After a collapse in carbon prices and a judicial knockback, the government has reversed emissions trading settings.
The rejection of the Climate Change Commission’s (CCC) advice to tighten Emissions Trading Scheme (ETS) settings late last year – due to inflationary fears – was the first in a series of government moves that resulted in carbon prices collapsing from nearly $90 to below $35.
The High Court recently ordered Climate Change Minister James Shaw to reconsider the basis for the settings decision, saying they did not reflect the government’s carbon budgets nor New Zealand’s commitments under the Paris Agreement to limit global warming.
Shaw agreed with the courts and has, along with the cabinet, been looking at the settings for this year and through to 2028 in a concurrent process.
In a rapid turnaround for a ministerial decision, Shaw on Tuesday evening said the government will be applying the CCC’s original advice, and this will take effect for the NZ Units (NZUs) auction in December.
There will be one auction in September under the existing settings.
“Today is an important step forward in helping us to meet our domestic and international climate targets. The new settings put us in lockstep with advice provided by the Climate Change Commission in 2022 and 2023,” Shaw said.
“At the same time, the government is mindful of any impacts these decisions may have on living costs in the short term. This is expected to be minimal.
“Modelling shows that an increase of $10 per NZU will increase average annual household costs by about $1.67 per week. For lower-income households, the increase is estimated at $0.88-0.95 per week.”
He said the judicial review was about the process followed for the 2022 ETS settings decisions, not the decisions themselves.
“The government accepts there were deficiencies in the process and has moved quickly to fix them,” Shaw said.
This means that there will be 17.6 million fewer NZUs auctioned over 2023-2028 when compared to the current settings. This will drive the use of emission units stockpiled over time.
The government has also accepted the commission’s advice to raise the auction floor and cost-containment reserve (CCR) trigger prices more sharply.
The CCR is a mechanism designed to keep the carbon price from rising too high. Once this price is reached at auction, more NZUs are released.
A two-tier cost containment reserve trigger price will also be introduced. The Tier 1 cost containment reserve trigger price will increase from $82 to $173 in the December ETS auction.
The cabinet initially declined to accept this advice as ministers feared the carbon price would rise to meet the CCR level.
Now Shaw said: “We believe the new settings will prevent market participants from trying to hit the ceiling price, thus releasing more units, and will instead allow the market to operate in a more sophisticated manner.”
The auction price floor settings will also rise from the current level of $33.06 to $60 in December 2023.
NZUs peaked at $88.50 last year before a series of decisions and moves by the government sent carbon prices tumbling to about $35 – lows not experienced since the years the ETS lacked any teeth.
NZUs had been trading around the $45 mark or lower earlier this week but lifted in late trading to about the $50 point before the announcement was publicly released after the markets closed.
Another uncertainty in the market is the outcome of a review of the ETS.
Foresters are angry at the options being considered because they include treating NZUs created from forests differently from government NZUs. They have warned that forest planting will grind to a halt because of the uncertainty.
The review papers do not rule out these changes having a retrospective effect, and this, along with uncertainty about ETS settings in general, has caused many of those holding forestry NZUs to sell them into a market with very few buyers.
The first two NZU auctions of the year failed to clear. Aside from the collapse in carbon prices dampening financial incentives to reduce emissions, the loss of income from the auctions has also threatened to leave a hole in the government’s budget.
Decisions on the ETS review are not due for some time – and there is an election in October.
Shaw has indicated that there will likely be another round of consultation on the review as the government refines its thinking, and some options could not be delivered until 2025.
He has also tried to reassure foresters that no government would act retrospectively without serious consideration.
Despite this, the fall in carbon prices wiped billions of dollars off NZU holders’ and foresters’ assets on paper when prices collapsed.