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Carbon price volatility in the New Zealand Emission Trading Scheme

Author

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  • Yang, Yudou
  • Wen, Le
  • Sharp, Basil
  • Maani, Sholeh

Abstract

The design of an emission trading scheme (ETS) critically influences its efficacy in reducing carbon emissions. This study enhances the international discourse by analyzing carbon price volatility in the New Zealand Emission Trading Scheme (NZ ETS), a system distinct for its greenhouse gas emissions targets, direct trade of forestry entitlements by forestry participants in the secondary market, and the allowance for unlimited surrender of these entitlements to meet emission obligations. Utilizing daily time series data from 1 July 2010 to 31 December 2022, we apply ARIMA (p, d, q)-EGARCH (m, n)-X models to evaluate the effects of supply-side, demand-side, and regulatory factors on carbon price volatility in the NZ ETS. The findings reveal: (1) Entitlements exert significant long-term effects on volatility, initially positive due to increased supply followed by negative impacts, consistent with mean reversion theory; (2) Demand-side factors influence carbon price volatility only in the short term due to the stable demand for allowances; (3) Successful auctions and policy announcements related to the supply and demand of tradeable units significantly affect volatility; and (4) Regulatory adjustments to entitlement supply notably alter price dynamics in the NZ ETS. These insights assist policymakers in managing ETSs with substantial potential supplies of carbon credits, helping mitigate volatility risks. The evidence-based conclusions also serve as a valuable reference for Southeast Asian countries and those with abundant forest resources establishing or operating ETSs to meet their climate goals.

Suggested Citation

  • Yang, Yudou & Wen, Le & Sharp, Basil & Maani, Sholeh, 2026. "Carbon price volatility in the New Zealand Emission Trading Scheme," Energy Economics, Elsevier, vol. 153(C).
    • Handle: RePEc:eee:eneeco:v:153:y:2026:i:c:s0140988325009375
    DOI: 10.1016/j.eneco.2025.109107
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    JEL classification:

    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • D47 - Microeconomics - - Market Structure, Pricing, and Design - - - Market Design
    • Q23 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Forestry
    • Q52 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Pollution Control Adoption and Costs; Distributional Effects; Employment Effects
    • Q56 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environment and Development; Environment and Trade; Sustainability; Environmental Accounts and Accounting; Environmental Equity; Population Growth
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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