Submission in response to proposed changes in NZ ETS Regulations 2025

 

About Engineers for Social Responsibility Inc.

ESR is an independent group of engineers who consider  that being knowledgeable in the field of technology means that they also have a special obligation to  the public at large in matters that relate to engineering, or that can be addressed using engineering  approaches. Given the urgency of the issue, for some time now the organization has been  particularly focused on how to respond to the climate crisis by reducing emissions and  concentrations of greenhouse gases in the atmosphere. 

The key authors of this report are members of ESR with strong experience and qualifications in  engineering, and a broad knowledge in relation to global heating, what is causing it and how it can  be addressed. 

 

Introduction

This submission relates to the Ministry for the Environment (MfE) consultation document "Proposed changes to the New Zealand Emissions Trading Scheme (ETS) regulations 2025".  In this document the MfE raises a number of specific issues. But we consider that there are  also much more important steps that need to be taken so that we can start reducing our  emissions at a significantly more rapid rate with the aim of meeting emissions reduction  targets set by the IPCC and others. This is what we primarily cover in our submission. 

 

1. Current NZ targets too low to meet IPCC goals and NDC targets 

Because our ETS is the primary tool we currently have for driving emissions reductions, we  also need to consider whether our current reduction targets are appropriate. 

In its March 2023 AR6 Synthesis Report, the Intergovernmental Panel on Climate Change  (IPCC) says that to have some chance of holding global warming to 1.5°C, by 2030 we need  reductions below 2019 levels of 43% for all greenhouse gases (GHG) and 48% for CO2. It  has also proposed that we aim even higher than this, with a 50% reduction in GHG  emissions over the 2019-2030 period. In its April 2022 report the IPCC concluded that to limit  global warming to 1.5°C, coal use should fall by nearly three-quarters between 2020 and  2030. 

As a developed country with the necessary skills and resources, it would make sense for us  to be aiming to try and meet the IPCC goals, at least for CO2 emissions, though doing so for  overall GHG emissions is more of a challenge because of our high methane emissions from the agricultural sector. Also, many climate scientists believe that the opportunity to stay  below 1.5°C of warming has now closed, which means we need even stronger action to  protect our planet. 

New Zealand is reportedly on track to meet its own target of reducing GHG emissions to 31% below 2019 levels by 2030, as outlined in MfE’s December 2024 publication, “New  Zealand’s second emissions reduction plan” (ERP2). This is a smaller figure than the 43%  reduction that the IPCC is calling for, but there is actually a major problem in making the comparison using the New Zealand figures, as currently presented. 

Our understanding is that the New Zealand emissions reduction figures were arrived at by  using ‘target accounting’ measures for net emissions. These cannot be directly compared  with the standard net emissions measurements used by the IPCC and most other countries. Also, how these ‘target accounting’ emissions figures are derived does not seem to be  explained clearly enough to allow a simple comparison. 

From information supplied by Dr Geoff Bertram, who has significant skills in this area, while  the WEM (with existing measures) December 2023 figures that the Government has derived  show a reduction in target accounting net emissions of 31% over the 2019-2030 period,  when these target net figures are converted to WEM December 2023 standard net figures,  as used by the IPCC and others, the standard net emissions reduction is 9% - far less than  the 43% reduction the IPCC says is needed, and even further below the 50% reduction it  recommends we aim for. 

Hence, based on the available information, our current target for emissions  reductions over the 2019-2030 period is far weaker than what the IPCC says is  required. We need to rapidly re-set our emissions budgets with goals that are a lot  closer or will meet the IPCC’s specified targets. 

 

2.  Higher charges needed to drive emission reductions 

The price of New Zealand Units (NZUs), which are used to pay for emissions under our ETS, has fluctuated between around $45 and $75 per tonne CO2-equivalent during the year  ending in early June 2025, finishing at around $55. 

Going beyond the current period, the MfE ERP2 plan involves raising the price of NZUs to  $75 in 2028, but then letting it fall back to a long-run price of $50 per tonne. Also, in its 2025  advice on NZ ETS unit limits and price control settings for 2026-2030, the Climate Change  Commission (CCC) advises that the ETS price controls – the auction reserve price (ARP)  and the cost containment reserve price (CCR) - remain at their current levels, adjusted only  for inflation, so as to align with the Government’s emission reduction targets. Hence it  appears that the CCC is not pushing for targets more in line with what the IPCC says is  needed, which seems rather extraordinary. 

Based on the available information, the NZU prices given above are far too low to drive the  necessary emissions reductions for us to meet internationally set targets, even specifically  for CO2 emissions, and to make an appropriate contribution to controlling global warming. In  its 2018 Special Report on Global Warming of 1.5°C (SR15), the IPCC said that carbon  charges needed to be in the range of US$135 (approx. NZ$223), rising to US$5,500  (approx. NZ$9,075) by 2030, though this last figure seems to be rather steep. 

NZU prices are also currently way below the estimated cost of the damage that the  emissions are causing. There have been lots of figures published for this damage cost,  some of which are very high, but one that has been regularly referred to is the US Environmental Protection Agency December 2023 figure of US$190 / ton CO2. After  converting US tons to metric tonnes and US$ to NZ$ (based on June 2025 figures), this  gives a damage cost of NZ$346 / tonne CO2. 

What this means is that New Zealand businesses are currently being massively subsidised  for the damage their emissions are causing. This damage is going to seriously affect all of us  unless New Zealand and other countries take strong action to reduce emissions. 

Quite a lot of other countries already have significantly higher emissions charges than we  do. For example, charges in some other areas are currently: European Union €73 (approx.  NZ$138), UK £50 (approx. NZ$113), and Sweden SEK 1,510 (approx. NZ$251). Sweden  introduced its carbon tax in 1991. Compared to 1990 levels, by 2021 its gross emissions had  fallen by 33%, while ours had increased by around 21% (based on our 1990-2023  greenhouse gas emissions data). Beyond that, EU Climate Action has deduced that by 2022  Sweden’s net emissions were 86% below 1990 levels. Over the same period, our net  emissions had increased by around 35%. 

Some countries are planning to put financial border adjustments on imported goods coming  from countries with lower carbon charges. For example, the EU is in the process of  introducing a Carbon Border Adjustment Mechanism (CBAM) that is due to be fully in place  by 2026. The importation of some items into Europe will then require the purchase and  surrender of CBAM certificates to account for the difference in carbon charges between the  EU and the country where the goods were produced. 

For New Zealand to do its part in controlling global warming, we need to be taking  strong steps towards meeting the IPCC targets. With the ETS currently being our  primary tool for driving emissions reductions, this means that we need to start  making major increases in our carbon charges. This will also start to give us some  protection against having to pay border adjustment fees on our exports.

 

3.  Emissions reductions from higher carbon charges 

Here we focus on reductions in some specific areas. 

 

3.1 Process heat 

Higher carbon charges are needed to drive many businesses into lower emissions options.  For example, Fonterra is one of our largest coal users, but we understand currently has a  very weak target of quitting coal use by 2037, and has so far only taken very small steps to  move to other options for the supply of process heat – electricity and wood biomass. 

The use of wood biomass as an energy source does lead to CO2 emissions, but these are  removed from the atmosphere as further trees planted for fuel production are growing. For  example, pinus radiata can be harvested about 35 years after planting. In contrast, coal  formation typically takes millions of years. 

As noted earlier, in 2022 the IPCC concluded that to limit global warming to 1.5°C, coal use  needs to fall by nearly three quarters over the 2020 to 2030 period. To respond appropriately  to this, by 2030 we need to have largely moved away from the use of coal to supply low- and  medium-temperature process heat. Moving away from coal for higher temperature use is  more of a challenge, and can be expected to take longer. 

An appropriate increase in carbon charges can be expected to substantially  accelerate the reduction of coal use by Fonterra, and by other organisations using it  as a low- or medium-temperature process heat source. It can also be expected to reduce the use of natural gas for this purpose. Some other coal users, such as  cement and steel manufacturers, will probably need considerably higher carbon  charges, if we just rely on the ETS to drive emissions reductions. 

 

3.2 Electricity generation 

Electricity is the primary heat and power option for many people and businesses moving  away from fossil fuel use, but to make this fully viable in reducing New Zealand’s total  emissions, they need to be moving to electricity that is generated from renewable sources – not from fossil fuels. Reportedly, around 80-85% of our electricity is currently generated this  way, but we are still using large amounts of fossil fuels for electricity generation, and  particularly coal at the Genesis-owned Huntly Power Station. 

According to the Genesis chief executive, Malcom Jones, Huntly is still burning 150,000 to  300,000 tonnes of coal a year, but moving to biomass is being considered. 

Higher carbon charges can be expected to push faster development of renewable electricity  generating options. But one problem with the renewable energy sources we are currently  using is that the generating capacity they offer can vary significantly. Solar generation drops  when the sun is not shining, wind generation drops when the wind is gentle, and hydro  capacity drops when we go through long dry periods and lake levels fall. When these things  happen, Huntly Power Station starts generating more electricity and burning more coal. 

The development of tidal energy needs to be carefully considered because it would provide  a very reliable power source, and could remove the need to use fossil fuels as an energy  backup. 

Higher carbon charges are needed to speed up the move away from coal and natural  gas use to renewable options for electricity generation. Higher electrical generating  capacity will also be needed as more people and businesses move to using electricity  as an energy source, rather than fossil fuels. 

3.3 Transport 

Norway is one of the leading countries in moving to the use of electric vehicles (EVs). At the  end of 2024, 28.6% of its passenger car fleet were battery powered, and 12.3% were  hybrids. EV’s accounted for 89% of all new car sales in 2024. 

Getting figures for New Zealand seems to be more of a challenge, but data from the EVDB  website says that plug-in EVs currently account for 2.72% of our total light vehicle fleet, and  data from Wikipedia says that 11.2% of 2024 new vehicle sales were plug-in vehicles. The  rate of uptake of EVs had previously been somewhat higher, but the Clean Car Discount  scheme, which offered rebates for purchasing new or used EVs, ended on 31 December  2023, and road user charges for EVs and hybrids were introduced on 1 April 2024. 

Road vehicles currently account for around 21% of our overall carbon footprint.  Significant increases in carbon charges for our ETS can be expected to result in a  more rapid move to electrically powered vehicles, and a significant drop in our overall  CO2 emissions.

 

4.  Major issues with the ETS that need addressing 

If New Zealand is going to keep relying on the ETS as the main tool to drive emissions  reductions, then besides the need for higher emissions charges, there are other issues that  need to be sorted out. The term ‘units’ refers to emission units that can be traded under the NZ Emissions Trading Register, with one surrendered for each tonne of CO2-equivalent  produced. 

 

4.1 Stability of pricing of emissions units 

The cost of units currently fluctuates considerably, so there is no clear information for  businesses and other entities as to what future emissions charges to expect. For example,  over the year ending in early June 2025, it fluctuated from $45 to $75, ending up at around  $55. 

We need to move to a system under which current emissions charges are reasonably  stable, and future emissions charges are clearly indicated for coming periods, so  businesses and other entities can plan ahead, and take effective action. 

 

4.2 Revenue received from the sale of emissions units 

Currently some of the revenue from the sale of emissions units goes to the Government and  a significant part goes to other entities that are selling off units that they have recently  received, or that have been ‘stockpiled’. 

We need to move to a system under which the Government will receive all or virtually  all the revenue from the sale of emissions units. This will give it the necessary  revenue to help compensate the public for the rising costs of goods and services  resulting from higher emissions charges, with some revenue also available to assist  businesses and other entities in reducing their emissions. 

 

4.3 Reduction of the number of emissions units 

According to the Climate Change Commission, there are currently too many emissions units  available to allow the ETS to work effectively. This is one reason why auction prices for units  frequently fall below the price levels planned by the Government to control emissions, and  as a result the incentive to reduce emissions falls off and Government revenue from unit  sales is reduced. It is one of the key problems with the current ETS. 

We strongly agree with the CCC’s advice that it is critical that the Government reduce  the ETS unit volume, and bring the price settings back into alignment with emissions  reduction goals. We further recommend that the Government buys back these units at  the price originally paid for them, or if that is not workable, then at the unit price in the  period before the buy-back starts. 

 

4.4 Reduction in the provision of free allocations of emissions units

Some organisations that are involved in what are categorised as ‘emissions intensive’ or  ‘trade-exposed’ (EITE) activities, receive a free allocation of emissions units. Our  understanding is that these free units are just effectively new units that the Government  creates, and hence the total number of units available is increased. 

The Sustainability Council and others have argued that the allocation of free units to emitters  is too costly because the Government receives no revenue from them. The allocation of  these free units is also removing the financial incentive a carbon charge would provide for  the receiving organisations to reduce their emissions. 

We recommend that considerably stronger steps be taken to reduce the number of  freely allocated units. A workable alternative is to start charging for some or all of the  emissions from an entity currently receiving a free allocation, and instead provide  Government financial support to the entity so that it can take steps to reduce its  emissions.

In order to stop the increase in total units available that the provision of free units  currently causes, we further recommend that the free units become units of a different  category, which are just returned back by the receiving organisations as their  emissions are made, and are not otherwise exchangeable or saleable on the carbon  market.  

 

4.5 Agricultural emissions need attention 

Agricultural activities are currently responsible for around 48% of our total emissions. New  Zealand’s first emissions reduction plan (May 2022) included a set of key actions to support  farmers and growers to lower these emissions. Some government support is now being  offered to farmers to help achieve this, but taking positive steps to reduce these emissions is  still at an early stage 

A major part of New Zealand’s methane emissions is generated by farm cattle. The IPCC is  calling for overall methane emissions to be reduced by around a third over the 2019-2030  period. While methane has a much shorter life in the atmosphere than CO2, it also has a  much stronger effect on global warming per unit of mass.  

Some work has been done to determine how these cattle emissions can be reduced. There  have also previously been plans to introduce charges for livestock-related methane  production, but the implementation of these keeps getting delayed, most recently in June  2024 when the current Government announced that it plans to keep agriculture out of the  ETS but to “implement a fair and sustainable pricing system for on-farm agricultural  emissions by 2030”. However, no details about this seem to have been given yet. 

In contrast, in June 2024 Denmark announced that it plans to introduce a tax on agricultural  emissions from 2030, with an initial price of €16 (around NZ$30) per tonne CO2-e, rising to  €40 (around NZ$76) by 2035. It is the only country in the world that has currently shown  clear plans for taking this approach. 

Denmark is also advocating for a European-wide tax on agricultural emissions, in which case  it would make sense to bring them under the EU’s CBAM (Carbon Border Adjustment  Mechanism). If this happens, then we may well end up paying a tariff on agriculture-related  exports to the EU based on the difference between what European and New Zealand  farmers are paying for emissions. 

Some of our farmers have already moved to a ‘regenerative’ approach to farming, which  involves using soil-conserving and soil-building practices, increasing biodiversity in pastures  and crops, and minimising tillage. These practices lead to healthy farming, and draw more  carbon into soils, which is a positive for the climate. They can also make possible a  reduction in the use of pesticides, herbicides, and other toxic chemicals. However, there do  not yet seem to be any serious measures taken to promote the regenerative approach here. 

Given the reduction goal the IPCC has set for methane emissions, and what may be  going to happen in Europe, there is a strong case for New Zealand to seriously  consider bringing in a charge for methane emissions from cattle. As in Denmark, this  can have its own charge and not be part of the current ETS.  

We further recommend that steps be taken to make farmers aware of the benefits of  moving to regenerative and organic farming measures, which improve carbon capture  in soils. 

4.6 The simple carbon tax option 

A simple carbon tax, as was introduced in Sweden in 1991 to cover part of its emissions,  would give much clearer price signals than our ETS currently does, and would also be much  simpler and cheaper to operate. In early June 2025 Swedish tax was the equivalent of  around NZ$251. Over the 1990 to 2021 period, Sweden’s gross emissions fell by around  33%, while ours increased by around 21%. 

We need to seriously consider moving to a simple carbon tax system, rather than the  complexities and lack of pricing clarity with our current ETS.

 

5.  Making higher carbon charges workable 

5.1 Protecting the public from rising costs of goods and services

Higher carbon charges will push up the price of goods and services. To make this workable,  US climate scientist James Hansen and others have recommended introducing a citizen’s  dividend, funded by the revenue the government receives from carbon charges. All citizens  and legal residents receive a regular dividend, with smaller payments made in relation to  children. 

The citizen’s dividend or bonus approach has already been introduced in Switzerland,  Canada and Austria, and was earlier proposed in New Zealand by the Green Party, and  more recently by the Act Party. 

We strongly recommend that a citizen’s dividend be promptly introduced to help  compensate the public for the increased costs of goods and services that carbon  charges have already caused, and for the rising costs that will result from higher  carbon charges, with a major part of the carbon charge revenue used in this way. A  smaller amount can also be used to assist organisations in reducing their emissions. 

Taking this step will also be a small move towards addressing the rising income  inequality that we have experienced over the past 40 years, which has had serious  negative effects on our society.  

 

5.2 Assisting businesses with emissions reductions 

Higher carbon charges will result in larger amounts of revenue flowing to the Government,  but some businesses will struggle financially to make the changes needed to reduce their  emissions, and also pay the carbon charges they are encountering. 

With higher carbon charges, we recommend that some of the revenue received by the  Government be used to financially assist business with making the changes needed  to reduce their emissions, so that they can remain operational.

 

6.  Clarity needed in net emissions measurements 

The Government is using a ‘target accounting’ measure for net emissions, which differs from  the standard net measurement used by the IPCC and most other countries. The Climate  Change Commission has gone along with the Government’s choice, despite saying that it’s  high-level objective for accounting is: “A robust, transparent accounting system which tracks  genuine environmental gains while balancing completeness with practicality”. 

These target accounting net emissions figures are certainly not transparent, because how  they are determined is not clearly explained. The Climate Change Commission itself has  said that, because there were no official estimates for target accounting net emissions up to  2022, it had to use other data to try and estimate them, which it says: “is a key caveat to our findings on how Aotearoa New Zealand is currently tracking towards meeting the first  emissions budget”. 

This lack of information and clarity means that very few people are able to accurately assess  how New Zealand’s planned emissions reductions compare with those of other countries, or  how they compare with reduction goals that the IPCC and others have presented. 

While there may be some arguments for using the target accounting method of  expressing net emissions, its adoption may also have been motivated as a way of  making New Zealand’s emissions reduction figures look stronger than they actually  are, and harder to compare with internationally-set targets, and the targets and  achievements of other countries. 

We need to immediately abandon this obfuscation, and start expressing both our  current net emissions and our future net goals in terms of the standard net emissions  measurements. 

Note: re price and emissions figures 

Unless otherwise stated, prices charged for emissions in other countries are converted to  NZ$ using the conversion rates in early June 2025.