New Zealand's ETS settings consultation fails to boost carbon market

New Zealand's consultation to update carbon auction price settings for its emissions trading scheme failed to provide certainty to the market, with the government's option to lower the auction floor denting market confidence and pushing prices down, sources said.

The consultation released on May 15 was part of an annual review of the price and volume settings for the quarterly auctions of New Zealand Units, under which the government must consider the advice of its national climate body, Climate Change Commission.

The latest consultation will review the settings for 2025-2029 but the government cannot change settings for the next two years without citing specific circumstances.

The consultation sought public response on whether the government should follow CCC advice to cut the auction volume of New Zealand Units for 2025 by more than half to 5.9 million from 12.6 million to align the ETS with the country's national climate target.

CCC said in March that the estimated surplus of NZUs had grown to 68 million units from 49 million units at the end of September 2023.

"The internal modelling shows that the Commission's proposed settings are more likely to be in strict accordance with meeting emissions budgets across the scenarios tested than current settings," according to the consultation document released by the government.

The government added that CCC's proposed settings were likely to lead to higher NZU prices, providing greater incentives for emissions reductions and removals.

It, however, sought feedback on whether there were any particular circumstances that would allow the government to justify lowering the auction volumes for 2025-2026.

"I think it shows that the government is largely supportive of the auction volume cuts that the CCC has proposed," a carbon trader said, adding however that the consultation also raised uncertainty around the auction price floor.

Source: Climate Change Commission

Price settings

The auction floor price is the minimum price at which NZUs can be sold and was set at NZ$64/mtCO2e for 2024.

While the CCC had recommended keeping the price settings unchanged, the government also provided the option to lower the price settings for the auction floor and the cost containment reserve trigger price, without providing any figures.

The CCR trigger price leads to additional units being released for sale to balance prices.

"A lower price corridor could apply from 2025 if there are circumstances that enable changes to be made to the first two years of settings," according to the consultation document.

There was no option provided to increase the price floor, with the government saying that a higher floor would be above the spot price and could encourage speculation.

Market sources said the option for lower price settings was seen as negative.

The government also provided the option to increase the CCR volumes to reflect the potential reduction in surplus NZUs.

The CCR trigger price leads to additional units being released for sale to balance prices.

The government has previously said that CCC recommendations cannot be taken as final word but the previous high court ruling will prevent them from rejecting the climate body's advice outright, a second carbon trader said.

A High Court ruling in July 2023 ordered the previous Labor government to reconsider its lower ETS settings after a climate group sought a judicial review of the government's December 2022 decision to not follow the CCC advice.

The consultation will close on June 14, with final settings expected to be released by the end of September.

Price movement

The NZU trading volumes jumped on a daily basis on May 15, with a total of 75,000 mt traded through the day compared with just 15,000 mt the day before.

NZU price traded up earlier in the day to NZ$56/mtCO2e ($33.94/mtCO2e), before drifting down to NZ$54.25/mtCO2e.

Platts, part of S&P Global Commodity Insights, assessed the price of NZUs at NZ$54.25/mtCO2e on May 15, down 25 cents on the session.

The market was oversupplied and traders were protecting themselves by taking quite destructive actions, the second carbon trader said.

The pricing was at the marginal level of supporting forestry and seemed generous considering the incoming future supply, the trader added.