Climate Change Minister James Shaw says there are no plans to intervene in the Emissions Trading Scheme (ETS) after a second auction was declined due to insufficient bids.
No units were sold in the quarterly auction held on Wednesday as the clearing price did not meet the minimum price settings.
There are two different reserve prices in the auction, a legislated minimum of $30 and confidential reserve price which is set in relation to the secondary market price.
New Zealand Units were trading at about $57 prior to the auction, but climbed above $60 during Wednesday afternoon.
The jump in price likely reflects an increased risk that an entire years’ supply of carbon credits could be canceled if the two remaining auctions are also declined.
When an auction is declined, the available units roll over into the next auction but only until the end of the year. After that they are canceled altogether.
Christina Hood, the head of Climate Compass, said each subsequent auction became more difficult to clear as the volume builds up.
For example, the September auction will require participants to bid for triple the usual volume to achieve a clearing price.
This raised the question of whether the government should adjust the settings for the final two auctions, to prevent the units from being canceled.
“Given the massive unit surplus, I’d say allowing all 2023 auctions to fail could well be in the public interest,” she said, in a tweet.
In an email to Interest.co.nz, James Shaw said he did not intend to make any changes as the market was working as it should.
“Like any auction, when the market doesn’t turn up to buy at a price that the vendor is willing to sell at, the minimum price is in place to protect what’s being auctioned from going for significantly less than their open market value”.
ETS settings are locked-in two years in advance but can be adjusted in certain circumstances.
If all four of the auctions fail to find a clearing price, none of the carbon credits on offer will be carried over into 2024.
“That means the supply of units will go down and, in theory, would increase the price of NZUs in the future. But there is still some water to go under the bridge before this happens,” Shaw said.
Stockpiles for miles
The supply of carbon credits has been significantly greater than required by emitters, which has resulted in large stockpiles of NZUs which can be surrendered to meet future obligations.
In this sense, losing a year's worth of units would not cause much, if any, disruption to businesses that have to emit carbon to operate.
Motu estimated there were almost 140 million units stockpiled in 2021, compared to an annual surrender volume of about 40 million units.
The cost containment reserve, which releases yet more units into the market when prices get too high, has been triggered three times since September 2021 — adding to the oversupply.
Susan Kilsby, an agricultural economist at ANZ who monitors the ETS, said there were plenty of units in circulation and emitters only had to surrender them once a year.
Despite the oversupply, the carbon price had been tracking higher on the expectation that future settings would be much more restrictive.
That was undermined by a Government decision last December, which ignored the Climate Change Commissions advice and kept settings fairly loose.
In addition, the Ministry for the Environment has been asked to assess what changes could be made to the ETS to incentivise emitters to reduce emissions, rather than just offset them.
Currently, pine forest offsets are one of the cheapest ways to reduce net emissions but the Climate Change Commission worries those forests are themselves prone to climate risks.
The Environment Ministry is expected to begin public consultation on its review within the next couple of weeks. Until then, participants have little confidence in trading the market.
“Once it is clearer how the ETS will operate going forward then we should see some price convergence between the secondary market and this market,” ANZ’s Kilsby said.
“But while there is a lack of clarity as to how the ETS will operate, it is very hard to put a value on these units”.
IMF’s carbon concern
Also on Wednesday, a representative of the International Monetary Fund noted the falling carbon price as part of an economic monitoring report.
In a statement, IMF staff said New Zealand was making progress in closing the gap between its expected emissions and its actual targets.
“However, the sharp decline in the emissions price is a concern as it could weaken the signal to the private sector to reduce emissions and lower the cash proceeds to the Climate Emergency Response Fund”.
Had the ETS auction on Wednesday cleared at the market price, it would have earned the government approximately half a billion dollars to spend on climate priorities.
In the nine months to March, the lower carbon price cost the government about $800 million in lost revenue and contributed to a significantly wider than forecast deficit.
Evan Papageorgiou, the IMF’s mission chief, said he had noted the declined auction on Wednesday and also pointed to the upcoming review as the likely cause.
“We would like to see a reduction in policy uncertainty, that could go a long way to addressing some concerns of market participants,” he told reporters.
73 Comments
There is demand - by legislation. This is market timing.
My farming mate sold his at the top price ($83 if i recall). About $800k. Go run the numbers on todays price and see why he's a happy farmer! Some people get on with it, some don't get it. Which one are you?
There is always risk but there is also good money to be made. Farmers going into forestry need a consultant who understands the ETS and is working for them. Farmers need to be wary of consultants who take a share of the profits. A forestry consultant should fit in to the same professional category as accountants and lawyers, i.e. charge for service.
KeithW
Yes the are plenty of farmers onto it who have planted up their areas of marginal land. Some seem to be savvy enough to realise they have been given another opportunity to diversify away from just meat and wool. Some are just down the rabbit hole.
My ageing mate sold off his $800k worth so he could enjoy life without cashing up the farm - and reckons those who inherit will be getting enough for free so can sort out their own necessary credits one day.
That is fair enough for an experienced farmer.
But it is dangerous for an inexperienced forester.
My guess is that you employ both an accountant and a lawyer.
if you are a farmer going into forestry, then you need someone who understands the intricacies of the ETS as they apply to your property. It might only be one to two days of service time but it is important.
KeithW
So: central government has created a market solution to carbon pricing, and is the supply presence in the market, but isn't prepared to participate in meeting the market to get credits moving.
It suggests a market that's being made dysfunctional by the monopoly player who is aware of what they are doing, but looks to be unwilling to acknowledge supply-and-demnd-101 in what they created.
But why? Doctrine? A desire to avoid any kind of accountability that would be entailed in having to actually make a decision in an election year? Something else?
Some clarity would be nice.
Not sure how the whole ETS system works. If these credits are conjured up out of thin air can they not be conjured away entirely?
Would this be similar to a company going bust, shares have zero value and those who bought at some point prior when there was some value, take a big haircut and become bald?
The story doesn't quite tell the full tale. The govts supply of CO2 credits isn't invented at the stroke of a pen, it's from actual real sequestration from state owned forest lands.
Additionally, if the whole lot fails to sell these credits don't get disolved, they stay in the govts existing stash of credits, still available to be sold at a later date, and probably at a higher reserve price, so in a way it's a win for the govt. Emitters still have to dig into their stash of pre-purchased credits to square up their emissions budget for the year.
No they're not. The Government creates and issues NZUs for those forest offsets undertaken by non-Government entities that are registered in the ETS and which meet ETS criteria. This costs the Government nothing. These units are then sold in the secondary market to emitters who need carbon units for surrender to the Government.
Until recently there were not enough units being sold in the secondary market to meet the needs of emitters so the Government offers additional units for purchase at quarterly auctions. But in the last two auctions the emitters have been unwilling to clear the auction at acceptable prices to the Government. The auction works on an 'all or nothing' principle. If the bids are insufficient to clear all of the units at the auction, then no units are sold. And so this is what happened yesterday (14 June) with no units being sold. How it will play out from here is exercising the minds of everyone involved in either emitting or sequestering carbon.
KeithW
We store about 10 tonnes of carbon per km2 per year, in shells on our 6 million km2 continental shelf, and this is never counted. If it was we would already be net zero as a country already. But that would be politically inconvenient and James wouldn't able to rack up any more air miles or subsidise his rich mates second car EV handouts.
Profile,
Being in the exclusive economic zone does not give us rights to claim sequestered carbon, because it has nothing to do with any active management on our behalf. On a global basis, the carbon dioxide sequestered in the ocean each year is equal to one third of the carbon dioxide currently emitted each year.
Keith W
True. But if we could successfully mass plant sea grasses (instead of pine trees, for example) do you think the current FCCC framework would allow for us to account for these in sequestration terms?
I might be overly optimistic about this potential, but given the money we are spending on (what is effectively) re-engineering ruminants, I do wonder whether a more obvious lifeboat - one that also restores a pre-existing natural ecosystem is the one NZ should board?
Kate,
The problem is that the benefit of sea grasses that I am aware of is as a feed to reduce methane production in ruminants, rather than a heap of new carbon sequestration. So it would become an accepted technology to reduce methane liabilities, and farmers would purchase the sea grass, or perhaps the specific bio-actives within sea grass. Just like Bovaer, there are likely to be challenges making it work in a pastoral environment, and there is more work to be done.
To the extent that sea grass was sequestering new carbon as a direct result of human activity, then the carbon benefits should be capable of being claimed under Paris and UNFCCC rules.
KeithW
Yes, thanks Keith. I hope that application of seagrass proves useful as well.
But, I'm thinking about this application from the UNEP - it is dated 2019, so I wondered whether more has been done since?
https://www.unep.org/news-and-stories/story/seagrass-secret-weapon-figh…
So we all suffer because we have a crap/biased team of negotiators. Our continental shelf sequestration doesn't follow virtue signalling voluntary agreement so we all suffer. Ignore a vast stream of carbon sequestration while taking $15/tank off a minimum wage factory worker fills to get to work. You just highlight what self serving mongrels the climate change parasites are.
Hamish, there are approximately 150 million NZUs in existence owned by non-Government entities, and carbon dioxide emissions are about 40 million units per annum. This excludes methane and nitrous oxide emissions which are close to another 40 million tonnes of CO2 equivalents per annum, using the official conversion ratios, with most of these coming from agriculture.
KeithW
Sorry, poorly worded question.
I just looked and all I can find online for NZ emissions (gross/net) are only up to 2020, from Stats NZ. Same looking data on genless.govt.nz
Is there any other source that is more up to date? So far there just seems to be a lot of noise around ETS and carbon pricing here. As a country are we actually on track to meet the objective of the exercise?
This is a very good article by Dan that captures the key components of a very complex system. Currently there is huge uncertainty as to what will happen in the next two auctions but further failures now seem very likely. James Shaw would probably be very pleased if this occurred as it would likely lead to an increase in the price of NZUs, soon thereafter, with these being sourced from the secondary market.
KeithW
"James Shaw says the ETS market is working as intended "
I thought the idea was to get people/companies to change behaviour and use less fossil fuel. Whilst a few companies are taking advantages of state handouts to electrify their operations, I see no change in the publics behaviour regarding fossil fuel use. The price of NZUs needs to increase tenfold.
Finite,
I don't think that is a correct statement from James Shaw, but I do think that James Shaw as co-leader of the Greens will be enjoying the failure of the ETS auctions. The CCC will also see the failure of the auctions as having benefits. Grant Robertson may be somewhat displeased as the auctions are a source of money to the Government.
KeithW
What it has done is the one thing markets hate - it has created uncertainty.
No longer a one way bet. At least for now..
Rural and provincial NZ can breathe a temporary sigh of relief. Between OIA rules tightening up foreign investment and interest rates pushing up holding costs for locals, and now local councils having a say blanket planting of pine trees across farmland is going to slow to a trickle and hopefully give time to have constructive discussion on how trees fit in.
It has and planting will stop - all good - watch land values now - see what the bank thinks of that or as some of my farming friends have chillingly realized their retirement plans have gone up in smoke - it certainly wont be Wanaka now.
How then do we meet the targets that our overseas customers want to see? and we have committed to overseas? - actually address the problem? - for those of us who believe we have a problem.
EU just put in a CBAM on steel etc - looking at other bits as well.
Im certainly not promoting wholesale planting endlessly but we are a bit dillusional as we have few options and no one really wants to bite the bullet and reduce emissions.
IMHO we havn't got much time for cups of tea otherwise we wont be putting a carbon price on - our customers will be and we cant tell them what to do - you can put their face on a golf ball but it wont achieve anything.
If I hear anyone say plant only natives Ill scream - a pocket calculator tells us we havn't got a chance in Hades of getting the numbers with them plus where are the average of 50 to 80 farms every year that are going to be locked up and converted every year for the next 20 to 30 years?. NO ONE can answer that one.
Well I can actually - a Gabrielle every year or 2 and a lot of land will be walked off.
To Quote Minister Shaw:
“Like any auction, when the market doesn’t turn up to buy at a price that the vendor is willing to sell at, the minimum price is in place to protect what’s being auctioned from going for significantly less than their open market value”.
This is why we need to protect free speech, as without people feeling free to say what is in their heads we could only presume that they are stupid rather than them open their mouths and remove all doubt.
Jimmy, the 'open market value' is what a unit sells for, not what you think it is without having sold it. All you have confirmed by not being able to sell any is what they are not worth.
Its cost to produce can be known and generally, items are not produced if their market value is lower than the cost of production.
And since the carbon credits are an invented nontangible cost, then by not selling at what the market is willing to offer you are setting an arbitrary monopolistic value that has nothing to do with a true free market value.
I think people are waiting for the election so the next Govt. can throw the scheme out. They may be worth next to nothing now, and less than nothing after the election.
Dale, The open market price the Minister is referring to is the secondary market where units are being sold and bought most days in large quantities. The Government is not part of that market. Without understanding this secondary market, you have developed a flawed argument.
KeithW
1) His definition of how auctions work with regard to market value is incorrect, in any scenario.
2) Given that incorrect definition, how do we know what market he is referring to if he hasn't specified which one he is talking to?
3) Given none sold at auction, what is the price on the secondary market at present?
Dale
The latest sale today on the Jarden platform is at $60.00
On Wednesday there were about 300,000 units sold across all platforms - possibly a record. Yesterday (Thursday) there were minimal sales.
However, units can be bought and sold directly by buyers/sellers without going through a platform. This saves brokerage fees. And the big participants in the market place know each other and are talking directly. (There were only 17 participants at the Wednesday auction - that is publicly available although I have not seen it reported in the media.) There are no public data as to the extent of this direct buyer/seller activity although eventually one arm of Govt will have access to it via share transfer data.
KeithW
“Currently, pine forest offsets are one of the cheapest ways to reduce net emissions” actually the cheapest way to offset for emitters is by utilising the free allocation supplied by the government; currently over 90% of emissions are offset this way with seemingly little to no requirement to reduce gross emissions, thus requiring just the remaining 5-10% of emission’s to be offset using forest grown NZU’s supplied by the market.
Apologies “highly emissions intensive firms face NZ ETS costs of 10% of their emissions, and moderately emissions intensive firms face 40% of NZ ETS costs.” Seems I’m not the only one: https://www.rnz.co.nz/news/national/471420/data-confirms-suspicions-com…
Imagine a bank had accidentally deposited someone else's money into your account? Would they not reverse that incorrect deposit? Of course they would. If they've been proved to have been overpaid, the government should have either demanded the credits back, or if they have sold them on the secondary market, demanded they purchase an equivalent amount from new units issued by the government.
The administration of the ETS has been a comedy of errors from the get-go - not just this government, but its predecessors as well (i.e., the 'scam' offshore credit fiasco).
Moral of the story - governments cannot be entrusted to manage a market process.
The Government has not been overpaid and it does not buy or sell units on the secondary market. It issues credits (NZUs) directly at zero cost to those who have sequestered carbon within the rules of ETS. The owners of those credits can then sell those units on the secondary market, or hold them as an investment to be sold later. The buyers are either emitters who needed offsets or people who simply think they are investors.
KeithW
No, I'm saying that according to the article linked to - the Government overallocated (overpaid) credits to certain industry emitters. Now that that fact is known and quantified - why do those overpaid not have to pay these credits back? Or, if they have sold them all on the secondary market - shouldn't they have to purchase them by way of new credit issuances from the Government?
Or, did the Government never appropriately account for these 'free passes' in the market they created. If so, that's kind of like - we thought you were going to pass through the toll gate 100 times over the next year, and we wanted to subsidise you for your first 50 trips (50% of your costs). Now we find you only ever did 30 trips, so we shouldn't actually have subsidised you at all. The way a proper market would account for that would be to say, pay the toll for 50% of your 30 trips.
Maybe I read the article wrong, or am missing something?
Kate,
I like your analogies.
I think there have been some rorts in the way the protected units work.
But I am hopeful that those who rorted the system are and will get caught.
From memory, the penalties will be three times any rorting (plus payment of the rorted amount) and the law says that these penalties cannot be reduced. So it real hurts when someone is caught.
I see those issues as clearly being one of the ETS issues that I think is being addressed. I see those issues as sitting alongside but apart from the issues discussed in this article from Dan.
KeithW
Kate
They are dealing with big companies who fight tooth and nail to get benefit. They threaten to leave, politicians get scared and somewhere an agreement is reached.
If you look at the NZ steel deal the government says it’s cost the taxpayer $16 per tonne of emissions that will be reduced. Say it’s 50% by the taxpayer the total cost per tonne of emissions is @$32 (50% each).
So at a carbon price above $32 the emitter would be better to pay for the change and save paying say $60 per tonne.
The emitter says well we will just leave and it’s a game of chicken - the politician gets scared so gives them a subsidy. Would they leave? I don’t know but if there’s a dollar to be made they won’t or someone else will take it over. This is what National are saying.
I would pick if National win we will see a carbon dividend paid to lower income people so in effect they pay very little and higher income NZers pay the carbon cost - in effect a wealth redistribution system. The carbon price can go up, cause change but the rich p***** pay - a good political sell!!! At $200 plus coal will be gone within 5 to 8 years, domestic airfares should rise steeply and fuel costs more. A hit on inflation and our competitiveness reduced - the trade offs !! What do we want?
OR allow more offsets in and moderate the price curve - ie more forests, mainly exotic to get the numbers. Again choices but it’s real numbers and reality that counts as the atmosphere is totally agnostic to feelings and human desires.
footnmouth
There are approximately 80 firms that are protected. I would need to go back and check the precise number, but the protected units comprise a little less than 8 million units which is about 20% of the total carbon dioxide, and about 10% of total emissions if methane and nitrous oxide are included at the 100 year warming Co2 equivalent (CO2e) warming.
I agree that the level of protection needs to decline and this needs to be at an accelerated rate. But those arguments need to be developed using the correct numbers.
KeithW
And herein lie the problem - very few understand how this works, very few understand how markets work - the simple fact is in the last 2 years the government has sold excess offsets and the market bought them. Theres plenty of supply in now and it needs to be eaten up. If we stick to the game plan supply will shorten up and then everyone has a choice - pay more or find alternatives. No different to when you are at the supermarket and your favourite food doubles in price - do you pay more or substitute?
The issue is no one wants to change and it costs.
There was always going to be restrictions on forests but we do need some more exotic and cant do it all with native. At the end of the day forestry is actually a small part of the ETS and clouds the bigger picture of actually reducing emissions. Trees simply help smooth the change a bit but the longer we avoid actually doing real reductions the harder it will get.
Demanding less forest offsets is asking for the price of fossil fuel to be raised higher and faster - whats your pick?
Always appreciate your insight JL. It’s a polarising issue with the band hammering away whilst the boat sinks.
Susan Kilsby was commenting on ETS dysfunction on an RNZ article proffering advice that forestry should be seperated out of the ETS and natives used in preference to exotics due to lifespan and risk. Amazing that financial commentators that can’t even understand the market principles underpinning an ETS feel the need to expose their ignorance on the role of trees in sequestration, in conjunction with media that give them oxygen.
I contacted Susan and she was misquoted and was not happy. Again people, media, making statements and claims that are just flat wrong. The problem is everyone is wanting things that don’t relate to the actual issue.
For example wanting all native forests is the best from biodiversity and feel good etc. BUT the fact is they are very difficult to establish, sequester very low carbon volumes and won’t really help at all in meeting carbon storage - they do have a lot of other good benefits though.
Those who want just native are very well intentioned but are really focused on more native forests, less production land use etc. If you stand back they do not have carbon storage as the top priority and they don’t want to recognise the actual storage ability. They are not focussed on meeting the reduction numbers we need to try and get. It’s hard to accept your cause doesn’t solve this problem as you would like it to.
It’s the same with farming. We rely on Ag and need to be careful how we do it. The reality is many farms are big lifestyle blocks and all NZers are very lucky we have all these people prepared to work very hard to produce overseas income for little/no personal profit. With the farm devastation in EC etc there’s huge areas that could be retired into permenant forests, exotic and native, that would store vast amounts of carbon. Research is also finding pine forests, yes shock horror, actually store large amounts of methane - research ongoing but looking very interesting. Joint benefit ?
We need to be careful how we do Ag and I personally don’t see a punitive cost structure achieving much in that space. You can’t get blood out of a stone!! In fact the real issue is how long will people be prepared to work for very little?
The statement that Ag is 50% of emissions is wrong. A lot is cycled and in reality they probably only do 10 to 20% of our to worry about total emissions. I wish the Ag sector told this story better.
The ETS will work if it is allowed to. We just need the Government to stop fiddling with it and let it go. It will cause pain, but change is not painless and that’s the crux of the problem - people don’t like change but it is going to happen one way or the other.
In Shaw's defence , most of these "market solutions", and concessions to big polluters , were put in to get the ETS up and running with the then National government. Anyone who thinks a change of government will see the ditching of the ETS is wrong , this is their baby.
To Luxons credit, he has been very clear about this , though they have kicked the can down the road with agricultural emissions.
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