Abstract
New Zealand’s Ministry for the Environment (MfE) explicitly recognizes that the New Zealand Units (NZUs) price is set by a flexible unlimited supply of units, as well as demand for units. This thesis explores NZU pricing dynamics driven by the interaction between allowances supply and demand. The empirical results highlight that, firstly, there are two policy associated structural breakpoints in NZU returns over the period of July 1st, 2010- December 31st, 2019. Specifically, in 2013 following a large ban on international units with low environmental integrity and in 2016 following the announcement of a gradual phasing-out one for two ‘transitional’ measure. Secondly, increased carbon activities from the manufacturing and transportation sectors tend to increase NZU prices, while activities from the stationary energy sector put downward pressure on NZU prices. This may be explained by the large stockpile (bank) of unit held by stationary energy sector. Lastly and as expected, the results show that banking and net import negatively affect NZU returns, however, carbon removal entitlements surprisingly positively affect NZU returns.