ANZ’s Susan Kilsby says carbon unit values are moving in a market undergoing considerable tweaking in coming months.
After a heated run on the spot market, the year’s first carbon auction has had prices close off significantly down on where they were a month ago.
The first quarter carbon unit auction held earlier in March has prices settle at $70 a unit, only slightly upon the fourth quarter December auction value of $68 a unit, but well back on the $86 peak they achieved in February.
ANZ economist Susan Kilsby said there had been a sense in the market that it was a one-way bet, as prices continued to move strongly upwards through late last year to early this year.
“But there are a lot of NZ units already in circulation, and that was going to impact prices at some point,” Kilsby said.
She said in total those units were sufficient to cover about 10 years of emissions.
Each of the four auctions held yearly will allocate about 4.5 million units, with a buffer or cost containment reserve of 7m units held for the year, available for release to ease price rises past the $70 trigger price.
The March auction has already used 5.6m of those, leaving only 1.3m in buffer for the remaining three auctions this year.
“So there is quite a big back stop of units out there now,” she said.
“What is not so clear is why people are holding onto those units. Some are held by foresters who will have to relinquish them once a forest is felled, they account for many of the units. Some companies also need units as they are emitters and buy them now as hedging for future price rises.”
She said part of the ETS unit market also contains speculators, which help with liquidity, but can invoke a level of volatility.
“We have since seen prices lift back up a bit to $73 a unit, but not to the $86 we saw earlier,” she said.
She noted the ETS scheme still remained something of a work in progress, with some tweaking continuing around aspects including forest types, foreign ownership, and future trading platforms for units.
“Some things have been welcomed by the market, including the number of units to be released, the reserve number and timing of auctions, they are all seen as a positive,” she said.
Forestry Minister Stuart Nash recently revealed the Government’s desire to ensure only native forests could be planted for permanent carbon sequestration forests. The easier test on foreign buyers wanting to buy land to plant forests is also to be removed.
One future issue being hammered out with the sector is whether the ETS will trade on a single platform, akin to the NZX.
At present there are several carbon traders facilitating trades in NZ.
Estimates by the International Monetary Fund are that NZ’s ETS carbon unit value will need to reach $140 a unit to initiate significant change to emissions behaviour.
But Kilsby said it could also be possible in coming years the Government reallocates how much each sector is able to emit without having to purchase offsets, depending upon the technology it adopts, or is available to it.
She said she was not prepared to put a value on where the market will head from here.
“There are simply too many moving parts at this stage to pick that,” she said.
