The spot price for carbon units has fallen to its lowest level in almost two years as uncertainty over the future role of forestry in the Emissions Trading Scheme (ETS) has scared investors off the market.
New Zealand ETS units traded at $53.25 on the secondary market this week, down 40% from a peak of $88.50 and at the lowest price since September 2021.
While prices have not fallen below $53.25 on the secondary market, an auction monitoring report by the Ministry for the Environment used a hypothetical clearing price of just $43 when presenting data from the failed March auction.
The Ministry said this was the bid at which units would have sold if the confidential reserve price had been met. That would’ve been the lowest price for units since the second-ever auction in June 2021.
One commodity trader told Interest.co.nz that the uncertainty of future ETS settings was depressing the unit price and discouraging investment.
The Ministry for the Environment has been tasked with a review of the scheme to determine what balance of gross and net emissions should be incentivized.
Currently, the ETS has been functioning primarily as an offset scheme with large amounts of pine forests being planted for sequestration, but little being done by businesses to lower their gross emissions.
The forest for the trees
The Climate Change Commission is concerned that NZ has become overly reliant on forestry to achieve its carbon emissions targets and the ETS will cause extensive afforestation.
Establishing and growing a forest can remove carbon from the atmosphere at a cost of between $25 and $50 per tonne. Removing remissions at their source can often cost upwards of $100 per tonne.
There are four million hectares of land that could be profitably converted into forestry at $50 per tonne, according to the Ministry for the Environment.
This could act as a cap on the carbon price and reduce the incentive for actual gross emissions reductions.
And so the Commission has suggested creating new rules to either limit the amount of forestry in the scheme, impose a minimum price, or even set up a separate forestry scheme.
This advice was what the Environment Ministry was exploring in its review, which was supposed to be reported back to Cabinet in the first quarter of this year.
All the suggestions are aimed at lifting the carbon price and incentivising emitters to make gross reductions, rather than relying on cheap offsets.
However, the uncertainty hanging over the ETS has deterred participants from bidding for units and put extra pressure on already falling prices.
Markets hate uncertainty
Susan Kilsby, an economist at ANZ who watches the carbon market, said it was too difficult for investors to predict what impact the review would have on prices.
“On the face of it, if ETS changes occur that restrict the use of forestry — and therefore reduces supply of units — you would expect to see carbon prices lift,” she said in an email.
“However if the rule changes focus more on reducing gross emissions (rather than offsetting emissions) then the demand for units would potentially fall, putting downward pressure on prices”.
Unit prices peaked in November 2022, despite asset price declines in other markets, but took a tumble that December after the Government rejected Climate Change Commission advice to tighten the number of units made available in future auctions.
Prime Minister Chris Hipkins' so-called ‘policy bonfire’ in March further undermined market confidence in the government’s commitment to cutting emissions, and resulted in the first failed auction.
Unit prices have fallen more than 30% this year and are down almost 40% from their peak.
Earlier this week, Finance Minister Grant Robertson said the Government was still committed to making the emissions trading scheme work.
There had been a number of reasons for the fall in unit prices and it wasn’t solely due to government decisions.
When asked by reporters, Robertson wouldn’t say whether Cabinet would implement the Climate Change Commission’s latest recommendations for ETS settings.
“The challenge here is making sure we make the transition we need to make in a way that is fair and just, that requires a balance of timing, investment, and bringing people with us,” he said.
32 Comments
Investors shouldn't be allowed to buy them . They have created this problem by buying up units , and of course , panicking and dumping them on the market.
Plus large emitters have ebeen given so many free units , they don't need to buy any.
The government could set a minimum price by buying back low priced units , and only selling when the value hits a reasonable level .
If you are going to have a market system , then you can't have caps, give away free units , and otherwise interfere.
Our entire approach to climate change is irreparable.
We need to back out of this UNFCCC nonsense and implement climate pragmatism;
- accelerate energy innovation,
- build resilience to extreme weather, and
- pursue no regrets pollution reduction measures
That said, I fear many of our current FTAs require us to follow the UNFCCC approach. A costly waste of time and bureaucratic effort.
Who's we? NZs 0.002% or China, Indias and USAs 34%.
Idealism in NZ will never beat realism in Asia... nice ideas but these fecken peace activists need to horang china and the big polluters and leave the small fry alone before they bankrupt us for no net emmisions Gain
Climates have been heating and cooling for millions of years, CO2 is just a small inconsequential factor. Carbon credits are just another way of financializing our productive enterprises. What a scam! Water will be next, then maybe Oxygen. Hey let's put a meter on each breath we breathe!
Interesting point. There’s a hidden duplicity to a lot of this. The ETS seems to really be a geographic import tariff and a tax on productive enterprise. The US green new deal seems to be a public pork barrel for approved corporations to raid. Stakeholder capitalism seems to be socialism in disguise through the transformation of private business into uncompetitive state-run monopolies. ESG seems to be a mechanism to starve non-approved companies of capital so that they wither, and die on the vine.
I have a forest, purposely planted for the good of the planet (not for monetary gain).
And I kept out because it's bollocks; there was an above-ground amount of carbon - and there was an underground (lithospheric) store. You can't sequester the latter above-ground - it's very simple to understand.
But belittling those who tried, misses the point; the system which is doing the burning, has to - and will anyway - stop.
Key and Co were silly enough to think you could create a market for everything, and saw this as another opportunity. They were wrong.
I have plenty of trees I've planted over the years.
If we genuinely need more done at scale, it takes money.
Maybe the government should do it, but I've seen how the government does stuff. They'll spend $1 to save 20 cents.
Maybe it's whatever you're saying. I think all our predictions will be wrong.
I endorse economic design that is lead by ecology. I struggle to see how any other models would work in perpetuity.
The rub is that our ecology is used to the climate of the 20th century and prior, but we're on track for 1.5C+ and are still working on ways of slowing and reversing climate change.
The Goldilocks zones for different ecosystems are moving geographically, further south in our case. But the plant, reefs, kelp and microbes in our ecosystems can't easily uproot and leave, so if we don't act decisively we'll see stressed and collapsing ecosystems.
They're already seeing this in forests in the USA, where the old trees still live, but the understorey struggles to establish because the conditions are too hot, arid and harsh. This can have direct flow on precipitation, flooding and temperature effects to zones downhill and to the east of these places.
Try solving that problem with an economics degree and no eye for ecology 🫣
Well the trees on Ulva island, Stewart island, 160 years plus, and Wellington cemetery, 160 years, plus the very healthy and amazing 100 year plus stand at Kaiangaroa didn’t read that book. There are many 100 year plus stands dotted around NZ and well recorded in forest records.
As most timber is turned into something else - Furniture/House framing the carbon sequestered remains sequested until that timber is burnt or otherwise releases it co2 back into atmosphere so the benefit of trees in the ETS is giving time to resolve the issue at source, I see little evidence this is recognized let alone addressed,
You can do forwards etc but need big volume and good counterparty collateral, which is serious numbers. The ETS is a very large financial beast that 99% of people don’t see or understand but is embedded in the economy with large, many billions, contracted by large companies and large financial institutions, the governments had the money so reputationally and financially can’t get out of without serious harm to NZ inc.
Anyone can go to the NZX auction site and see the volume and buy size. Won’t tell you who though. The bid buyers are big emitters and banks which then do forward cover with an interest rate attached. Secondary market unseen but the volumes are small compared to auctions.
A big reason for slump is the government has sold huge amounts of credits in last 2 years and market is oversupplied - it will work if the government lets it but no one wants to pay more for petrol, diesel and gas!!
Wake up everyone it’s not some mythical thing that has to change it’s all of you and if you don’t the cost will keep rising. Read the CCC reports beyond the headline. You ain’t seen nothing yet with the market being shorted significantly in a few years - unless we all radically change - Can anyone use a pocket calculator anymore! By 2035 there are no more credits to be auctioned so …… and it starts dropping fast in a year or so.
Dan - get some graphs from forward projections by CCC and show the punters. The proverbial will be hitting the fan very soon.
Wrong Te Kooti my forest has several aims - production of timber for future use, productive use of land unsuitable for most other uses, an asset for my grandchildren Carbon credits are incidental as under current regulation credits sold need repaying when trees harvested so credits sold may result in a cash loss if credits increase in value.
Always worth a watch. Juice media.
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