NZUs are issued through auctions, free allocations issued by the government to some carbon-intensive export-exposed businesses, and those earned through planting trees and absorbing carbon.

Those involved in carbon markets were a bit surprised by the consultation and the short time frame, which was later extended. While most said some of the regulations proposed were reasonable, such as treating NZUs as financial instruments, other proposals were bemusing.

Primarily the concerns were about a vague proposal for the government to set up its own secondary trading market and clearing house for transactions.

Two of the main trading platforms are privately owned, while a subsidiary of the state-owned Transpower runs the third.

On Tuesday evening, MfE released the cabinet’s latest decision on market governance.

Ministers have approved two proposals to improve market governance, likely come into force in 2025:

• Enabling the Financial Markets Authority (FMA) through “Fair Dealing” provisions in the Financial Markets Conduct Act to regulate advice, trading and misconduct in the marketplace for NZUs.

• Allowing the Environmental Protection Authority (EPA) to collect information about participant trades. This includes the price, the transactor’s primary reason for holding an account, and whether trades happen between non-related accounts.

The government has also directed officials to begin a Request for Proposal process for a “centrally cleared, optional-to-use exchange and associated market infrastructure for the secondary market”.

MfE said there were no decisions on the government setting up a market with a report on the expected issue in March 2024.

“A further report back on a comprehensive market governance package is expected in June 2024. This comprehensive package report back will consider regulatory solutions for a range of market governance risks,” the ministry said.

They include but are not limited to: potential lack of transparency in the NZU market,  insider trading and manipulation of NZU prices.

Traders have said no evidence has been presented to show there has been any market misconduct. However, NZUs are now a valuable commodity, with emitters requiring around 40 million a year to settle their emissions obligations.

NZUs were trading at around $65 this week, down from last year’s peak of $88.50 but notably up from this year’s low of below $35.

The prices started plunging after a series of government decisions, the first of which was the cabinet’s decision not to implement the Climate Change Commission’s advice on emissions trading scheme (ETS) settings.

That decision was made but not announced publicly for some time and only after a carbon auction when NZU prices were at record highs.

That decision has since been reversed. But other uncertainties remain. In particular, what the election might deliver and possible changes to how forestry units are treated.

The cabinet paper released with the decision said an initial step of bringing in FMA oversight and greater data collection would improve the market.

There would also be an “education campaign” for ETS users on the reforms.

“Improving access to market-wide post-trade information is useful for transparency, monitoring, and oversight of the NZU market as it provides more visibility into transactions, prices, volumes, and market user activity.”

Making NZUs financial products for the purpose of the fair dealing provisions of Part 2 of the Financial Markets Conduct Act would allow the FMA to “use its extensive regulatory toolkit in response to misconduct relating to NZUs”.

The fair dealing proposal prohibits conduct that is misleading or deceptive, the making of false or misleading representations, and the making of unsubstantiated representations.

Legislative changes will be needed to enable agencies to share information to meet their regulatory responsibilities.

“While I consider the fair dealing provisions to be the appropriate regulatory response for now, further regulation may be warranted as the NZU market develops,” Climate Change Minister James Shaw said in the cabinet paper.

There had been complaints about “bad advice on … forestry obligations, entering in financial contracts, and NZU advice on the returns of their investments”.

The government has already partially acted in this area with other law changes.

The EPA’s collection and publishing of trading data is needed as “the government must rely on third-party sources to obtain the secondary market price of NZUs”.

The trading platforms do not always make market information publicly available.

Much of the information about the government’s thoughts on setting up its own trading platform was redacted, including how much it may cost.