Late last year, Cabinet decided not to adopt the commission’s recommendations to significantly increase the trigger price of the ETS’s cost containment reserve.

The advice saw the price of NZUs hit an all time high of $88.50 on the secondary market in November, and if adopted was expected to result in the price rising further, with the trigger price set at a level where the reserve was rarely if ever released.

With inflation front of mind, Cabinet decided to go against the advice of the commission - and climate minister James Shaw who sits outside cabinet - and stick with the status quo.

That decision has seen the price of carbon tumble to around $54 a tonne this week - well below the price experts agree is required to incentivise the switch from fossil fuels to renewables.

The decision also increases the likelihood of an additional 35 million NZUs being added to the ETS due to the trigger price being breached.

The commission had recommended introducing a two tiered trigger price set at $171 and $214. Cabinet decided to stick with the status quo of a single tier at just over $80.

LCANZI says that, in overriding the recommendations, Cabinet failed to address whether the settings were in accordance with the emissions budgets and the NDC.

“Instead the decision was driven by concerns that rising ETS unit prices would flow through to households.”

LCANZI is seeking a declaration from the Court that the regulations are inconsistent with the Climate Change Response Act, and an order that the regulations be remade. 

“These errors need to be addressed if Aotearoa New Zealand is to meet its obligations and address climate change in a way that is just and equitable,” LCANZI president Bronwyn Carruthers KC said.

“The ETS is supposed to act like a tether on our emissions. But, Cabinet signalled that whenever tension starts to go on it will throw out more rope. Unsurprisingly, the price of ETS units has collapsed following the December decision.”

“The Minister received expert advice from the Climate Change Commission which could have resulted in ETS settings that go some way to meeting our climate change obligations. Instead, regulations were weakened, moving us further away from meeting our obligations,” Carruthers said.

The many permutations of Cabinet's decision 

It’s been widely reported elsewhere that the Cabinet decision has resulted in a big hole in its revenues and will result in the addition of an extra 35 million NZUs entering the ETS.

Both could be true but it’s unlikely both will end up being true.

It’s too soon to say how big the drop in revenue due to the price fall and the subsequent failed ETS auction earlier this year will be.

That’s because there are so many possible outcomes of the decision. One - fairly likely - scenario is the next three auctions will fail, resulting in government missing out on the revenue from the sale of 17.9 million NZUs. 

Another is the entire allocation is sold for an average of $79, the price achieved at the last successful auction, and the government pockets $1.414 billion.

And that’s still a possibility, with three auctions still to go and the allocation from each failed auction being shunted forward to the next.

However, the chances of that happening decrease with each failed auction as the bar to clearing rises along with the number of NZUs up for grabs. (It’s complicated and we won’t go into the explanation for that right now.)

If the final ETS auction of the year in December fails, the entire 17.9 million NZUs are wiped from the current stockpile of about 140 million tonnes.

And that would be a good thing for the climate … probably.

The probably creeps in because the decrease in supply will result in an increase in demand, a higher NZU price going forward, and an increased likelihood of the trigger price being breached releasing the the cost containment reserve.

In the event that some or all of the 35 million NZUs in the cost containment reserve for the next five year are released, the government’s revenues will get a healthy bump.

But any chance of the country meeting its carbon targets with emissions reductions due to the price of carbon and the ETS will be severely compromised. 

An earlier case taken by LCANZI against the Climate Change Commission and the minister of climate change, James Shaw, arguing they had got their carbon maths wrong, was rejected by the High Court last year.

LCANZI is appealing that decision and hopes the court will rule on its current case before the government makes its next ETS decision.