With carbon prices surging 20% in only two weeks, analysts and traders say the signals to emitters to reduce carbon outputs is growing stronger by the day.
The Government’s carbon unit auction on September 1 resulted in a surge of bids that cleaned out the 4.75 million units on offer and pushed prices over the $50 a unit mark.
That in turn activated the Cost Containment Reserve (CCR), the Government’s war chest of an additional seven million units. These were also promptly purchased, with the final auction price settling at $53.85.
This week, the carbon market continued to surge to $62.25 a unit on the spot market, with future contracts in April 2025 at $68.95 a unit.
The surge in interest by both emitters and institutional investors has some in the sector calling for a curtailment on who can purchase the credits and limiting them to emitters only.
Sector commentator Keith Woodford labelled the clean out of the CCR and continuing surge in prices an embarrassment for the Government, being caught out by the interest.
The clean out of the CCR units means the last auction of the year in December is essentially open skies for bidders.
But Jarden head of commodities trading Nigel Brunel says the auction system was starting to operate exactly as it should, delivering the sort of price signals necessary to prompt a shift in emitter behaviour and adoption of new low-emission technology.
“Plenty of companies would have started to mobilise capital to make the changes necessary and that signal is only going one way now,” Brunel said.
“It is only through price signals and financial impact that you will effect change.”
Two consultations are also under way at present, with outcomes that may influence future price movements if adopted.
One is to curtail the ability of non-emitting investors to purchase units at auction and another to only allow units to be sold through a central unit exchange, similar to NZX, as opposed to the multiple outlets trading in them today.
But Brunel says any curtailing of carbon auction participants could have unintended consequences for the Government’s carbon efforts.
“What about those financial institutions who purchase units and provide credits to emitters, they play a vital role, particularly for smaller-scale emitters?” he asked.
Carbon Match director Lizzie Chambers says she has found a significant increase in interest in the market with prices now about $60 a unit, with a good mix of unit buyers and no one party dominating bidding.
“As far as we can see this market is liquid, it’s moving and it is working,” Chambers said.
She believed some critics of the market’s behaviour failed to understand that the $50 was never a ceiling, only a trigger point for the CCR units to be allocated.
“There is no evidence the units have been lost to speculators. You may find the auction has been dominated by institutions, but that does not mean they are acting speculatively, they provide a service that includes banks buying a position for clients requiring units in the future.”
She says proposals to try and curb the proportion of non-emitting bidders would be fraught with difficulty interpreting who was and was not valid and would only harm the market’s liquidity.
“People need the commercial freedom to transact in the carbon market and do not need the government meddling with that,” she said.
Climate Change Minister James Shaw says the fact the CCR was triggered shows the system was working as it should.
“It did what we put it in place to do, which was to avoid the impact of price spikes being passed on to consumers and businesses,” Shaw said.
He confirmed that with no further CCR units available, the final price for units at the December auction would be whatever the market determines it should be.
“The ETS is working more effectively now than ever before. Reforms we introduced last year included putting in place a sinking lids on emissions allowed with the scheme, meaning that it is finally doing its job and helping us to reduce emissions,” he said.
“Previous governments had essentially operated a scheme that had no limit on the amount of pollution permitted within the system.”