues within the scheme that extend beyond simple supply-demand imbalances.
Government Policy Responses and Political Interference
The auction failures have prompted significant government intervention, though critics argue that political interference has contributed to the current problems. That first failed auction happened after former Prime Minister Chris Hipkins and his Labour-led government got cold feet and tried to stop allowing the price of carbon to rise.
“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”.
The government’s decision to dramatically reduce auction volumes represents a significant policy shift aimed at addressing the oversupply problem. The cap (which limits the number of units from auctioning, industrial allocation, and the cost containment reserve – CCR) was reduced from 27.9 million in 2024 to 19.1 million in 2025.
However, critics argue that the current government bears responsibility for exacerbating the problem. “The reality is the previous governments created the oversupply by flooding the markets with hot-air credits,” Climate Change Minister Simon Watts said. “This government is serious about correcting such problems and trusts the market to now correct itself”.
Industrial Allocation and Free Permits
A significant component of the oversupply problem stems from the industrial allocation system, which provides free carbon units to emissions-intensive, trade-exposed industries. In December 2024, the government updated baselines for activities eligible for industrial allocation, to better reflect the actual emissions intensity of those activities. The regulations containing the new baselines came into force as of January 2025 and will impact the final allocations firms receive for 2024.
In 2023, 5.7 million NZUs were allocated for industrial EITE activities, representing a substantial portion of total unit supply. Industrial free allocation is being phased down. A minimum annual phase-down rate of 0.01% across all industrial activities applies from 2021 to 2030. That rate will increase to 0.02% for the years 2031 to 2040, and to 0.03% for 2041 to 2050.
The slow pace of this phase-down has contributed to the oversupply situation, as companies receive free allocations that exceed their immediate compliance requirements. These excess allocations can be sold on the secondary market, adding to supply pressures and depressing prices.
Forestry Sector Dynamics
The forestry sector plays a crucial role in New Zealand’s carbon market, both as a source of carbon sequestration and a contributor to market oversupply. NZUs generated from removal activities are forecast to be 13.8 million units in 2025, mainly generated in the forestry sector. Unlike capped emissions, there is no limit on NZUs generated from removal activities.
This unlimited generation of forestry credits has contributed significantly to the oversupply problem. One difficulty for a tree planting approach is that foresters say they are planning to reduce their activities in the coming years after a big boom. The latest survey of forester intentions found afforestation is expected to drop off precipitously from a peak last year.
The relationship between forestry credits and emissions reductions remains contentious. There is currently a sinking lid on free allocation of 1% per year (rising to 2% a year in the 2030s and 3% a year in the 2040s), but the unlimited nature of forestry credits means that the overall supply of NZUs continues to grow despite efforts to constrain other sources.
International Climate Commitments and Fiscal Implications
The auction failures have serious implications for New Zealand’s ability to meet its international climate commitments under the Paris Agreement. New Zealand’s Second Emissions Reduction Plan released by the Ministry for the Environment (MfE 2025) reveals that New Zealand is 84 million tonnes short of its Paris Climate Agreement 2030 target, excluding agricultural emissions.
The fiscal implications are substantial. To appreciate the projected emissions gap in fiscal terms using the Government 2025 floor price of $68 per unit, New Zealand’s carbon debt is growing at about 46,154 units a day, that is $3.14 million per day. The 2nd ERP says this amount cannot be produced domestically and must be obtained by purchasing overseas credits.
This reliance on overseas credits represents a significant cost to the New Zealand taxpayer and undermines the domestic benefits that could be achieved through effective carbon pricing. The failure of the domestic carbon market to function effectively forces the government to purchase credits internationally, transferring potential economic benefits offshore.
Cost Containment Reserve and Price Controls
The Emissions Trading Scheme includes various price control mechanisms designed to manage market volatility, though these have proven insufficient to address current market dysfunction. The 2025 auction reserve price floor is NZD 68 (USD 41.17), and the first CCR trigger price is NZD 193 (USD 116.86).
At the start of 2025, the first CCR trigger price is NZD 193 (USD 116.86), with a total of 2.6 million units available. The second trigger price is NZD 242 (USD 146.53), with 4.5 million units available. However, these ceiling mechanisms are irrelevant when auctions are failing to clear at the floor price.
The price control settings reflect an attempt to balance market stability with climate policy effectiveness. The auction price floor is currently set at NZ$68 ($40.75) in 2025, NZ$71 in 2026, NZ$75 in 2027, NZ$78 in 2028 and NZ$82 in 2029, while the ceiling price — which triggers additional reserve volumes under the auctions — ranges between NZ$193-235 over that same period.
Market Governance and Regulatory Framework
The regulatory framework governing New Zealand’s carbon market has come under scrutiny as auction failures highlight potential governance gaps. Allowances are not financial products in New Zealand law and, as a result, there is currently no single integrated market governance framework that would manage risks of misconduct in the NZ ETS. The government has work underway on options to improve market governance.
This regulatory gap may contribute to market dysfunction and price volatility, as participants operate without the full protection and oversight typically associated with financial markets. The absence of comprehensive market governance could undermine confidence and participation in both primary auctions and secondary trading.
Agricultural Sector Exemption
One of the most significant features of New Zealand’s Emissions Trading Scheme is the continued exemption of agricultural emissions, which represent a substantial portion of the country’s total greenhouse gas emissions. The Emissions Trading Scheme, however, continues to exempt the country’s largest contributor to greenhouse gas emissions – the agriculture sector – from a price on its methane emissions until 2025.
From 2011 until November 2024, companies carrying out certain agricultural activities had an obligation to report their emissions to the NZ ETS at the processor level, but this fell short of full inclusion in the carbon pricing mechanism. A new Pastoral Sector Group will replace the He Waka Eke Noa partnership. The government plans to price agricultural emissions (through a mechanism other than the NZ ETS) by no later than 2030.
This exemption of agricultural emissions, which represent over 40% of New Zealand’s current emissions, significantly limits the effectiveness of the ETS in driving economy-wide decarbonisation. The delayed inclusion of agricultural emissions means that a large portion of New Zealand’s emissions remain outside the carbon pricing mechanism, reducing the scheme’s overall impact.
Secondary Market Dynamics
While auctions have failed, trading continues in the secondary market, though at prices well below auction floor levels. The secondary market closed at NZ$49 on 18 June, the New Zealand Stock Exchange (NZX) and European Energy Exchange (EEX) — which jointly operate the country’s Emissions Trading Scheme (ETS) auction — disclosed.
Susan Kilsby, an economist at ANZ, said buyers only bid for about 3.6 million units out of the 15 million required for the auction to clear. This limited demand reflects the abundance of units available in the secondary market and the expectations of continued low prices.
The secondary market serves as a price discovery mechanism that operates independently of government auctions, though the failure of auctions creates uncertainty about future supply and pricing. with at least 750,000 metric tons of NZUs traded during the session following the government’s announcement of reduced auction volumes, demonstrating that market activity continues despite auction failures.
Stockpile Analysis and Future Supply
The accumulation of unused carbon units represents one of the most significant challenges facing the scheme. Total private unit holdings in the New Zealand ETS registry, also known as the stockpile, fell to 150.4mn at the end of 2024 from 160.8mn the year before, though this reduction has been insufficient to balance the market.
A December 2024 Ernst and Young report reviewed the MfE’s latest NZU stockpile surplus calculation of 67.3m, and estimated 14.9m fewer NZU surplus units under a “central case” scenario. However, even these revised estimates suggest a substantial oversupply that will take years to work through the system.
Although stockpiled NZUs in the secondary market are still available for use by businesses in the NZETS, their use does not contribute towards meeting New Zealand’s emissions reduction targets because they represent emissions reductions that occurred prior to 2021. This temporal disconnect between when credits were generated and when they are used undermines the environmental integrity of the scheme.
Climate Policy Effectiveness
The auction failures raise fundamental questions about the effectiveness of New Zealand’s primary climate policy mechanism. The idea is that paying for emissions gives companies an incentive to lower their climate pollution (and consumers an incentive to buy cleaner products), as well as being a tidy money spinner for the taxpayer. However, when carbon prices are depressed due to oversupply, these incentives are weakened.
The Commission also notes that, should the Government fail to follow its advice and continue to set price controls that keep emissions pricing at lower levels, it will need to introduce additional mitigation policies to reduce emissions in line with NZ’s budgets. This highlights the critical role that effective carbon pricing plays in achieving climate targets.
The relationship between carbon pricing and actual emissions reductions remains complex, particularly given the role of forestry credits in the system. There is the unanswered question of how much New Zealand will rely on tree planting to meet climate goals versus actually reducing carbon pollution.
International Comparisons and Best Practice
New Zealand’s experience with auction failures is not entirely unique in international carbon markets, though the persistence and scale of the problem are concerning. Nigel Brunel, the New Zealand managing director for trading firm Marex, says it’s not unusual internationally for a carbon auction to fail. However, the systematic nature of New Zealand’s auction failures suggests deeper structural problems.
The scheme’s design as an all-gases partial-coverage uncapped domestic emissions trading scheme that features price floors, forestry offsetting, free allocation and auctioning of emissions units creates unique challenges not faced by other carbon markets. The uncapped nature of forestry credits, in particular, distinguishes New Zealand’s scheme from other major carbon markets.
Market Operator Response
The joint operation of auctions by NZX and EEX represents an attempt to bring international expertise to New Zealand’s carbon market. A joint bid by the New Zealand Exchange (NZX) and EEX was selected by the NZ Government to develop and operate the managed auction service. While NZX is hosting and operating all auction-related processes, EEX is contributing the bidding system and providing expert support.
“The successful bid to the Ministry for the Environment showcased the value of bringing together the deep experience and capabilities of NZX and EEX to implement and operate a solution tailored to meet the needs of New Zealand and NZ ETS participants – and aligned with the design of other emissions markets globally”.
However, the continued auction failures suggest that technical expertise alone cannot overcome the fundamental supply-demand imbalances and policy uncertainties that plague the market.
Future Outlook and Reform Prospects
The government’s decision to dramatically reduce auction volumes represents the most significant reform attempt to date. “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,” said Kristen Green, director at Kapiti Climate Insights and a former government advisor.
The path forward requires careful balance between addressing current oversupply whilst maintaining long-term market confidence. “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,” one trader said.
The move is designed to accelerate emissions reductions by strengthening carbon price signals and incentivising businesses to decarbonise more rapidly. However, success will depend on whether the volume reductions are sufficient to absorb the existing oversupply whilst maintaining adequate price signals for emissions reduction.
Summary
New Zealand’s carbon auction crisis represents a significant policy failure that undermines the country’s primary climate change mitigation mechanism. The persistent failure of quarterly auctions, caused by systematic oversupply of carbon units, creates a dysfunctional market that fails to provide adequate price signals for emissions reduction whilst imposing substantial fiscal costs on taxpayers through the need to purchase overseas credits.
The government’s response of dramatically reducing auction volumes represents a recognition of the problem’s severity, but the effectiveness of this approach remains uncertain. The fundamental challenges of balancing forestry credits with emissions reduction incentives, managing industrial free allocations, and maintaining market confidence in the face of policy uncertainty continue to plague the scheme.
The crisis highlights the complexity of designing effective carbon markets and the risks of policy interference in market mechanisms. As New Zealand faces an 84 million tonne shortfall in meeting its 2030 Paris Agreement commitments, the restoration of a functioning domestic carbon market becomes increasingly critical for both climate policy effectiveness and fiscal prudence.
The ongoing exclusion of agricultural emissions from the scheme, despite their representing over 40% of national emissions, further undermines the ETS’s effectiveness as a comprehensive climate policy tool. Until these fundamental structural issues are addressed, New Zealand’s carbon market will continue to struggle to fulfil its intended role in driving the transition to a low-emissions economy.
For New Zealand’s international reputation as a climate leader and its domestic economic interests, resolving the carbon auction crisis must remain a policy priority that transcends political cycles and focuses on evidence-based design principles that restore market functionality whilst maintaining environmental integrity.
