New Zealand’s Parliamentary Commissioner for the Environment, Simon Upton, released a report on August 26 concluding that the country’s Emissions Trading Scheme, the cornerstone of its climate policy, will not achieve New Zealand’s climate goals without major reform. The report, titled “Adrift: What future does the Emissions Trading Scheme have?”, argues the NZ ETS has reached a critical turning point and calls for a comprehensive review, with the role of forestry inside the scheme singled out as the central design problem. For carbon market participants, this is a watchdog with statutory independence saying that one of the world’s oldest emissions trading systems needs to be rebuilt, not tuned.
What the Report Actually Says
The core finding is blunt: in its current design, the NZ ETS will not deliver the emissions reductions New Zealand has committed to. The report traces the evolution of the scheme, identifies significant risks emerging from its current structure, and lays out the choices facing decision-makers if the ETS is to contribute more effectively to emissions reduction goals.
Upton’s prescription has two layers. The first is a comprehensive review of the NZ ETS, explicitly framed to foster cross-party and public discussion about the future direction of climate policy and the outcomes the country expects the scheme to deliver. The second is a set of immediate changes aimed at, in his words, “freezing” the situation: stopgap measures to buy breathing space while workable solutions are developed, agreed and implemented.
The forestry question sits at the center of both layers. “Forestry still has an important role to play in New Zealand’s climate policy,” the Commissioner said. “The question is not whether forestry has a role, it is whether that role should continue to be delivered through the NZ ETS.” The report recommends reconsidering the role of forestry within the scheme and exploring opportunities for encouraging forestry outside the ETS entirely.
Why Forestry Is the Fault Line
The NZ ETS is unusual among the world’s carbon markets. It is an all-gases, partial-coverage and uncapped domestic scheme, and it is the only major ETS that lets forest carbon sequestration generate tradable units, NZUs, that emitters can surrender against fossil emissions without limit. Owners of post-1989 forest land can register, earn units as trees grow, and sell them to compliance buyers, while pre-1990 forest owners face deforestation liabilities.
That design has made tree planting the path of least resistance for compliance. The economics have been strong enough to drive large-scale conversion of farmland into exotic plantations, a trend the government itself moved to curb in September 2025 with restrictions on converting productive agricultural land into forestry driven by ETS incentives. The worry, which the Commissioner’s office has been building toward for over a year, is structural: a scheme that lets fossil emitters offset indefinitely against biological sequestration locks in continued fossil emissions while pushing land use toward monoculture plantations.
This is not a new theme for Upton. His April 2025 report “Alt-F Reset”, which examined the drivers of forestry in New Zealand, already recommended reforming the NZ ETS by phasing out forestry offsets for fossil emissions and creating a separate trading scheme for biogenic methane, followed by fifteen recommendations on forestry regulation. “Adrift” escalates that argument from the forestry portfolio to the future of the ETS itself.
What It Means for Buyers, Developers, and Investors
For compliance buyers and NZU traders, the immediate message is regulatory uncertainty layered on top of an already politicized market. The report does not change any rules today, but a statutory officer calling for a comprehensive review, and for interim “freeze” measures, raises the probability of near-term intervention in unit supply, auction settings or forestry eligibility. Long-dated positions in NZUs now carry a non-trivial redesign risk.
For forest carbon developers, the stakes are more direct. If forestry’s role moves partly outside the ETS, as the report suggests exploring, the revenue model for new plantations would shift from selling units into a liquid compliance market to whatever replacement incentive structure emerges, which could be narrower, budget-dependent or both. The report itself acknowledges that any change will have implications for farmers, foresters, Maori landowners, businesses and rural communities, and that changes will need to be carefully considered.
For investors watching from outside New Zealand, the significance is precedent. The NZ ETS has been running since 2008 and is routinely cited as proof that an ETS can absorb forestry. A formal finding by the country’s own environmental watchdog that the integration has failed, and that fossil and biological carbon may need separate instruments, would feed directly into debates over offset limits in other compliance markets.
What to Watch
Three checkpoints follow from the release. First, the government’s response: whether it accepts the call for a comprehensive review or defers, and whether any of the recommended “freeze” measures appear in near-term ETS settings decisions. Second, the shape of cross-party reaction, since the report is explicitly designed to force a durable political settlement rather than a single government’s fix. Third, the interplay with the land conversion restrictions introduced in September 2025, which were a partial admission of the same problem: whether those curbs hold, tighten, or get absorbed into a broader redesign of forestry’s place in the scheme.
