must reflect a changing world.
The New Zealand Emissions Trading Scheme (NZ ETS) broke new ground in ETS design. Drawing from analysis of core policy documentation, this paper examines the rationale, outcomes, and outlook for three key innovations – broad sectoral coverage with some upstream points of obligation, the absence of a hard limit on system emissions, and a two-part cost containment mechanism – following the first decade of operation.
It also provides comparative assessment with the European Union Emissions Trading System and California Cap-and-Trade Program. The NZ ETS was designed around the principle of least-cost compliance with international responsibility targets and a core assumption that the Kyoto Protocol emissions market would converge toward an efficient emission price aligned with rising global mitigation ambition. This assumption did not become a reality. As a result, the NZ ETS has produced a functional cross-sector trading market but little incentive for domestic mitigation to date.
In late 2019, amendments were introduced to reform sectoral coverage, unit supply, and price management features so the system will better support New Zealand's targets under the 2015 Paris Agreement and 2019 Zero Carbon Act. However, substantial technical and political challenges remain to set near-term domestic mitigation ambition, phase out industrial free allocation, determine the mitigation contribution from the land sector, and design the agricultural emissions pricing regime. The evolution of the NZ ETS, relative to other systems and in response to national circumstances, offers insights that can inform the future development of emissions trading globally.
Key policy insights
Catherine Leining, Suzi Kerr & Bronwyn Bruce-Brand (2019) The New Zealand Emissions Trading Scheme: critical review and future outlook for three design innovations, Climate Policy,