New Zealand's carbon market is close to resolving its commitment issues

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New Zealand carbon prices jumped by NZ$10 per tonne in late August to over NZ$60 per tonne (~€33). The price of New Zealand emission allowances (NZU’s) is now up almost 40% from its late May nadir.

The announcement by the New Zealand Government that it was overhauling the country’s emissions trading scheme, and crucially, slashing the number of NZUs available to the market though to the end of the decade, was the key to the price surge. In addition, the final settings for the period 2025-29 maintains and extends the existing price corridor for the auction reserve price (ARP) and cost containment reserve (CCR), with volumes held in the latter left unchanged.¹

Even more important than the details of the overhaul is that the New Zealand Government followed the advice of its independent advisory body, the Climate Change Commission (CCC). In February, the CCC concluded that the “unique design of the NZ ETS means that if its current structure persists, it will create challenges for meeting our emissions reduction targets in an equitable, stable and predictable way.” In response to these concerns, the CCC issued a series of recommendations to the government aimed at bolstering the ETS’ credibility, ensuring that going forward it delivers the incentives necessary to decarbonise.²

Delegation signals commitment to legally binding targets…

The UK was the first major economy to set legally binding carbon budgets. The UK Climate Change Act (CCA) of 2008 stipulates ‘legally binding’ interim and long-term (2050) targets for emission reductions. In 2019 the UK went one step further and became the first major economy to commit to net zero greenhouse gas (GHG) emissions by 2050.

Enshrining it into law, even if subsequent administrations could realistically alter it, is the most important driver of climate policy credibility. Legally binding obligations force obligated emitters to respond. Also, by making carbon policy part of the legislative process means that it is open to public scrutiny. That makes it much more difficult for policymakers to quietly drop the policy.

Perhaps less well known, the CCA also enabled the formation of an independent monitoring entity with the authority to advise and monitor the governments performance on a regular basis. The Climate Change Committee (CCC) was also formed in 2008, and importantly, the government has a legal obligation to regularly obtain and respond to its advice.

The CCC is considered to be a trailblazer in institutional climate restraint, bolstering the credibility of the UK in the eyes of investors. A recent paper by Grantham Research Institute found that the CCC helped to justify more ambitious climate action and achieve greater political accountability in the UK.³

Even if it is enshrined in law, market participants know that subsequent governments may revoke or at best dilute the policy. Delegating at least some authority to an institution insulated from short term political whims, and with a timeline beyond the electoral cycle adds an extra layer of commitment. The introduction of an independent advisory body coupled with the requirement that the government must respond is an example of a strong commitment device.

Dozens of other countries around the world have followed the UK’s lead and introduced their own version of an independent climate change committee. Nearly 60 countries around the world have introduced climate change framework laws, of which 26 contain explicit net zero targets. The laws gives 18 of these governments the power to establish an expert advisory body (i.e., a CCC), with just under half specifying the degree to which the government must respond to the advice of the CCC.

One of the country’s to follow the UK’s lead was New Zealand. It’s Climate Change Commission (CCC) was founded in 2019 under the Zero Carbon Act (ZCA). As in the UK, New Zealand’s CCC was set up as an independent advisory body, tasked with advising the government on climate change policy and monitoring progress towards New Zealand's emission reduction goals. The move to reduce the influence of political whims on the NZ ETS helped support the market; the price of NZUs surged to an all-time high of almost NZ$90 per tonne in November 2022 (see New Zealand's carbon market: The carbon trade you've probably never heard of).