Wednesday, May 18, 2022

Strong carbon prices blow into new year

A new year surge in the New Zealand carbon values has caught the market by surprise, with traders anticipating values may well impact upon the first carbon auction of the year due to be held in mid-March.

Despite global uncertainty, Carbon Match director Lizzie Chambers says it was hard to be bearish at this point about the global carbon market.

A new year surge in the New Zealand carbon values has caught the market by surprise, with traders anticipating values may well impact upon the first carbon auction of the year due to be held in mid-March.

Values for mid-January are now trading at $72.10 a unit, with a bullish sentiment on the market also reflected in future spot prices. The contracted market has April 2023 values trading at $75.20, and April 2026 at $83.40 a unit.

Lizzie Chambers, director of carbon trading company Carbon Match, said trading is now characterised by a myriad of buyers and sellers across the breadth of the market, including investors, farmers and emitters requiring credits to operate.

“Over the new year the market really gapped it from $69.50 to $71.50 a unit very quickly. It appears almost as if there was a decision made by many buyers first off at the start of the year to get in and tick the box on buying,” Chambers said.

As part of NZ’s Emissions Trading Scheme (ETS) market there are four auctions held a year for credits, with the first up in mid-March. 

The auctions operate with the Government releasing additional credits from a cost containment reserve (CCR) of seven million additional units when a trigger price is met for the 4.75m units offered on the open market.

 This year’s CCR trigger price of $70 a unit already sits below where the market is at now, making it highly likely additional CCR units will have to be released by the government.

Last year when prices surged above the then trigger price of $50 a unit, the Government’s entire CCR allocation of seven million units was released in a single auction event. All were still purchased at over their $50 price point at $53.85 a unit.

“So this time it would seem that the market would already see $70 a unit as being quite low, and those additional CCR units may well be gobbled up again in this first upcoming auction,” she said.

“We have already had 40,000 units go through this week at $72 flat.”

The Government’s ability to raise the $70 a unit trigger price on its CCR credits is limited by year-to-year increases to match growing carbon unit demand, with 2023 being set at $78.40 a unit.

However, with signals already so strong that the $70 a unit value will be exceeded, there appears to be some wriggle room in the fine print for the minister of climate change to lift that figure before the year ends. 

The ETS rules allow for changes to the trigger price under “special circumstances”.

This could include the release of the Emissions Reduction Plan later this year, and any changes it brings to emissions reduction levels.

While acknowledging the inevitable uncertainties that plague global markets in any traded item right now, Chambers said it was hard to be bearish about carbon.

“Two years ago it would often be foresters coming to the market. Now, with compliance requirements, financial institutions, and growing investor interest in carbon, the ETS market is a broad church with good liquidity and capital flow, even more than only a year ago,” she said.

Jarden head of commodities trading Nigel Brunel agreed with Chambers’ sentiments.

“There does not seem to be a lot of supply out there, ergo we are seeing higher prices and clearly more buyers,” Brunel said.

“It is potentially on the cards that we see the same thing happen at the next auction that happened last year. This is not a bad thing, the CCR is there for a purpose and it would not surprise me if this year’s credits were also taken out in the first auction.”

As the ETS scheme picked up pace it was being increasingly viewed by overseas investors and carbon emitters as a transparent, valid and robust system, built on solid policy and regulatory framework.

“You have to remember this is the second-oldest ETS in the world and is well-respected internationally – there are traders who want to add liquidity to this market,” he said.

Brunel reiterated the Climate Change Commission’s estimate that carbon prices would have to touch $140 a unit to initiate decarbonising changes in processes and technologies.

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