Wednesday, July 6, 2022

Carbon auction could result in a stable carbon price

The second carbon auction of the year on Wednesday is expected to be steady as she goes for carbon prices.

Nigel Brunel, head of commodities at Jarden, believed participants would look to snap up the 1.3 million New Zealand Units (a proxy for a tonne of carbon) left in the annual cost containment reserve after 5.69m of the 7m available were snapped up at the first auction of the year.

Aside from the NZUs in the reserve, the quarterly supply of 4.5m NZUs will also be available to buy.

Most participants will be trying to get as low a price as possible to hedge against future price pressures. 

However, auctions last year did see major plays in the auction, with single buyers driving up the price with high volume purchases to ensure they were stocked up.

At the last auction, there were 30 successful bidders, with 32 parties making 477 bids seeking 11.7m NZUs.

Brunel said it was probable the confidential price to trigger the release of extra units would be set just below or at the $70 reserve price. 

By law, the trigger can not be higher than the reserve.

At that auction in March, NZUs on the secondary market were trading at about $72.

After the March auction, carbon prices rose to trade between the $76 to $77 mark and have stayed flat ever since. 

In recent months, trading has been steady on the secondary market, Brunel says. Jarden runs one of the major platforms.

In past years, the post-March period has been quiet because it came after those who needed to surrender NZUs for their emissions had made their settlements under the Emissions Trading Scheme (ETS).

This timing may have a slight chilling effect on auction prices because there is a long time to wait before the next settlement date. 

This means no one will be desperate to ensure they have enough NZUs to fulfil their commitments or face the tough penalties such failure brings.

Another trading platform – Carbon Match – also recently reported steady buying interest, though this had been countered with emitters and others looking towards the June auction.

Brunel said it appeared price risk was all on the upside unless some geopolitical shock happened, such as Russia’s invasion of Ukraine.

“The carbon market seems immune to the jitters that have hit equities markets, and most regulatory moves pointed to upward pressure on price because they could decrease supply and possibly increase demand.”

Nigel Brunel

NZ’s carbon prices pushed above the $85 mark before the invasion – their peak so far – and then fell with other world markets shortly afterwards to $65.

Brunel said the carbon market seemed immune to the jitters that have hit equities markets, and most regulatory moves pointed to upward pressure on price because they could decrease supply and possibly increase demand.

These factors included the Government moving to remove permanent pine plantations from the ETS. 

Foresters earn NZUs for the carbon their trees absorb. 

The change is due to fears that permanent pine forests may not be the best use of land but are becoming increasingly profitable as carbon prices rise.

However, the planting of pines for harvest and replanting remains under the ETS and is still a profitable proposition.

The Government is also edging towards how it will price agricultural emissions. 

Farming bodies want a separate, lower levy, but the possibility remains that ministers may decide to bring farms under the ETS. 

If this happened, it would increase demand from 2025, although current plans are only to charge farms for 5% of their emissions.

The number of free credits that trade-exposed energy-intensive industries get is also slowly reducing while officials mull over changes to the allocation calculation, as well. 

Longer-term work is also being done on some form of carbon border tax to eventually replace or reduce the role of the free allocation.

Carbon Match also pointed to officials doing the annual review of auction volumes and rules such as the trigger price and other settings.

“Work continues on an overarching framework for governance of the ETS. 

“Policy decisions are also expected very soon on these matters, with a legislative bill expected to be introduced later tis year. 

“One idea explored in the original consultation document raised particular concern and it was that of imposing ‘position and purchase limits’.

“The concept was that position limits, which would restrict the number of NZUs a user can hold at any one time, would limit the ability to exercise market power,” Carbon Match said.

Purchase limits (which would restrict the maximum number of NZUs a user can buy at primary NZU auctions) have also been explored by officials.

“The problem with both ideas is that we are over 10 years into the ETS and the market has matured considerably. 

“Such proposals could materially affect the myriad time spreads, forward contracts, structured offtake agreements and other private commercial arrangements already in place.”

Responses made to the proposals showed little support.

Other factors since the last auction include the government releasing its Emissions Reduction plan and carbon budgets. 

This all pointed to the need for a higher carbon price to push behaviour change, but also the fear of pushing costs too high.

The contradictions and tensions between these two policy imperatives were graphically shown when the government decided to temporarily drop petrol taxes, while carbon prices were intended to drive up the price to change behaviour.

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