Government weighed cancelling carbon auctions after its own policy changes sank prices
The New Zealand government considered cancelling its carbon auctions after its own policy changes caused carbon prices to fall, according to official documents obtained by RNZ.
Ministers ultimately decided to stick largely with the status quo on carbon auctions. Officials had warned that unexpected changes could create more uncertainty among the companies and individuals who buy carbon units.
The documents trace a chain of events that began in November, when Climate Change Minister Simon Watts announced the government would change climate laws to 'uncouple' the emissions trading scheme (ETS) from New Zealand's international climate pledges. The ETS works by putting a price on greenhouse gases: emitters have to buy carbon units to cover their pollution. It covers about 43 percent of the country's emissions but does not include agriculture.
Think of the ETS as a market where the government sells a limited number of permits to pollute. When those permits are scarce, the price goes up, and emitters have a stronger financial reason to cut emissions. When the supply looks uncertain, prices can swing sharply.
After Watts' announcement, the New Zealand carbon price plunged overnight from about $50 to as low as $33. The final quarterly government carbon auction for the year failed to sell a single carbon unit, with the market described as 'surprised' by the government (RNZ, 3 December 2025).
A day after that failed auction, officials gave Watts advice on sending an early signal about the number and price of carbon units available in coming years, to improve ETS market confidence and reduce price volatility. Officials noted that ETS market volatility had come about 'in response to recent government climate announcements.' They advised that Watts could send a market signal through anything from a speech to an early decision ahead of the usual annual consultation process.
By late February, with carbon prices still below the auction reserve price, officials wrote that there may be interest in pausing or cancelling 2026 auctions. The logic was straightforward: cancelling auctions would create a scarcity of units, forcing emitters to buy elsewhere or use up stockpiled units, which would push the carbon price back up.
The minister could cancel 2026 auctions by revoking auction regulations or changing the law, but officials warned both approaches carried risks. Cancelling auctions might send a sharp message of intent to the market, they said, but could also raise concerns about stable, predictable policy settings and the integrity of climate law. Officials warned that cancelling auctions would signal the government is willing to override its own legislation for short-term goals.
By March, officials wrote that Watts may be interested in setting auction volumes to zero for 2027 and 2028. They cautioned that this could be seen as a significant departure from established practice. Watts took a paper to the Climate Priorities Ministerial Group that suggested 'effectively cancelling auctions for the next 1–2 years' as an option.
In April, officials said the novel approach of cancelling auctions was not supported by them or by the people buying carbon units.
New Zealand's 2026 ETS auction reserve price floor is set at NZD 71 (USD 41.27) (ICAP). The Environment Ministry has scheduled four NZ ETS carbon auctions for 2026: 3 March, 9 June, 8 September, and 1 December (Environment Ministry).
The government opened a consultation from 12 June to 12 July seeking feedback on New Zealand Unit (NZU) auction volumes and price settings for 2027 to 2031 (Environment Ministry). ETS settings changes announced by the government take effect from 1 January 2026, with 16.9 million units available between 2026 and 2030 (Environment Ministry, August 2025).
Critics of New Zealand's ETS argue the country will not decarbonise at $60 a tonne and that cancelling carbon units would probably push the carbon price higher (RNZ, 5 July 2025). The government had said in August 2024 it would more than halve the number of units it makes available to offset carbon emissions, starting from 2025 (Reuters).
The broader context here is the tension between political control over the ETS and the integrity of the framework the market relies on. Officials repeatedly flagged the risks: overriding legislation for short-term price goals undermines the predictability that makes the scheme function. Watts faced pressure to act after his own policy announcement tanked prices, but the advice from his officials was unambiguous. Cancelling auctions, they said, was not supported by the people the policy was designed to influence.
The episode also points to a structural challenge. The ETS covers less than half of New Zealand's emissions, and market participants have built up stockpiles of units that suppress demand at auction. When the government uncoupled the scheme from international pledges, it removed a key anchor for future scarcity expectations. Prices fell accordingly. Cancelling auctions to manufacture scarcity would have been a direct intervention to correct the consequences of a policy choice the government itself had made.
What ministers settled on was a consultation on future auction volumes and price settings for 2027 to 2031. The question of whether that restores market confidence, or simply delays the reckoning, is one participants are now weighing.
