New Zealand carbon market in stalemate as Q2 holdings fall but surplus remains

A drawdown in holdings of New Zealand Units at the end of the second quarter of 2024 along with a slowdown in forestry issuance is expected to reduce surplus credits available in the market but might still not able to push prices higher, market participants said.

The NZU holdings fell to 144.55 million mt as of June 30, 2024, from 169 million at the end of the first quarter, showing major drawdowns in the forestry holdings, according to data from the New Zealand Environmental Protection Authority.

Holdings for forestry-related NZUs fell by 41% from Q1 to 91 million mt and auction-related NZU holdings fell by 23% over the same period to 32.9 million mt.

This was expected to reduce the surplus of NZUs, estimated at around 68 million units at the end of September 2023 by the Climate Change Commission, New Zealand's national climate body.

Under the New Zealand emissions trading scheme, auctions account for the largest share volume of New Zealand Unit supply available in a year, followed by units from forestry projects. Some units are allocated freely to industrial participants.

Forestry drawdown

The forestry-related NZUs issuance rose in the second half of 2023 due the end of the five-year mandatory emissions return period, when foresters needed to submit their applications, said Kristen Green, director at Kapiti Climate Insights and a former adviser to the government.

While the NZU prices dipped in 2024, the foresters still needed to make cash returns to fund further afforestation, Green said.

Platts, part of S&P Global Commodity Insights, assessed the price of NZUs at NZ$52.50/mtCO2e on July 22, down 23% from NZ$68.35/mtCO2e at the start of 2024.

"A portion of those units will now be eaten up and you can see that in the decrease of forestry units," Green said. "In general, the kind of supply that we have seen in the last few years, over the next two to three years, it should dip down."

The rate of plantings for NZUs is expected to drop to as much as 25% of previous forecasts at the current carbon price and interest rate environment, a carbon trader said.

While the market might seem well supplied amid low prices, considering the liabilities of foresters, speculator positions, the likelihood of auction failures and a strong possibility of cutting of auction volumes by the government, the available volumes for retirement might fall to as low as 35 million mt in 2025, the trader said.

Market sources said there was a high possibility of auction failures as the spot price was way below the auction reserve price of NZ$64/mtCO2e, the minimum price below which units cannot be sold in an auction.

Based on the current market price, it was unlikely that auction units would come to the market and as a result, the stockpile should most likely contract further, a carbon broker said.

Further, CCC advised(opens in a new tab) the government earlier to cut the auction volume of NZUs 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.

In that scenario, the holdings will start to draw down fast and tighten the market further, the trader added.

Existing surplus

Market participants, however, saw the NZU stockpile still high enough to keep the market well supplied until next year.

"It is still higher than what some people would have hoped for," a second carbon trader said.

The drawdown was not sufficient as some volume cleared in the first auction(opens in a new tab) and hence the market already had 2.97 million units higher than previous expectations, the trader said.

"Realistically it needs another year of auction failure before things are in a much more comfortable position," the trader added.

While surplus should be drawn down quicker than the CCC expected, it should still be enough to keep things relatively stable for next year, Green said.

If compared with the EU ETS surplus volumes relative to surrender obligations, the surplus was still quite large and roughly equal to a year's worth of surrender, Green added.

"If you added the forestry picture and stuff, the next year, I suspect it will not be as gloomy as it has been in the last three to six months, but it's not out of the glut," Green said.

Buying was limited as it was too risky to take a position in the market until the government decides the auction floor price later this year, the first trader added.

The NZU price hit a near 10-month low May 17 after a government consultation(opens in a new tab) to update carbon auction settings suggested a lower floor price.