NZ ETS reform needed as forestry supply risks undermining carbon prices: Commissioner

New Zealand's Emissions Trading Scheme requires major reform as increasing forestry-driven unit supply risks undermining carbon prices and the country's climate objectives, according to a report released Aug. 26 by Parliamentary Commissioner for the Environment Simon Upton.

The report argues the NZ ETS is "at risk of being swamped by unit supply" and lacks the tools needed to ensure New Zealand meets its emissions budgets, 2050 net-zero target, and international climate commitments.

However, several market participants told Platts, part of S&P Global Energy, that the report is more of a non-event for the actual market.

Platts assessed NZUs at NZ$52.50/mtCO2e, down 30 cents/mtCO2e day over day. Since the report was released after the market closed Aug. 26, prices haven't moved much, and only gained 20 cents/mtCO2e.

Oversupply concerns mount

The NZ ETS is New Zealand's primary climate policy instrument, requiring covered emitters to surrender NZUs for their emissions while allowing forestry participants to earn NZUs by removing CO2 from the atmosphere through forest growth.

A central finding of the report is that the mechanism helping New Zealand meet climate targets in the short term is also undermining long-term emissions reductions.

According to modeling commissioned by the Commissioner, higher carbon prices encourage more afforestation, generating additional NZUs that eventually suppress carbon prices and weaken incentives for gross emissions reductions.

The report concludes that the NZ ETS, as currently designed, is unable to deliver substantial gross emissions reductions while also maintaining New Zealand's long-term emissions goals.

Forestry representatives pushed back against the report's conclusions, arguing the issue lies with the design of the ETS rather than forestry participation itself.

"Forestry is not the problem. A poorly managed ETS with constant changes is," a New Zealand-based forestry industry representative said.

The report highlights growing supply concerns within the NZU market. The NZU stockpile was estimated at 121.2 million units as of May, including around 29.7 million surplus units, equivalent to roughly one year of emissions covered by the scheme.

The modeling cited in the report projects NZU prices could initially rise before declining from the mid-2030s as forestry supply increases and emissions demand falls. It further suggests gross emissions reductions under current NZ ETS settings would occur only slightly faster than in a scenario where the carbon price effectively falls to zero.

Different reports say different outcomes

Concerns over long-term oversupply are not new. In recent years, the government has repeatedly adjusted NZ ETS settings in an effort to restore market confidence, including reducing future auction volumes and introducing restrictions on farm-to-forestry conversions.

Platts reported that the government changed the Climate Change Response Act to limit exotic forestry conversions on LUC class 1-6 farmland that can be registered in the NZ ETS.

A New Zealand-based forester and NZU developer said emissions reductions and afforestation should be viewed as complementary rather than competing approaches.

"New Zealand doesn't need to choose between reducing emissions and growing forests. We need both," the developer said.

Platts reported that New Zealand's Climate Change Commission has warned that demand for New Zealand Units may outpace supply as early as 2028, potentially triggering volatile price spikes and prompting government intervention, according to its annual advice on NZ ETS auction settings for 2027–2031, released on April 25.

The developer added that a blanket forestry moratorium would undermine investor confidence and risk slowing forest establishment, arguing that forestry units are fundamentally different from government-auctioned units because they represent carbon already removed from the atmosphere.