Emission Trading Scheme March auction partially clears at a price of $64

The March Emissions Trading Scheme (ETS) auction has partially cleared at the floor price of $64 in the first successful sale of units since December 2022. 

Just under 3 million units were sold to 16 participants for roughly $190 million, meaning another 550,000 went unclaimed, at 2.1% below the most recent market price. 

Paul Harrison, a director at Salt Funds, said the auction showed there was minimal demand for units even at the floor price and future auctions this year were likely to be declined.  

“I think emitters are pretty much done in terms of what they need for 2023,” he said. 

Harrison said he hoped the result would push the Government to accept the Climate Change Commission’s recommendation to significantly reduce future unit volumes. 

For an auction to clear, participants have to place bids for enough volume above both a floor price and a confidential reserve price which is set in relation to the secondary market price. 

The methodology used to calculate the reserve price was reviewed after the December 2023 auction and the new Climate Change Minister opted to change it ahead of the March auction.

Law requires the methodology to be reviewed after every failed auction, but this was the first time it had been changed since 2021. 

Whatever changes were made, the methodology allowed the auction to clear at the floor price despite units having traded on the secondary market above $70 during the month of March. 

The confidential reserve price exists to prevent the auction from significantly undercutting prices on the secondary market and therefore disrupting its operation. 

Data on Jarden’s CommTrade platform showed units were trading just above $64 in the days leading up to the auction but the spot price dropped to $57 shortly after the auction.

This reaction could suggest that emitters don’t expect to buy any more units at future auctions, where units will cost at least $64, and are only interested in buying at a discount.

Carbon costs 

On Tuesday, analysts at Treasury published a note looking at the cost-of-living impact of the carbon price and how the Government could choose to mitigate it. 

It said the supply of carbon credits would tighten as emissions budgets moved towards long-term climate targets and ultimately push up prices of carbon-intensive products. 

The paper did not specifically forecast the future price of ETS units but considered scenarios ranging from $45 to $225. 

Electricity and petrol prices were being boosted by around 2.5% at the lower end of that scale and almost 25% at the upper end. Food prices were less affected at between 0.1% and 1.1%. 

The cost of diesel was most sensitive to the carbon price with an increase of anywhere between 4.1% and 41%. 

The Treasury analysts said the overall impact on households was “small to moderate” compared with the recent inflation spike. 

“For example, the largest expenditure impact modelled here: the 13.4% price increase for petrol, due to a carbon price of $134.90, is much less than the 32% increase experienced between the 2020 and 2021 December quarters,” they wrote. 

However, the impacts are felt more strongly by lower-income households who spend a larger proportion of their income on these staple goods.