Friday, December 1, 2023

NZ’s carbon auction shows first signs of volatility

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Clearing price fails to meet the confidential reserve price, resulting in no winning bids.
Clearing price fails to meet the confidential reserve price, resulting in no winning bids.
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The first carbon auction of the year has failed for the first time since the process began, dealing a blow to the government’s revenue-raising plans.

The clearing price did not meet the confidential reserve price and as a result there were no winning bids.

All available units will be rolled over to the next auction in June, the second of four auctions this year.

There were 4.475 million NZ Units (NZUs) offered with another 8 million NZUs available in the cost-containment reserve if the trigger price of $80.64 was reached.

Before the auction, NZUs were trading at about the $64-$65 mark on light volumes on secondary markets.

The carbon price on the secondary market has slumped from a high of $88.50 since the government announced it was not following all of the Climate Change Commission’s advice on tightening the Emissions Trading Scheme (ETS) settings and NZU supply.

Cabinet papers show that ministers were more concerned about the cost pressures from a rising carbon price than they were about sending stronger price signals to reduce greenhouse gas emissions.

Secondary market operators have reported stagnant interest from buyers and sellers since then, largely due to political and regulatory uncertainty.

There had been predictions that buyer wariness could lead to a no-show at the auction.

The auction’s failure to raise any money for the government compares to the last auction in December (just before the cabinet’s decisions, made in November, were made public) which cleared at $79 and reaped $381m.

There has been increasing speculation that the government is considering returning part or all of the proceeds from carbon auctions to the public as a form of a “carbon dividend”.

This would be a reversal of current policy settings, which divert money raised directly into programmes intended to lower greenhouse gas emissions.

There has been much debate about the best use of the money with the cabinet set on reducing emissions, while others have argued it should be partly spent on funding mitigation efforts – such as managed retreat. 

Meanwhile, others have advocated for a return of the money to the public to compensate for the increased costs they face from higher carbon prices being passed through to higher energy and other costs.

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