New Zealand updates carbon price settings, falls short of climate body recommendations

The New Zealand government updated Dec. 15 the country's Emissions Trading Scheme (ETS) carbon allowance price and volume settings for 2023 to levels significantly lower than as advised by its national climate body.

The Climate Change Commission (CCC), an independent body tasked with advising the government on climate policy, had recommended in July a steep increase in carbon auction price settings to align with the country's climate goals.

Higher price settings for the auction of carbon allowances within the ETS were expected to boost the price of carbon in the secondary market in 2023, but the latest settings were seen by the market as weak.

Under the New Zealand Emissions Trading Scheme (NZ ETS), the government distributes allowances to covered entities for every metric ton of carbon dioxide equivalent emissions through a mix of free allocations and auctions.

The allowances, called New Zealand Units (NZUs), are auctioned quarterly and can be traded by ETS participants in the secondary market before being surrendered to the government by the end of the compliance year.

In the cabinet minutes released by the government, New Zealand's Minister for Climate Change James Shaw advised the government to accept CCC recommendations but also offered alternative options such as maintaining status quo by following the current price trajectory with adjustments for inflation.

Price settings

The government increased the auction reserve price to NZ$33.06/mtCO2e ($21.07/mtCO2e) from NZ$30/mtCO2e, but it was still lower than NZ$60/mtCO2e recommended by the CCC. The auction reserve price is the minimum price at which the NZUs can be sold to participants.

The cost containment reserve (CCR) trigger price was increased to NZ$80.64/mtCO2e from NZ$70/mtCO2e, significantly lower than the CCC's recommendation of a two-tier price structure of NZ$171/mtCO2e and NZ$214/mtCO2e. The cost containment reserve trigger price leads to additional units released for sale to balance prices. Under the two-tier structure, bidding at NZ$171/mtCO2e would have released an extra 2.9 million units, while the breaching of NZ$214/mtCO2e would have released an additional 5.1 million units.

The minister warned the cabinet that the current NZU prices were already trading above NZ$80.64/mtCO2e, making it likely that the CCR will be triggered in 2023. He added that a lower trigger price could continue to act as a "magnet" for secondary market prices rather than a safety valve for unexpected market behavior.

This view was supported by the auctions in 2022, during which the CCR price was trigged constantly and the reserve was exhausted by the second auction in June.

The government also reduced the volume of NZU's available for auction in 2023 to 17.9 million units from 19.3 million units. This was still higher than 16.3 million units recommended by the CCC, which intended to draw down the NZU stockpile available in the market.

CCC had advised that the current surplus of NZUs in the market could present significant challenges in meeting emission targets and they were expected to be used in trading and speculation rather than to meet climate obligations.

The minister added that the impact of the price setting recommended by CCC on the fuel prices as well as inflation is expected to be minimal although it might affect the emissions intensive and trade exposed industries such as oil, gas and metals.

"If NZU prices reach high enough levels, there is a possibility that some industries in New Zealand will close and required goods will need to be imported instead," the cabinet minutes stated.

Market reaction

"My take is that the government ignored the climate change commission recommendations for political reasons as we are going into an election year," a carbon trader told S&P Global Commodity Insights.

The latest decision comes after the NZU price touched a record high of NZ$88.50/mtCO2e in November followed by a steady fall in prices due to uncertainty around the government's decision on price settings.

The last auction of 2022 in December saw a fall in the auction clearing price from the previous auctions for the first time at NZ$79/mtCO2e amid a lack of direction from the policymakers. The price for NZU in the spot market was at around NZ$85.50/mtCO2e on Dec. 15, according to market sources.

"The settings are weak and give no proper guidance as to how seriously New Zealand sees the climate crisis," the carbon trader said, adding that there was still a consensus that US$200/mtCO2e plus carbon price is needed to reduce emissions.