Why do the government's carbon auctions keep failing, and does it matter?

Explainer - Seven failed auctions and counting. How did the government lose hundreds of millions of dollars in revenue from big polluters?

Here's what you need to know about the steep decline in carbon credit auctions.

What's this revenue from?

It's all about carbon.

On a single day in 2021, the government earned over $600 million in revenue in around three hours - just from selling the rights to emit carbon dioxide.

That was just one of its quarterly auctions of something called NZUs - New Zealand Units, or, in colloquial terms, licences to produce a tonne of carbon dioxide emissions.

Many companies, including petrol companies, have to buy these every year to cover their planet-heating emissions under the Emissions Trading Scheme (ETS).

Farmers are exempt when it comes to their methane and nitrous oxide, and certain big emitters (like Rio Tinto, Methanex, NZ Steel, Fletcher Building) get most of their NZUs given to them free by the government on the basis they're exposed to overseas competition.

The auction price is set by the market, but can't be lower than a minimum floor - currently $68 a tonne.

Companies have four chances a year to buy what they need from the government.

The idea is that paying for emissions gives companies an incentive to lower their climate pollution (and consumers an incentive to buy cleaner products), as well as being a tidy money spinner for the taxpayer.

How tidy an earner are we talking?

At Budget 2021, Treasury estimated that selling carbon credits would generate $3 billion for the government over the next five years - and many market observers at the time thought that was too conservative. In the past, revenue has topped a billion dollars in a year.

The money earned is there to be spent on helping companies cut their carbon emissions, giving people tax cuts or whatever else the government of the day wants to spend it on.

Along with ACC levies, earnings from the selling NZUs are the biggest source of government revenue after the tax take.

That sounds lucrative...

It used to be.

Then the auctions started failing.

The first failed auction happened in March 2023. Not one tonne of carbon sold.

The same thing happened in June, September and December 2023 - a whole year without a sale.

In March 2024, the government managed to sell around 3 million tonnes, earning around $200 million.

That was followed by two more failed auctions, then a brief rally in December 2024, when 4 million tonnes were sold.

The recovery was short-lived though.

In 2025, demand has been back in the doldrums. Both of 2025's auctions have failed. In fact, in June, nobody even bothered to register to bid.

Nigel Brunel, the New Zealand managing director for trading firm Marex, says it's not unusual internationally for a carbon auction to fail.

"But you could stand back and say, if they're continually not clearing, what's at play?"

Perhaps all these companies have slashed their emissions and don't need to buy NZUs to cover them?

Nope. It's not that companies have stopped polluting the atmosphere with their heating emissions.

New Zealand's total emissions have only fallen a few percent during the time the auctions have been failing.

In short, the reason companies don't want to buy these from the government is that they can buy their NZUs cheaper elsewhere.

You see, the auctions aren't the only market for carbon.

The government only auctions off as many NZUs as it thinks it can inject into the market without blowing the country's emissions budgets - aka how much the country is allowed to pollute the climate each year.

And, these days, it keeps a pretty tight reign on supply.

Every year, the number of NZUs available to buy from the government shrinks a bit.

And every year, the minimum price the government can sell them for rises a bit.

The combination of falling volumes and a rising floor price is meant to keep the country on track for meeting its climate targets, by ensuring companies don't get their hands on too many NZUs at once, which they can use to pollute.

But outside of the government auctions, companies can trade NZUs privately at whatever price they want -- and that price is outside the government's direct control.

For most of the last two years, buyers have been able to get their carbon cheaper elsewhere, on what's called the secondary market.

What is this secondary market?

Companies buy NZUs to cover their annual emissions, but they can also bank them for use or resale later. They can even trade them like commodities, if they want to.

The government isn't the only entity able to create NZUs.

Forestry owners can also create new NZUs in unlimited quantities, by planting trees, and, like other NZU owners, can sell them whenever they want at a price they choose.

Right now, a tonne of carbon dioxide on the secondary market is about $10 cheaper than the government's minimum auction price.

Little wonder that nobody is bidding.

As for how the secondary market price is set, well, how highly companies value the carbon they have in their store cupboards depends on a lot of things.

Like, what do they think the carbon price is going to be in the future? How much do they themselves intend to emit?

How much demand for NZUs do they think there will be from other emitters? Do they think the government is strongly committed to slashing emissions, meaning NZUs might get harder to come by?

This all involves a lot of second-guessing, including about how committed the government of the day is to meeting its emissions budgets, and maintaining a strong carbon market.

So why is carbon cheaper on the secondary market?

It's complicated, but it's fair to say that politicians have played a big role.

That first failed auction happened after former Prime Minister Chris Hipkins and his Labour-led government got cold feet and tried to stop allowing the price of carbon to rise.

Independent experts had told the government it couldn't keep pumping more NZUs into the system to lower the price, whenever the price at auctions got high.

This was when the carbon price was above $80 a tonne, and a supposedly rare contingency plan for putting more NZUs into auctions was being triggered frequently.

With the country recovering from lockdowns, Hipkins didn't want to drive up petrol or electricity costs, both of which are affected by the carbon price. He refused to follow the advice.

Ultimately, he backed down after a court challenge.

But the market saw the decision as a lack of commitment by the government. The price of NZUs on the secondary market crashed.

Then the Hipkins government announced a review of how credits generated by forestry were treated.

Although the government's intention was to make the market stronger, the move prompted some foresters to panic-sell their NZUs, crashing the price again.

The new, National-led coalition government came to power promising a strong and stable carbon market - and promptly cancelled the forestry review.

But within less than a year, prices had dropped again, this time after the new government made a surprise announcement that it was considering lowering 2025's minimum floor price.

Again, the proposal never became reality.

But prices haven't really recovered by much.

So is it all politicians' fault?

Not this time.

There's also the matter of millions of tonnes' worth of "spare" NZUs that are stashed away in companies' accounts.

These represent the right to produce millions of tonnes of future climate pollution.

Companies are allowed to hold NZUs that they'll never need themselves - and many of them are holding big stockpiles.

Because these could land on the secondary market any time, they can make the price more volatile and unpredictable - and push it down, if lots of them are released at once.

"The long-running saga of the New Zealand ETS has been the surplus of units sitting in private accounts ... where there isn't really a clear purpose for those being in private accounts," says Kristen Green, a climate change consultant and economist.

"You could be an international hedge fund and hold some units ... there's a pool that might be held by speculators, there could be some that foresters or emitters had hoarded over the last 10, 20 years when the market settings were a bit looser so they have built them up to sell," she says.

At the latest estimate, there were thought to be roughly 50 million of these excess units, the equivalent of more than a year's worth of the nation's carbon dioxide emissions.

Brunel of Marex says a surfeit of NZUs on the secondary market is the underlying factor behind the continued failure of auctions.

"It appears to have been - and there's a lot of evidence to back it up - that a lot of small to medium forest owners have sold an excess amount of carbon," he says.

He says many sheep and beef farmers have woodlots on their land to supplement their income with logs or NZUs.

"If you go back a year and a half ago to when this started, economically, New Zealand wasn't in a great place, with high interest rates, and beef and sheep farmers struggle sometimes at the best of times."

Typically, any forest owner who plans to eventually harvest their trees keeps some NZUs to cover the carbon they'll emit when they fell the trees.

"What was clear was that some of these farmers that had units held back for harvest, decided not to harvest and sold those units into the market," says Brunel.

He says log prices had also been relatively subdued, which might have made some forests less economic to harvest - and made selling the NZUs more attractive.

"There was clearly an excess number of units being sold, which was picked up by emitters, which really kept the price subdued and somewhat weak.

"It's making its way back now, we're almost at $60, but clearly those emitting companies didn't need the auctions to satisfy their demands," he says.

Can we fix it?

The government - on the advice of the Climate Change Commission - has been trying to flush the surplus units out by selling fewer NZUs at auction, and Brunel says that should start having an impact.

"The supply coming into the market is approximately 18-20 million tonnes a year, 6 million at auctions, 6 million of free allocation, and approximately 6 million of forestry.

"But the actual demand or the requirement (for NZUs) to be surrendered every year is around 35 to 36 million tonnes, and that was brought about to try and eat into the stockpile.

"Everyone knows there's a quantum of units that have built up over the last decade that are excess."

Brunel says that as long as forestry planting stays reasonably constant over the next few years, those excess NZUs should start being used up by emitters, making the market more stable.

So we're sorted?

Not quite.

There's a twist.

At the end of every year, any unsold NZUs from government auctions are meant to be cancelled. The next year's auctions start with a clean slate.

But the Climate Change Commission has told the government it should reinject unsold NZUs from the string of failed auctions back into the market, in 2028-30.

"Some people didn't expect that, even though the Climate Change Commission is technically correct," says Brunel. "If they weren't required at the auction, why bring those units back?"

The government is still deciding whether to cancel the unsold units, and the commission has faced a lot of pushback.

"The government should probably consider banking that win," says Brunel.

"We're not going to decarbonise at $60 a tonne and by cancelling those units it would probably push the price higher. The auctions would also probably start clearing, which would be good for the government because it would get that revenue.

"We really need to be reducing gross emissions, and I can't see that happening at the current price."

Kristen Green says cancelling the unsold carbon would give the government some wiggle room when it comes to meet its future climate targets.

"We don't have any kind of tangible measure in place for agricultural emissions, which is 50 percent of our emissions, and when you look at forestry, which is so uncertain about how many removals it will deliver, having that wiggle room is important.

"I think the reaction from stakeholders has rightly been quite critical [of re-adding the units].

"The ironic thing here that makes you pull your hair out, is that the commission have also advised the government on its fourth emissions budget ... and part of that advice was, hey government, you should drop your emissions budgets ... by 15 million tonnes, which happens to be about the number of units they've said should be added on."

Green says the commission was only following the law when it delivered the two pieces of conflicting advice, but from the perspective of those watching "it's maddening".

If the government followed both pieces of advice to the letter, she says, "all those extra units would come straight back off again".

Does it even matter if carbon prices are low?

It depends who you ask.

The ETS has long been New Zealand's main tool for lowering emissions.

Under the current government, it's virtually the only tool because the coalition government believes in a market-led approach and hasn't allocated any real funding for cutting carbon emissions.

Climate Change Minister Simon Watts has said the failed auctions and the cancelled NZUs are just the market working as intended to rebalance.

The government has also made it clear that it doesn't mind if the carbon price is too low to drive companies cut emissions - in its view, planting trees at a lower cost to soak carbon up is just as good, especially if it works out cheaper for emitters and households.

Others - the Parliamentary Commissioner for the Environment, the Climate Change Commission and the OECD among them - disagree.

They say New Zealand is running a risk of suffering major regret in the future, when there's no more suitable land for planting pine trees and it still hasn't tackled the root sources of its carbon emissions. Plus, there will be swaths of land tied up in (potentially fire-prone) trees that can never be cut down ... unless their owners repay all the NZUs they've generated.

"It depends on what your vision of the role of the ETS is," says Green.

"It won't have any effect on gross emissions at the prices we're seeing today.

"If you buy into the 2008-era vision of the ETS, which is being agnostic as to how many forestry removals you get and how many gross emissions reductions you get, then the current prices of $60 might not be an issue to you, and in fact you might see that as a positive because the cost to households is less than it might have been.

"From a personal standpoint, if you want an effective transition over the long term, you need to start driving action on gross emissions and get system changes happening," she says.

Brunel says you don't necessarily want the price rising fast, because it creates inflation. But a steady pushing upwards signals to companies that it's time to change, with minimal impact on inflation, he says.

Currently, the persistently low prices are even affecting the government's climate plans.

A major plank of the government's climate plans was allowing carbon capture and storage.

Its calculations that it was on track for its climate targets partly rested on the assumption Taranaki's Todd Energy would commission a major carbon capture and storage project to put emissions underground at its Kapuni gas field, in around 2027.

Todd Energy now says carbon prices are too low to make the scheme economic, unless it gets a subsidy.

The government says it is re-calculating its emissions estimates based on recent developments, and will tweak its plans as needed.

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