Monday, February 26, 2024

ETS auction wipes millions of credits at year-end

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Uncertainty still affecting Emissions Trading Scheme.
ANZ agricultural economist Susan Kilsby says the inflation battle is not yet over, but there are signs that the pace at which prices rise will slow down.
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The final Emissions Trading Scheme auction of the year failed to clear the 15 million carbon units on offer, signalling a tightening of supply heading into the new year, possibly to push carbon prices higher.

The auction had 15 million NZUs (New Zealand Units) on offer, of which the bulk were units that had also not sold at the other auctions this year. The ETS market has four auctions a year with the final auction’s unsold units being cancelled and no longer available into the new year.

ANZ senior economist Susan Kilsby said having the 15 million NZUs wiped would result in a tightening of total unit volume in a market that has been oversupplied for some time. 

Estimates done by her are that the NZU stockpile consists of 141 million units, despite only having demand estimates of about 43 million units. 

She said that, perhaps surprisingly, the NZU price took a drop after the auction’s failure, sliding from $71 a unit down to $65.

“I think some thought the market may be come to be seen as being in short supply as a result of the auction, and upwards pressure would come, but it had already been factored in.”

The auction’s failure to clear comes almost a year after NZUs were trading at $80 a unit but fell sharply after the previous government’s decision to ignore Climate Change Commission’s recommendations to tighten supply and let NZU prices rise higher to prompt emissions reductions. 

That saw NZU prices plummet to $33, wiping millions off forestry and investor portfolios while also putting the brakes on further forestry conversion projects.

That move was challenged in court and the government was compelled to reverse its decision, ensuring higher reserve prices with a lower number of units offered.

But foresters and investors remained shy on re-entering the market, amid concerns the government was going to overhaul the ETS system, including setting one price for sequestered carbon and one for emitted.

But since the election the new government has moved to reject any wholesale ETS reform, seeking greater stability in the market.

However, while the rejection of a review may be welcome, Kilsby said there is still a need to examine aspects of the ETS market.

“Out ETS market is quite different to the rest of the world given we have forestry included. If they want to align the units on offer with climate change goals, that is quite hard to do at present given uncertainties around NZU supply sources. This still needs to be sorted. A carbon budget should be very clear how that flows to NZU supply.

“It is not necessarily the trading mechanisms that need to be changed, but the market needs certainty over supply of NZUs.” 

She said the challenge at present is that it is still cheaper to offset with trees, rather than actually reduce emissions.

“But this could be dealt with by limiting the quantity of emissions you can offset, or limit planting. But the more you limit planting, that puts upward pressure on price and could prompt more speculation. 

“Regardless, we cannot leave it as it is.”

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