The final auction of the year for New Zealand’s Emissions Trading Scheme (ETS) did not sell all 15 million carbon units on offer, indicating a potential tightening of supply as the new year approaches. This development could lead to an increase in carbon prices.
In this latest auction, the majority of the 15 million New Zealand Units (NZUs) were leftovers from previous auctions this year. The ETS market, which holds four auctions annually, cancels any unsold units from the final auction, removing them from availability in the following year.
Susan Kilsby, a senior economist at ANZ, commented that the removal of these 15 million NZUs would tighten the total volume of units in a market that has been oversupplied for some time. She estimates that the NZU stockpile is currently around 141 million units, despite a demand of only about 43 million units.
Contrary to expectations, the NZU price fell from $71 to $65 per unit following the auction’s failure. Kilsby noted, “Some anticipated that the market might be perceived as short-supplied as a result of the auction, leading to upward pressure on prices, but this had already been factored in.”
This auction’s outcome comes nearly a year after NZUs were trading at $80 per unit. Prices had dropped sharply following the previous government’s decision to disregard the Climate Change Commission’s recommendations to tighten supply and allow NZU prices to rise, prompting emissions reductions.
This decision, which saw NZU prices plummet to $33, wiped millions from forestry and investor portfolios and slowed down forestry conversion projects. The government was later compelled by a court decision to reverse its stance, leading to higher reserve prices and a reduced number of units offered.
Despite the new government’s rejection of wholesale ETS reform, aiming for greater market stability, foresters and investors have remained cautious about re-entering the market. There are concerns about potential overhauls to the ETS system, including different pricing for sequestered and emitted carbon.
Kilsby believes that while the market welcomes the rejection of a review, there is still a need to examine aspects of the ETS market. She points out that New Zealand’s ETS market, which includes forestry, differs from other global systems.
Aligning the units on offer with climate change goals is challenging due to uncertainties around NZU supply sources. She emphasises the need for clarity in how a carbon budget translates to NZU supply.
Kilsby also highlights the current challenge: offsetting emissions with trees is still cheaper than reducing emissions. She suggests addressing this by limiting the quantity of emissions that can be offset or restricting planting. However, she warns that limiting planting could increase prices and lead to more speculation.
In conclusion, the ETS market in New Zealand is at a crossroads, with the need for balancing supply and demand, aligning with climate goals, and providing market certainty. The recent auction results reflect these ongoing challenges and the complexities of managing a carbon market that includes forestry.
