A year’s worth of carbon credits will be erased and the Government will miss out on $900 million of revenue after the final Emissions Trading Scheme (ETS) auction of 2023 failed on Wednesday.
Fifteen million New Zealand emission units were made available in 2023 but have remained unsold in successive quarterly auctions. Units are rolled over to the next auction but not into the next year.
The unsold units would be worth $900m at the floor price of $60, or about $1.3 billion at the market price of $75.25 at the time of the auction.
Auctions have a confidential reserve price based on recent secondary market prices higher than the floor price.
Bids above the reserve price must be made for all units for the auction to clear. This has made each auction less likely to be a success, as buyers must bid for more units each time.
The New Zealand Stock Exchange, which operates the auctions, said the December auction was declined because the clearing price did not meet the minimum price settings.
Nigel Brunel, head of commodities at Jarden, said the auction being declined wasn’t a surprise and would help to reduce the large stockpile of units already in the system.
The Climate Change Commission has estimated there is an excess of up to 49 million units in the registry relative to future emissions targets.
“The failed auction, and therefore the 15 million tonnes not coming to the market this year, starts to rebalance the market,” Brunel said.
He said the scheme was functioning well, despite the declined auctions, and was one of the best carbon markets in the world.
“It’s had a torrid year, to be fair, because of what Labour did last year, but it seems to be starting to come right”.
The carbon trader said he would like auctions to be more frequent and allow them to clear any bids above the reserve price. This would prevent the huge build up of units like in 2023.
Regulatory risk
ETS units traded at more than $80 late last year but fell sharply after a December decision by the Labour Government to ignore policy settings recommended by the Climate Change Commission.
This decision was later challenged in court, on the basis that it did not align with emissions targets and considered extraneous factors such as the cost of living, and was overturned.
Prices recovered in July after Cabinet remade the decision, with higher reserve prices and less overall units on offer. The auction floor price rose from $33 to $60.
Still, market uncertainty has lingered after the Government announced it would look into setting different prices for gross and sequestered emissions.
This could mean units generated by forestry were worth less than Government issued units, which spooked some investors, and would better incentivise actual emission reductions.
The newly-elected National-led Government has signaled it wants to bring stability to the ETS settings, likely scrapping the review, and let the carbon price rise as the market sees fit.
However, it has also promised not to let too much productive farmland be converted into permanent carbon forests. But that could be achieved through land-use regulations, rather than ETS price settings.
National also plans to use the revenue earned from the scheme to contribute to the cost of its income and property tax cuts. Missing out on the revenue from 2023 will worsen the fiscal starting position of the new coalition Government.
Oversupply
Susan Kilsby, an economist at ANZ, said buyers only bid for about 3.6 million units out of the 15 million required for the auction to clear.
“The carbon markets have been oversupplied for some time, so the fact that no additional units were taken up by the market this year will help address the oversupply situation”.
Businesses eligible for free units still would have received them and any units created by new forests would still have added to supply in the market.
“Planting of trees for carbon credits did slow this year due to the uncertainty brought about by the ETS review which will also reduce the number of units in circulation in the future”.
She said the new Government will halt the ongoing review of ETS settings which has caused uncertainty.
“However, simply stopping the review doesn’t necessarily provide all the answers the market is looking for,” she said.
A total of 14.1 million units will be offered In 2024, excluding the cost containment reserves which are triggered if the carbon price climbs above $173 and $216, respectively.
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