New Zealand's carbon auction fails on lower bids, lifts spot price slightly

New Zealand's third quarterly carbon allowance auction of 2023 failed due to lower bid levels, the government said Sept. 6, with the spot price rising slightly on expectations of reduced supply next year as emitters will need to enter the spot market to fulfill compliance needs.

The auction offered nearly 13.5 million New Zealand Units, or NZUs, excluding the 8 million units available under the cost containment reserve (CCR). If triggered, the CCR leads to additional units being released for sale to balance prices.

"September 2023 has been declined because the clearing price did not meet the minimum price settings. As a result, there are no winning bids," the government said.

This was the third consecutive failure(opens in a new tab) after previous auctions failed due to policy uncertainty amid weak auction price settings.

The unsold NZUs will now be rolled over to the last auction of 2023 in December, which is also widely expected to fail due to a lack of bids.

"I haven't talked to anyone who didn't think we would have a failed auction and the same is the case for December," a carbon broker said.

If all the auctions of 2023 fail, the total volume of 17.9 million NZUs offered through the year will be taken away from the market.

Future supply

"The market is treating the failure as bullish as emitters are forced to secure units from the secondary market," a carbon trader said.

Market participants expect the failure of auctions to result in a reduction in NZU supply in the spot market and boost prices.

If the December auction does fail nearly 17.9 million NZUs will effectively be removed from the market, representing half a year's supply, a second carbon trader said.

"That's going to really help reduce the oversupply that has been hanging in the NZU market," the broker added.

The price for units is expected to rise further in the December auction as the auction reserve price -- the minimum price at which the NZUs can be sold -- will nearly double under the new settings to NZ$60/mtCO2e ($35.30/mtCO2e) from NZ$33.06/mtCO2e.

This will be followed by a further rise to NZ$64/mtCO2e in 2024, as the government aligns(opens in a new tab) its policy with the advice from its national climate body, the Climate Change Commission.

The government has set the CCR trigger price to at least NZ$173/mtCO2e for the December auction, compared with the current price of nearly NZ$81/mtCO2e.

The government also reduced the annual volume of NZUs available through the auctions to 23 million for 2023 from 25.9 million, with that number reducing further in subsequent years.

Market price

"Muted reaction price-wise to today's failed NZU auction," a second carbon broker said.

Platts, part of S&P Global Commodity Insights, assessed the price of NZUs at NZ$71.10/mtCO2e on Sept. 6, up 1.6% on the day.

"Price was largely unchanged and hasn't been as volatile as it was after the failure of the other auctions," the first carbon broker said.

Prices were seen spiking after the previous auction failures in March and June, S&P Global data showed.

There were still chances of volatility in the short term as changes are expected to the system as part of ongoing government consultations, the first broker said.

New Zealand's government on June 19 opened(opens in a new tab) consultations on new rules to increase the effectiveness of its emissions trading scheme in cutting pollution at source as well as to redesign the regulation for issuing carbon allowances to the forestry sector.