Salt Management’s carbon fund has reported a more than 20% loss in the 12 months to March, underlining the collapse in carbon prices in the last months of 2022.
Salt’s fund is one of the few ways retail investors can get exposure to carbon prices, which are set by secondary markets dealing with New Zealand Units (NZUs). These are the equivalent of one tonne of carbon and must be surrendered by those who emit carbon under the emissions trading scheme (ETS).
In its latest quarterly report, Salt said it had $80.9 million in the fund. Of this, 90.5% was invested in NZUs, 4.91% in cash and 4.59% in carbon credits from the Australian emissions trading scheme.
For the year to March 31, the fund recorded an annual return (after deductions for charges and tax) of minus 20.53%.
This compares to a positive return of more than 60% in the 12 months to March 2022.
From a peak of more than $85, NZUs collapsed to just over $50 on the secondary market after the cabinet rejected advice from the Climate Change Commission that would have tightened supply.
Commentators have described the impact of that decision as shattering confidence in the ETS, with politicians unwilling to risk higher carbon prices driving inflation up and causing political damage as well, particularly in an election year.
A lower carbon price not only reduces the financial incentives for businesses to cut emissions, but also reduces the cash raised for the government to spend on other things.
The first auction of the year and the first after the collapse in carbon prices failed to clear, with the bids needed to complete the auction falling below a confidential reserve price set near the then-current secondary market price.
NZUs were trading around the $57 mark on Friday afternoon.
The next auction is in June and it is possible that could also fail to clear, with many uncertainties about the future direction of the ETS and how trading will be conducted in the future. However, balancing that is the need for emitters to have NZUs to settle their ETS obligations.
The government is considering several areas that could change ETS settings and the carbon price, with a consultation under way, ending on June 16.
There is also a wider review of the ETS, as well as debate about the treatment of forestry in the ETS and agriculture emissions.
Another part of the budget included a reference that implied the government is pressing ahead with setting up its own secondary carbon market platform.
The budget set aside $38m over four years for market governance regulation to increase the integrity of the ETS and reduce the risk of misconduct.
This includes developing a new carbon trading platform, an idea which has angered those already running secondary market platforms who say it is unnecessary and a waste of taxpayers’ money.