Climate Change Minister Simon Watts. Photo: RNZ / Cole Eastham-Farrelly
The carbon price is expected to rise on news the government is slashing the number of tonnes of planet-heating emissions for sale by more than half.
Climate Change Minister Simon Watts said advice he has received suggests the impact on household bills should be "minimal", adding only 3-4c a litre to petrol by 2029.
"We need the carbon price to encourage businesses and individuals to reduce their emissions to meet our climate targets," he said.
The coalition is hoping that by selling fewer permits-to-pollute, it will flush out stockpiles of carbon credits companies are holding onto. Tuesday's announcement means it will offer radically fewer units or permits than previously announced from 2025-2029.
Each permit or unit gives the right to emit one tonne of carbon dioxide, and the government announces every year how many it intends to auction over the next five years.
Carbon prices have been in the doldrums following a series of confidence-shaking announcements by both Labour and National.
Five of the last six quarterly government auctions failed to sell any permits - a sign companies already had plenty of units to cover their emissions and/or did not foresee the price rising steeply enough to buy more government prices of at least $63 a tonne.
Watts said oversupply was jeopardising New Zealand's climate targets.
If demand to buy units is low, the price is low, and that means it is cheaper for a lot of companies to keep polluting than take action to cut emissions.
In February, the Climate Change Commission warned the government there were too many units floating around in company stockpiles and urged it to sell fewer from 2025-2029 to try to mop this surplus up.
In the announcement, the government has not only followed this advice but gone further, taking more permits out of the market than the commission recommended.
Watts said the decision to remove more units was because the latest data - which the commission did not have - showed the oversupply was worse than the commission's February's advice showed.
He said the government's call was still in line with the commission's advice and intentions.
The move will likely see carbon prices rise, which could flow into higher petrol, electricity and gas bills.
But Watts said advice he had received suggested the impact would be small.
"The impact on inflation, our estimate is it could increase CPI inflation by 0.03 of a percentage point by 2029 so that pretty insignificant," he said.
"Petrol you're potentially looking at 1 percent by 2029 or around 3-4 cents a litre."
Photo: RNZ / Dan Cook
The government was elected promising to use emissions pricing as its main tool for getting the country's greenhouse gases down.
It promised to restore confidence in the carbon market or Emissions Trading Scheme after Labour made a series of announcements that shook confidence and tanked appetite to buy the credits.
But the price slumped again earlier this year when the current government released a consultation document unexpectedly floated the idea of lowering the minimum carbon price.
That suggestion has now been dropped, and the price floor will not change.
Watts said as a new minister, he had wanted to ask a wide range of questions during consultation "so I was able to get a good sense of market participants [views] on a wide range of areas".
"I've taken on board all of that feedback when I made the announcement today ... actions speak louder than words and this action today supports the words that we want to see a credible market.
"Stability of the market is a priority so we made a decision... [that the price] settings are working and should not be adjusted," Watts said.
Watts said today's move will restore confidence in the carbon market or Emissions Trading Scheme and get the market back on track.
The carbon price covers major polluters such as petrol retailers and coal- and gas-burning electricity companies as well as companies burning coal or gas for manufacturing.
The announcement means the government will auction just six million tonnes of emissions next year, with the ability to sell more if the price hits $193 (around four times the current price).
The government will also give away a further six million tonnes next year to major exporters such as Methanex, Fletcher Building, Tiwai Point aluminium smelter and NZ Steel, each of which receives tens of millions of dollars worth of carbon permits free in a bid to shield them from losing business to overseas competitors who may not pay a carbon price.
As a result of today's changes, the government will likely give away more permits than it sells at auctions every year from 2026.
Watts said there were no plans to make any major changes to these freebies, although the government is continuing with updating the allocations so companies do not get more free credits than they should do, based on outdated emissions estimates.