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Nov 2025 - New Zealand’s carbon market is bogged down by deep uncertainty around the Coalition Government’s real commitment to emissions reduction – and time is running out.

Long before now, the market was supposed to deliver a rising carbon price – this adjusts constantly as New Zealand Units (NZUs) trade under the Emissions Trading Scheme (ETS) – that would drive this country’s long-term transition into a lower emissions economy.

Back in 2018 when that prospect was new and taken very seriously, a major Productivity Commission report foresaw NZUs rising to $200 or more over “the next few decades for NZ to achieve the reductions in domestic emissions to which it aspired under the Paris Agreement”.

The ETS refinements in 2019 and alongside these, the statutory creation of today’s complex framework for government setting of emissions budgets and targets were all supposed to set us on that track.

And so they did for a while: During 2022, two ETS quarterly auctions cleared at prices over $82 and there were periods of secondary market trading when NZUs almost reached $90.

But wobbles set in early the next year driven by fears of NZU oversupply after rampant growth in new forestry registrations within the ETS.  There were also growing doubts over the then-Labour Government’s political will to see higher carbon prices that could be quickly reflected in New Zealand consumer inflation. In 2023, ETS auctions began failing to clear at prices above $60.

Last year, the rot spread with partial clearances in just two of the four auctions and very volatile NZU prices in secondary market trading.

This year has seen more of the same but rather more pronounced. Three auctions have failed completely – the fourth, on 4 December, will likely fail also – and the traded New Zealand carbon price, around $65 in the early months, has collapsed under $50 in November.

Little of this can be blamed on NZU supply issues. Auction failures, reductions in “industrial allocation” (NZUs handed to industries that would otherwise be disadvantaged in their international competitiveness) and recently legislated constraints on growth of forestry land registrations within the ETS are obviously limiting supply of new NZUs.

The total of NZUs on the Environmental Protection Agency (EPA) register is steadily declining – these are the units issued or allocated to all types of holder since 2008 and not yet surrendered to cover specific emissions liabilities. The total at 30 September was 135.7 million, down from 160.8 million two years ago. There is, accordingly, a welcome decline in the NZU stockpile – that portion of the issued and allocated total which could come onto the secondary market in response to higher prices and thereby stall any recovery back to 2022 levels.

No, the market’s issue is political and it is on the demand side of the market. There is plainly an excessive degree of uncertainty among NZU holders and traders about whether the Coalition (and perhaps any other government after 2026) will stick with policies that do, in fact, work to drive up the carbon price. Stick with commitments to steadily reduce New Zealand’s emissions and achieve a low emissions economy which is the fundamental rationale for having an ETS at all. Will future demand for NZUs slacken off or even decline?

Climate Change Minister Watts insists there is no diminution of ambition on emissions or of role for the ETS. But the market does not believe him given the raft of policy reversals announced by the Coalition through 2025.

Most notable was the 4 November statement on watering down the 2019 Act to de-couple the ETS and emissions budgets from New Zealand’s international commitments (ie the 2015 Paris Agreement), lessen the capacity of the Climate Change Commission and others to challenge government policy, and remove future commitments for some form of charging on agriculture for its methane emissions. NZU prices fell heavily on the days after 4 November.

The market has seen Coalition partners ACT and New Zealand First declare their preferences for New Zealand to quit Paris: National has rejected that course but the doubt surely remains. Will New Zealand become an outlier as kindred States and trading partners go further to embrace emissions reductions and use market forces to do so?

This month’s COP30 climate change summit in Brazil has had mixed outcomes but it has confirmed the importance of international carbon markets. Something has seriously gone wrong with the New Zealand market in 2025.