Wednesday, April 24, 2024

ETS uncertainty further erodes carbon prices

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NZU prices fall below $50 mark for first time.
Carbon consultants are calling for an extension of the December 31 deadline to join the ETS, to avoid “hundreds of properties throughout the country” missing out on “credits worth tens of millions of dollars”.
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Carbon prices have fallen below the $50 mark for the first time since 2021 in the wake of the government releasing its thoughts on reforming the Emissions Trading Scheme.

The price of New Zealand Units (NZUs), which are the equivalent of a tonne of carbon, peaked at $88.50 on secondary markets late last year and began their descent after the government declined Climate Change Commission advice to tighten Emissions Trading Scheme (ETS) settings.

Since then, two auctions have not sold any NZUs, while the secondary market price continued declining, with a few bumps along the way.

Prices seemed to have settled around the low $50 mark but had a bounce after the last auction on June 14, up to about $60. Those involved in the market said this was on the continuing light volumes that have persisted since last year’s peak.

On Monday, the government outlined the options being considered to reform the ETS. These are centred on concerns about the effect of NZUs earned from forestry. These worries are mainly around the ETS driving more permanent pine forests than wanted and it being cheaper to plant trees than actually reduce emissions.

The options are wide-ranging and a final report, with recommendations, won’t appear until after the election, when the makeup of cabinet could look very different from now, with different attitudes to the ETS and wider climate change policy.

The uncertainty has further chilled carbon prices this week.

Early Thursday afternoon, the Carbon Match platform had an NZU trade last fixed at $49 and Jarden’s CommTrade at $47.

The emsTradepoint market had its last trade at $50 on volume of 382,440. The best bid to buy was $44 and the best offer to sell was $55.

The fortunes of those investing in Salt’s Carbon Fund have been even more dramatic.

The fund offers retail investors and others exposure to carbon markets.

Before the collapse in carbon prices last year, fund units were trading at a peak above $2.40. They declined rapidly after this.

Last Friday, before the government released its thoughts on ETS reform, the units were at $1.79.

On Thursday afternoon, the units had fallen to $1.47. This was on very light volumes and indicates it is probably traders on Sharesies cutting their losses and fearing the future.

The next government auction of NZUs is in September and it is increasingly likely that no units will be sold due to the general uncertainty.

At the last auction, there were bids for just over 3 million units of the almost 9 million on offer, after the 4.4 million units from the first auction were rolled over into the second.

Those units from the first two auctions will now roll over into the third, which will add another 4.4 million units.

For the auction to clear, there will have to be enough bids above the confidential reserve price, which is set near the secondary market price, for the more than 13 million on offer. While unlikely amid the current market sentiment, it is not impossible.

If all auctions this year fail, it will mean all the NZUs on offer this year will disappear. This will reduce the supply and, in theory, push up the price next year as emitters sitting on stockpiles will have to start surrendering them to meet their obligations.

While the auctions’ failure means the government will get less cash in the near term, it could mean NZUs will be more costly in the long term. That is when the future of the ETS and its settings will be decided.

For now, the law remains that greenhouse gas emitters must have NZUs to settle their ETS obligations, and once their stockpiles are low, they will have to enter the market.

There are currently about 170 million NZUs floating around and emitters as a whole need about 40 million a year to settle with the ETS.

For now, emitters can generally sit tight and wait to see what the election result brings.

Before then, the government has another chance to drive carbon prices up or down.

In April, the Climate Change Commission formally offered its advice on ETS settings for 2024 through to 2028.

It essentially repeated its earlier, declined, advice to tighten the supply of NZUs and make settings to drive the price higher.

The commission said then: “If the government chooses to accept the commission’s recommendations for NZ ETS settings, then it will enable the ETS to do the job it was set up to do. It will also bring the ETS settings back into step with Aotearoa New Zealand’s emissions budgets and targets.

“If the government declines the recommendations, then it will need a much stronger policy approach to achieve emissions budgets than the one outlined in the emissions reduction plan.”

The government must make decisions on these ETS unit limits and price control settings in time for the regulations to be updated by September 30, which will then come into force in 2024.

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