In July 2021, the Ministry of the Environment published a new consultation document, “Designing a Governance Framework for the New Zealand Emissions Trading System” (the consultation document). The consultation paper examines at a high level whether, and how, New Zealand’s Emissions Trading System (ETS) should be regulated. This article summarizes his findings.

The status quo

The ETS is a program designed to reduce greenhouse gas emissions in New Zealand. Generally speaking, the program requires companies to cede New Zealand units (NZUs) to the government in exchange for their emissions. NZUs are initially issued by the government, but they can be bought and sold by companies wishing to hedge existing emissions or offload unused NZUs.

Currently, there is no specific regulatory or regulator framework that governs the ETS market. While the ETS market is subject to commercial legislation of general application (for example, the Commerce Act 1986 may apply with respect to anti-competitive behavior in the ETS market, and the Fair Trading Act 1986 may prohibit false advertising and misleading by NZU traders), the current approach does not protect against all risks in the ETS market.

Today, trading is largely done over-the-counter (OTC), with the buyer and seller dealing directly with each other without resorting to an exchange. Since OTC transactions are negotiated directly between the parties, there is no public record of negotiation details or price.

Potential issues with the status quo

The consultation document identifies seven risks that could arise if the status quo is maintained. These risks are grouped under three themes (board governance, governance of exchanges and governance of market behavior). The risks are:

Under the theme of board governance
  • Users receiving poor, false or misleading advice from NZU advisers (people and organizations that provide advice to ETS users) who do not have to go through an accreditation process
  • NZU advisers hiding or disguising conflicts of interest (for example, an advisor cannot disclose that he accepts commissions for referrals).
Under the theme of trading governance
  • A lack of transparency, supervision and control in the secondary market. Since transaction information is not made public, traders may hide misconduct or anti-competitive behavior
  • Credit and counterparty risk. This is the risk that one of the parties to an NZU transaction will default on their contractual obligations, which means that the transaction cannot be settled.
Under the theme of the governance of market conduct
  • Insider trading and information asymmetry
  • NZU Price Manipulation
  • Money laundering and terrorist financing.

Other countries have already taken steps to address these risks (for example, South Korea’s Emissions Trading System requires trades to take place on the Korean Stock Exchange, so that trades can be traded. be monitored). For this reason, the consultation document suggests that the status quo should not be maintained. Rather, it recommends that the government take measures to mitigate the identified risks.

Regulatory options

The consultation document sets out options the government could pursue to mitigate the risks associated with each theme.

The options discussed for dealing with the risks found in the topic ‘board governance’ include maintaining the status quo, creating a consumer education campaign (the aim of which would be to educate HTA users on ETS advisers), creating sectoral guidelines for NZU advisers (which would assess an expected level of service from advisers), and creating a code of conduct while also requiring accreditation and registration of NZU advisers ( the competence of counselors could be assessed when applying for a license, and the code of conduct would set a benchmark for behavior).

The options discussed for dealing with the risks found in the topic ‘trade governance’ include maintaining the status quo, encouraging users to voluntarily report transactions to a regulator (which could improve market transparency), obligation for NZU traders and ETS participants to disclose the total number of NZUs they hold or borrow (which would make the market more transparent and provide information on the distribution of market power), and would require that the Most or all of NZU’s transactions take place on one or more regulated exchanges (this would provide the most information to the public, and a common set of rules could be imposed to ensure that users are treated equally and that they can buy and sell at the fair market price).

The options discussed for dealing with the risks found in the ‘governance theme of market behavior’ include maintaining the status quo, setting position and buy limits (which would prevent a user or group form to acquire such a large share of NZU that they could exercise an unfair power market), encouraging users to voluntarily declare the price of negotiated NZUs and requiring full mandatory reporting of transactions (under which users would be required to report a list full details of the transaction to the regulator).

The consultation paper also examines whether a regulator should be appointed to oversee the market. Six options are discussed in this regard. The government could:

  • maintain the status quo
  • Appoint an industry self-regulatory body. Under this option, one or more members of the industry could take on the responsibility of overseeing the sector. This body could work independently or in concert with government entities
  • Appoint an advisory regulator. This would be an independent body with the power to provide policy advice to government on HTA
  • Appoint a market surveillance regulator. This would have the same powers as above, but the body would also be able to collect information to report misconduct or provide data to the government.
  • Appoint a market compliance regulator. This would have the same powers as above, but the agency would also be able to investigate and enforce market rules defined in primary legislation or regulations.
  • Appoint a market design regulator. This would have the same powers as above, but the body could also issue market rules.

The consultation document assesses the pros and cons of each option. The risk coverage of each option (the ability of each option to adequately respond to the risks of each theme) is also analyzed. In general, the consultation document notes that the options requiring regulation present the best risk coverage.


As the consultation document makes clear, there are risks associated with maintaining the status quo. For this reason, it seems likely that the government will seek to regulate the emissions market. The question is how far the government will seek to go. The consultation paper suggests that the government would like to move towards trading on the stock exchange, as well as establishing a regulator with the power to enforce compliance, but nothing is certain at this point.


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