New Zealand carbon price hits 10-month high; March auction in focus

The New Zealand carbon price jumped to a more than 10-month high on Jan. 23 driven by strong demand amid expectations of further increases in prices in the spot market.

Platts, part of S&P Global Commodity Insights, assessed New Zealand Units at NZ$65/mt of CO2 equivalent ($36.82/mtCO2e) on Jan. 23, up by NZ$1.05/mtCO2e day over day. NZUs were also assessed at this level March 19, prior to the first auction of last year, and were last assessed higher March 14 at NZ$65.10/mtCO2e, marking a more than 10-month high.

"I think buyers see anything below NZ$68/mtCO2e as good buying with that being the auction floor this year," a New Zealand-based forest developer said.

Demand may improve amid fresh issuances

Participants in the NZ emissions trading scheme who carry out removal activities may choose to submit Quarterly Emission Returns detailing the amount of removals carried out in the last quarter or year via the New Zealand Emissions Trading Register.

"Supply before January is typically quite low. At the start of the new year, all forest owners claim their vintages. Many of them choose to sell these vintages immediately, which subsequently leads to an increase in supply," the New Zealand-based forester said.

The forester said a significant number of small forest owners collectively contribute to a substantial amount of NZUs. Due to considerable strain in the farming and livestock sector, where many of these small forest owners operate, they are likely to sell the units to maintain cash flow.

"Last year, we observed significant selling from January to March, and I suspect we might witness a similar trend this year, when the vintages will be issued, particularly to farm-forestry, timber, and sheep and beef holders," a New Zealand-based trader said.

The trader said that due to financial challenges, these participants might be inclined to sell their units as soon as they acquire them. "It will be interesting to see if they offer their units at lower levels due to the pressure for cash inflow."

Market participants said a significant volume offered in the secondary market at a price below the auction floor price will encourage emitters to acquire the units at these levels.

March auction dynamics

The next quarterly auction for NZUs under the country's ETS is scheduled for March 19 and will offer 1.5 million units at a newly increased floor price of NZ$68/mtCO2e, which is higher than last year's floor price of NZ$64/mtCO2e. Under the NZU auction, the bids have to be equal to or above the auction floor price.

"The next two months will be pivotal as we approach the first quarterly auction of this year. We need to monitor whether prices will remain at current levels or rise to the floor level," the NZ-based trader said.

He said buyers are unlikely to bid higher as they already have decent volumes amid the weak supply. However, this dynamic could shift next month when there would be large volumes on offer, potentially below the floor price. Therefore, it's likely that the first auction might only clear partially.

Of the four quarterly auctions in 2024, only two cleared partially while a total of 7.007 million units were sold, leaving 14.793 million units to be retired in total, according to government data.

"It will be interesting to see whether the auction volume will compound like last year or if the reduced volumes will encourage buyers to secure volume in the early auctions," a New Zealand-based forest manager said.

On Aug. 20, 2024, the New Zealand government announced that the ETS auction volume will be reduced by half, from 45 million to 21 million over 2025-2029¸ following advice from the Climate Change Commission, New Zealand's national climate body, which had suggested a drastic reduction for the new surplus estimate of about 68 million units.

This year, four quarterly auctions will offer a total of 6 million base auction volumes, along with 7.1 million under the cost containment reserve, or CCR. If the CCR is triggered, more units are released for sale at a specific trigger price.

An Australia-based trader dealing in NZUs attributed the rise in prices to very "strong fundamentals" in the market, saying the auction volumes halving in 2025 is likely to provide further support to prices.

The forester added that the expectation is that the price will reach NZ$68/mtCO2e this year, the question is just when.

"I think [there will be] partial clearance at NZ$68/mtCO2e if the spot market is trading below. If spot is trading above in March, then it could fully clear and the price go higher later in the year," the NZ-based developer said.