Wednesday, December 6, 2023

CCC advice prompts slight carbon price bounce

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Still a long way to go, though, to restore confidence in a shattered market.
The cabinet was concerned that high carbon prices seemed to be driving the planting of more trees and not reducing emissions. This triggered a wider review of the ETS, which sent carbon prices even lower earlier this year.
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Carbon prices bounced back a bit after the release of the latest round of advice on Emissions Trading Scheme settings from the Climate Change Commission, but there is a long way to go to restore confidence in a shattered market.

Secondary market prices lifted closer to $60 on Thursday, still well off the peak last year of more than $85.

This is up from the lows of around $54 on most secondary markets in March.

Carbon markets fell from their peak after the cabinet declined major parts of the last round of advice from the Climate Change Commission (CCC).

The advice is given annually in advance to cover a rolling five-year window and includes how many New Zealand Units (a proxy for a tonne of carbon) should be available, how they should be issued and the trigger price for releasing more NZUs through a cost containment reserve.

CCC chair Rod Carr essentially repeated his last prescription with some even tougher medicine but added a dose of “I told you so”, even if it was couched in more diplomatic language.

“Our analysis is largely the same as last year, however this year there are further adjustments in unit limits to bring the scheme back in line with Aotearoa NZ’s emissions budgets and targets,” Carr said.

“We have also been more explicit that some of our recommendations are interconnected and should not be implemented in isolation.”

The current price settings mean the Emissions Trading Scheme (ETS) could not function as effectively as it should, he warned. This meant if the government was serious about emissions reductions it would have to follow the advice or find the reductions by other means.

The cabinet rejected last year’s advice from the CCC on two major grounds.

One was that setting the cost containment trigger too high would risk pushing up carbon prices to near that level – above $150 – which would have added inflationary pressure and serious cost of living impacts.

The CCC doubted then and still doubts now that “the magnet effect” of secondary market prices tracking to the cost containment reserve would hold true at such high levels.

Carr also said on this point: “The government has other social policy tools to empower households and businesses with limited choices, and to manage the risk of any short-term cost of living impacts for those groups.”

The second was that high carbon prices seemed to be driving the planting of more trees and not reducing emissions. This has land use implications and waters down the need to actually cut greenhouse gases entering the atmosphere.

This triggered a wider review of the ETS, which sent carbon prices even further lower earlier this year.

After yesterday’s announcement, Jarden, which runs the CommTrade platform, said the market seemed to price NZUs at $61, up $2 from the previous close. Another secondary market platform Carbon Match reported similar price movements and more buyer and seller interest after months of stagnation.

Both said it was early days and there was much to digest from the CCC’s recommendations. There is also the Ministry for the Environment-led consultation to come and then, of course, what decisions the cabinet will make ahead of any changes for 2024.

Jarden said in its commentary: “We do think this report, one fully digested and coupled with the ETS review, will see NZU prices continue to climb.”

Whether those who trade in carbon agree with a platform that makes its money from the trade is yet to be seen.

The fact is that confidence was badly dented by recent government announcements. Not only in their nature but also in their timing.

There are broadly two groups who trade in NZUs – those who need them to settle their emissions on the ETS and those who do so for profit.

Both rather naively believed that carbon prices were essentially, aside from a few bumps in the road, on a rising trajectory. They did not take into account that a market that is entirely based on politics and regulation could be changed on the whim of regulators and politicians.

The timing of the decisions has also aroused concern.

The decision to ignore climate change advice was made well before the announcement last year. The public release of that decision followed shortly after an NZU auction.

The cynical or uncharitable might think that this was deliberately done to maximise revenue from the auction. It may be that ministers did not think or know that carbon prices would tank. It is hard to know because Climate Change Minister James Shaw has declined to respond to questions on the issue.

For those used to trading in the realm of ongoing disclosure, even if it is sometimes ignored, it creates suspicion that they might get caught out by capricious politicians again.

There is also just the general uncertainty about what happens next. A review might well find ways to drive up the price, delink forestry from the ETS or any other number of things.

There is also the election. Any possible combination of political parties forming a government could come up with several different attitudes to climate change policy and the role of the ETS within it.

For those who were trading in carbon with the idea of profit, recent events are likely to continue a cautious approach for all but the bravest speculator.

Those who need NZUs to settle emissions have to balance the need to keep some in stock while trying to work out where prices may go amid the political uncertainty.

Those making such decisions will earn money if they manage to get it right.

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