Three years of warnings, zero reform
The Climate Change Commission’s latest warning, published this week, is blunt: the Emissions Trading Scheme faces huge volatility and will fail without reform by the 2030s. Commission chief executive Jo Hendy said a unit shortfall as early as 2028 could produce price spikes and significant economic harm, “potentially resulting in factory closures to reduce emissions rather than investment in decarbonisation.”
Climate Minister Simon Watts said the government would “carefully consider” the advice. That phrase has become a policy holding pattern. The Commission has been sounding this alarm since at least 2023, and the government’s response each time has been to defer, dilute, or actively undermine the scheme’s credibility.
In March 2023, the Commission told the government to change the ETS or risk failing to meet climate targets. Then-chairperson Rod Carr warned that declining the recommendations would require “a much stronger policy approach.” Cabinet had already rejected the Commission’s advice to raise price settings, citing the cost-of-living crisis. The carbon price collapsed. The government’s books took a hit of nearly $500 million.
In March 2024, Carr said the Commission had found the unit surplus was 19 million units (38%) larger than previously thought, largely due to a surge in forestry registrations. The Commission recommended more than halving auction volumes, from 49.5 million to 24.7 million units over six years. Carr was direct: “This unit surplus will not self-correct.”
By December 2024, Carr was no longer hedging. He said the ETS “will fail” and was “not fit for purpose”, identifying two structural flaws: too many units on issue and too few obligations on emitters.
The market stopped pretending
The auction data is damning. In December 2025, not a single bidder registered for the year’s final ETS auction, making 2025 the second full calendar year in which all four quarterly auctions failed. The auction reserve price sat at $68 per unit, but emitters were buying on the secondary market for as little as $40. Why pay a government floor price when the open market is 40% cheaper?
In December 2025, Marex commodities broker managing director Nigel Brunel said recent policy announcements were “primarily responsible” for the market collapse. The specific trigger was the government’s November 2025 decision to decouple the ETS from New Zealand’s Paris Agreement pledges, described by Carbon News in April 2026 as “a brutal hit to market confidence”.
By early 2026, the NZU price had slid to approximately $45, down from around $60 at the start of 2025. The stockpile of privately held units stood at roughly 135 million tonnes, with annual demand running at about 40 million tonnes against new supply of 27 million. The gap is being filled by drawdowns from the stockpile. That arithmetic has an expiry date.
Cheap carbon is not free carbon
Here is the part the market-price cheerleaders miss. A $45 carbon unit does not mean decarbonisation costs have fallen. It means the price signal has broken. Businesses that should be investing in lower-emission processes are instead banking cheap credits and deferring capital expenditure. When the stockpile runs down and the structural shortfall hits, the Commission’s price forecast suggests units could spike toward $90 within five years.
In a June 2025 submission, BusinessNZ and the BusinessNZ Energy Council said persistent regulatory uncertainty had weakened the carbon price signal and investment direction. Their practical ask was that ETS settings be locked in by legislation out to at least 2035, giving firms a planning horizon. That is not a green lobby demand. It is a business planning demand from the country’s peak business organisation.
Forest and Bird climate spokesperson Scott Burnett said this week that the market had lost confidence due to volatility and policy announcements, including the rollback of action on agricultural emissions. When environmental groups and business groups are saying the same thing, the diagnosis is not controversial.
The blunter instruments waiting in the wings
A broken carbon market does not eliminate compliance costs. It redistributes them into messier, less efficient forms. If the ETS cannot deliver emissions reductions, the government will eventually face a choice between abandoning its climate commitments entirely or reaching for blunter regulatory instruments: sector-specific mandates, direct output restrictions, and prescriptive compliance requirements that offer none of the flexibility a functioning market provides.
For businesses currently enjoying a cheap ride, the calculation should be simple. Invest now while the carbon price is low and capital is relatively available, or wait and face either a sudden price spike to $90-plus or a regulatory regime designed by officials who have given up on the market. Neither of those outcomes is kind to a balance sheet. The ETS is not failing because the policy concept is flawed. It is failing because successive governments have treated it as a revenue line and a political inconvenience rather than the centrepiece of industrial transition it was designed to be. Business will pay for that indecision, one way or another.
Sources
- RNZ: Climate Change Commission warns NZ ETS could fail without reform (2026-04-26)
- RNZ: Emissions Trading Scheme year’s final auction fails to sell a single carbon unit (2025-12-18)
- RNZ: Emissions Trading Scheme ‘will fail’ without radical reform – Rod Carr (2024-12-20)
- Interest.co.nz: Climate Change Commission recommends drastic reduction in ETS units (2024-03-12)
- RNZ: Climate Change Commission tells govt change emissions scheme or risk targets failure (2023-03-22)
- CarbonCrop: CarbonCopy Q1 2026 – NZU Price, ETS Tools and Catchment Group News (2026-03)
- BusinessNZ and BEC Submission on Annual Updates to NZ ETS (2025-06-29)
- Carbon News: Supply-side pressures and political uncertainty ahead for carbon market (2026-04-07)