Wednesday, April 24, 2024

Carbon price push likely to continue

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Despite the onward march of carbon prices, values may have to press onwards over $100 a unit before they start to have an impact upon emission behaviour in New Zealand.
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Jarden head of commodities trading Nigel Brunel says companies are already reviewing their energy options as carbon prices surge.

Despite the onward march of carbon prices, values may have to press onwards over $100 a unit before they start to have an impact upon emission behaviour in New Zealand.

Jarden head of commodities trading Nigel Brunel says while prices were likely to continue to move upwards in the near term, if the Emissions Trading Scheme (ETS) market did what was intended that price rise would be finite.

“There is debate there around the country, but as you get prices go a lot higher then people will stop polluting and prices would ease,” Brunel said.

He says he agrees with the Climate Change Commission, that if New Zealand wanted to decarbonise by 2050, then by 2030 the carbon price would need to be in the vicinity of $140 a tonne.

This week NZ carbon units are trading at $64.50 a unit with future contracts committed at $73.70 a unit. This week’s carbon price is about double what it was only 14 months ago.

The ETS scheme attracted some criticism after the last auction on grounds the strong demand for the 4.75 million units offered required the Government to add its 7m cost containment reserve (CCR) units, which were also purchased in the auction and did little to cool the price surge.

Brunel also agrees with Climate Change Minister James Shaw who defended the surge in carbon prices, saying the ETS was operating as it should.

“When you look at the CCR, it was there to be used if required. If you think about 80 million tonnes of emissions a year, over 30 years you are talking over two billion tonnes. So a few million tonnes here and there to smooth the price, that is not a huge amount,” he said.

“I think often critics lose sight of the big picture on this, which is to decarbonise the economy.”

Government recently sought submissions on improving the market system for the ETS, including the possibility of a single exchange and limiting auctions to emitters only, removing the ability of financial institutions to trade in auctions.

But Brunel says if the market was not broken, it did not need fixing. Multiple entities have been trading carbon credits successfully for several years.

He also questioned whether any proposal to stop financial institutions trading ETS units was wise.

At the last auction about a third of the units sold were bought by a single financial institution, who provided a service to smaller businesses wanting to purchase credits.

With global fuel prices already rocketing, the addition of emission costs has hastened changes in emitting behaviour at an industrial level now.

“Coal is probably the most expensive example where for every tonne there is two tonnes of carbon with that cost, also coming when coal is not cheap at the moment,” he said.

He suspected the increased volatility in hydrocarbon-based fuels and the carbon cost was hastening more companies to consider sustainable energy options.

In the meantime, as farmers became concerned about carbon forests eclipsing pastoral land, Brunel says the differential between carbon returns and pastoral farming may yet prompt some level of government intervention in the ETS market.

A recent BDO report released about exotic plantings on the East Coast for carbon highlighted that if all the region’s Class 6-8 land was placed into permanent carbon forests, 10,000 jobs would go and $300 million of GDP a year lost from farming and logging.

The report also acknowledged the environmental benefits of carbon farming included better water quality than that delivered under farming or logged forest operations.

“When you plant that tree for carbon, that land is lost forever. If you think about farming generation after generation, you could argue some land is better to remain as farmland,” he said.

As often happened with government constructs, there may need to be some tweaking to deal with the unintended consequences of a scheme that may push trees ahead of farmland.

“That could be that by 2030 no new exotic plantings under ETS are permitted, and it is natives or none,” he said.

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