Carbon pricing and system linking: Lessons from the New Zealand Emissions Trading Scheme

Allowance prices and importation in the early phase of the New Zealand Emissions Trading Scheme (NZ ETS): The graph shows Net Imports and international (CER) and national (NZU) carbon prices. Initially, NZ ETS allowed unlimited importation of Kyoto allowances. We expected, and found, a structural break to occur when CERs become cheaper than domestic NZUs in 2011, making it more economically rational to import and surrender CERs and “bank” NZUs for later use. As a consequence, NZUs become “price takers” and importation increases over the relevant period. A second break occurs in 2013 when a large proportion of CERs are banned for NZ ETS surrender purposes, decoupling the CER and NZU prices. However, importation continues, and indeed accelerates, in anticipation of New Zealand's pre-announced withdrawal from Kyoto Commitment Period 2 - the final date when Commitment Period 1 allowances could be submitted was in 2015.95