History of Carbon Farming in New Zealand
New Zealand was a pioneer in carbon markets. When the NZ ETS launched in 2008, it was the first emissions trading scheme in the world designed to cover all sectors of the economy. Understanding this history helps explain why the system works the way it does today.
The Kyoto Protocol Era (1997-2012)
New Zealand ratified the Kyoto Protocol in 2002, committing to reduce greenhouse gas emissions to 1990 levels during the first commitment period (2008-2012). This created the framework for carbon accounting and introduced concepts like carbon sinks and removal activities.
Crucially, Kyoto distinguished between forests that existed before 1990 and those planted after. This distinction—pre-1990 versus post-1989—remains fundamental to how forestry operates in the ETS today.
The Birth of the NZ ETS (2008)
The Climate Change Response (Emissions Trading) Amendment Act 2008 established the NZ ETS. Forestry was the first sector to enter the scheme, from 1 January 2008, reflecting New Zealand’s significant forest estate and its potential as a carbon sink.
Key features from launch:
- Voluntary for post-1989 forests — Landowners could opt in to earn credits
- Mandatory for pre-1990 deforestation — Removing pre-1990 forest triggered liabilities
- Free allocation — Pre-1990 forest owners received free units to offset potential liabilities
- International linkage — NZUs could be exchanged with Kyoto units from overseas
The Price Collapse (2011-2015)
From 2011, international carbon prices collapsed. European and Kyoto unit prices plummeted from over $20 to under $1 as markets flooded with credits of questionable quality.
Because the NZ ETS was linked to international markets, domestic prices followed suit. NZUs traded below $2 for extended periods. Forest planting stalled. Many questioned whether the ETS would survive.
This period taught hard lessons about market design and the risks of unlimited international linkage.
Reform and Recovery (2015-2020)
In 2015, New Zealand severed links with international Kyoto markets. From then on, only NZUs were valid for compliance. The market became domestic-only.
Prices slowly recovered but remained volatile and uncertain. The government grappled with how to strengthen the scheme while maintaining flexibility.
The Permanent Forest Sink Initiative (PFSI), launched in 2006, continued to operate alongside the main ETS scheme. It allowed permanent forests (no clear-felling for at least 50 years) to earn credits under a covenant structure. Many landowners chose this simpler pathway for native regeneration.
The Zero Carbon Act (2019)
The Climate Change Response (Zero Carbon) Amendment Act 2019 transformed New Zealand’s climate policy. It established:
- A target of net-zero emissions by 2050 (excluding biogenic methane)
- Five-yearly emissions budgets
- An independent Climate Change Commission to advise on policy
The Act signalled long-term commitment to emissions reduction, providing greater certainty for forest investors and carbon market participants.
Modern ETS Reforms (2020-2023)
The government implemented significant reforms to strengthen the ETS:
2020: Auctioning begins NZU auctions commenced, allowing the government to manage supply and generate revenue. A price floor was introduced through an auction reserve price.
2021-2022: Price surge NZU prices rose dramatically, from around $35 in early 2021 to over $80 by late 2022. Carbon farming became highly profitable, driving rapid conversion of farmland to forestry.
2023: New accounting options From 1 January 2023, two new frameworks replaced the old system:
- Averaging accounting — For production forests that will be harvested and replanted
- Permanent forest category — For forests committed to remain standing for at least 50 years
These changes simplified harvest liabilities for timber producers while creating a clear pathway for permanent carbon sinks.
Land Use Tensions (2023-2025)
The surge in carbon forestry created tensions. Rural communities raised concerns about:
- Productive farmland being converted to pine plantations
- Impacts on rural economies and communities
- Exotic monocultures replacing pastoral landscapes
- Absentee overseas owners purchasing land for carbon
In response, the government introduced Land Use Capability (LUC) restrictions in 2023, limiting exotic forestry registration on higher-quality farmland (LUC classes 1-6). Native forestry remained unrestricted.
Where We Are Today
The NZ ETS remains the primary mechanism for pricing carbon in New Zealand. As of 2025:
- The market cap is set at 19.1 million units (down from 27.9 million in 2024)
- The auction reserve price is $68 per NZU
- Spot prices trade between $60-65 per NZU
- Around 500,000 hectares of post-1989 forest are registered
- Native forestry comprises about 11% of registered forest
Agricultural emissions remain outside the ETS, with a separate pricing mechanism planned for implementation by 2030.
Lessons from History
New Zealand’s carbon farming journey offers several lessons:
- Policy certainty matters — Extended periods of uncertainty (2009-2015) suppressed investment
- Price signals drive behaviour — When prices rose, planting surged
- Markets need boundaries — Unlimited international linkage undermined domestic prices
- Community matters — Rapid land-use change without social license creates backlash
- Long-term thinking required — Forests take decades to grow; policy needs similar horizons
Understanding this history helps landowners navigate today’s scheme and anticipate tomorrow’s changes.
Timeline Summary
| Year | Event |
|---|---|
| 1997 | Kyoto Protocol agreed |
| 2002 | NZ ratifies Kyoto |
| 2006 | PFSI launched |
| 2008 | NZ ETS begins, forestry first sector |
| 2011-15 | International carbon price collapse |
| 2015 | NZ ETS delinks from international markets |
| 2019 | Zero Carbon Act passed |
| 2020 | NZU auctions begin |
| 2022 | NZU prices peak above $80 |
| 2023 | Averaging accounting and Permanent Category introduced |
| 2023 | LUC class restrictions on exotic forestry |
| 2025 | Current settings established |