As outlined below, immediate decision on EB1 and EB2 are important for current ETS operations. If a delay is unavoidable for EB3 and EB4 this should be as short as possible, with decisions ideally taken by early 2026 in time to be factored into next year’s ETS settings decisions.

Under the Climate Change Response Act, the requirement to “accord” ETS settings with current and future emissions budgets means that ETS auction settings are deeply tied to decisions on budget levels. These in turn fundamentally affect ETS market operations and
sentiment. Budgets being set on a legislated schedule provides visibility of the path to be followed and is a foundation of the stability and credibility of the ETS market and investor confidence.

EB1 (2022-25)

The Climate Change Commission has recommended tightening EB1 by 7Mt to correct for methodological changes since it was set, restoring original ambition. The government’s response cannot be delayed after 31 December 2025 as the Act prohibits a budget being
modified after it has been completed.

Recommendation: Decision by 31 December 2025

EB2 (2026-30)

The Climate Change Commission has recommended tightening EB2 by 1Mt to correct for methodological changes, and 14Mt for the significant extra ETS forestry registration beyond what was anticipated when the target was set. Delay in the government’s response creates uncertainty for the ETS market: will scarcity be restored to what was anticipated when the budgets were set (likely leading to upwards pressure on today’s price), or not? The market may also judge that delay beyond December 2025 significantly tilts the playing-field against restored ambition because:

• the Act sets a much higher bar to amend a budget already underway than before it has started.
• It would be impractical to significantly tighten EB2 if there is a two-year delay. A December 2027 decision would only affect 2029 and 2030 ETS settings (set in 2028). There are only 4.1Mt scheduled to be auctioned in those years, making a 15Mt tightening impossible without buying back NZUs.

The government’s rationale for delay – to consider the implication of changes to the 2050 methane target – is not relevant in the EB2 timeframe as the 2030 10% methane target applies.

We note that the EB2 “cap” for ETS sectors introduced in 2024’s ETS settings is based on accordance with the existing EB2 budget. It does not provide any certainty with respect to possible revision of the budget.

Recommendation: Decision by 31 December 2025

EB3 (2031-35)

From next year, ETS settings will begin to be made for the EB3 period. The government has set an indicative ETS cap based on the current EB3, but this does not provide any certainty with respect to possible revision of EB3. The Climate Change Commission has
recommended 18Mt tightening to take account of extra ETS forestry. Again, whether this occurs will affect scarcity and price in the market. Delay and uncertainty are not helpful.

If further work is required on EB3, we suggest that any delay to the legislated timeline should be as short as possible – ideally April/May 2026 to enable clarity for next year’s ETS settings decisions.

We have heard it suggested that a two-year delay would be a “maximum” and actual decisions could be taken earlier. We do not consider a situation where the government can update the budget at any time in the next two years to be helpful for market stability. Clear timelines matter.

Recommendation: Decision by 30 April 2026

EB4 (2036-40)

Forestry investments occurring today will deliver ETS removals in the EB4 period. Investors
deserve clarity on intended ambition in that timeframe.

Recommendation: Decision by 30 April 2026

The government’s reliance on the ETS as the primary pillar of climate change policy means that it is especially important to support ETS confidence. Beyond the specific issues for each budget period, the decision to amend the Act’s timelines and processes without consultation, and without the ability to provide input via a full Select Committee process, will not be helpful for rebuilding ETS market credibility.

We are available to you or your officials to discuss these points further.

Best regards,

Christina Hood
Head, Compass Climate

Lizzie Chambers
Founder and General Manager, Carbon Match

Nigel Brunel, MCCSP
Managing Director, Marex New Zealand

Disclosure: Nigel Brunel is part-owner of Carbon News.