James Shaw says the ETS market is working as intended after another auction gets declined due to insufficient bids
15th Jun 23, 6:49am by Dan Brunskill
James Shaw says the ETS market is working as intended after another auction gets declined due to insufficient bids
15th Jun 23, 6:49am by Dan Brunskill
New Zealand's climate minister James Shaw (left) meets his Australian counterpart, Chris Bowen, in June 2023
Climate Change Minister James Shaw says there are no plans to intervene in the Emissions Trading Scheme (ETS) after a second auction was declined due to insufficient bids.
No units were sold in the quarterly auction held on Wednesday as the clearing price did not meet the minimum price settings.
There are two different reserve prices in the auction, a legislated minimum of $30 and confidential reserve price which is set in relation to the secondary market price.
New Zealand Units were trading at about $57 prior to the auction, but climbed above $60 during Wednesday afternoon.
The jump in price likely reflects an increased risk that an entire years’ supply of carbon credits could be canceled if the two remaining auctions are also declined.
When an auction is declined, the available units roll over into the next auction but only until the end of the year. After that they are canceled altogether.
Christina Hood, the head of Climate Compass, said each subsequent auction became more difficult to clear as the volume builds up.
For example, the September auction will require participants to bid for triple the usual volume to achieve a clearing price.
This raised the question of whether the government should adjust the settings for the final two auctions, to prevent the units from being canceled.
“Given the massive unit surplus, I’d say allowing all 2023 auctions to fail could well be in the public interest,” she said, in a tweet.
In an email to Interest.co.nz, James Shaw said he did not intend to make any changes as the market was working as it should.
“Like any auction, when the market doesn’t turn up to buy at a price that the vendor is willing to sell at, the minimum price is in place to protect what’s being auctioned from going for significantly less than their open market value”.
ETS settings are locked-in two years in advance but can be adjusted in certain circumstances.
If all four of the auctions fail to find a clearing price, none of the carbon credits on offer will be carried over into 2024.
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“That means the supply of units will go down and, in theory, would increase the price of NZUs in the future. But there is still some water to go under the bridge before this happens,” Shaw said.
Stockpiles for miles
The supply of carbon credits has been significantly greater than required by emitters, which has resulted in large stockpiles of NZUs which can be surrendered to meet future obligations.
In this sense, losing a year's worth of units would not cause much, if any, disruption to businesses that have to emit carbon to operate.
Motu estimated there were almost 140 million units stockpiled in 2021, compared to an annual surrender volume of about 40 million units.
The cost containment reserve, which releases yet more units into the market when prices get too high, has been triggered three times since September 2021 — adding to the oversupply.
Susan Kilsby, an agricultural economist at ANZ who monitors the ETS, said there were plenty of units in circulation and emitters only had to surrender them once a year.
Despite the oversupply, the carbon price had been tracking higher on the expectation that future settings would be much more restrictive.
That was undermined by a Government decision last December, which ignored the Climate Change Commissions advice and kept settings fairly loose.
In addition, the Ministry for the Environment has been asked to assess what changes could be made to the ETS to incentivise emitters to reduce emissions, rather than just offset them.
Currently, pine forest offsets are one of the cheapest ways to reduce net emissions but the Climate Change Commission worries those forests are themselves prone to climate risks.
The Environment Ministry is expected to begin public consultation on its review within the next couple of weeks. Until then, participants have little confidence in trading the market.
“Once it is clearer how the ETS will operate going forward then we should see some price convergence between the secondary market and this market,” ANZ’s Kilsby said.
“But while there is a lack of clarity as to how the ETS will operate, it is very hard to put a value on these units”.
Evan Papageorgiou, IMF's chief of mission.
IMF’s carbon concern
Also on Wednesday, a representative of the International Monetary Fund noted the falling carbon price as part of an economic monitoring report.
In a statement, IMF staff said New Zealand was making progress in closing the gap between its expected emissions and its actual targets.
“However, the sharp decline in the emissions price is a concern as it could weaken the signal to the private sector to reduce emissions and lower the cash proceeds to the Climate Emergency Response Fund”.
Had the ETS auction on Wednesday cleared at the market price, it would have earned the government approximately half a billion dollars to spend on climate priorities.
In the nine months to March, the lower carbon price cost the government about $800 million in lost revenue and contributed to a significantly wider than forecast deficit.
Evan Papageorgiou, the IMF’s mission chief, said he had noted the declined auction on Wednesday and also pointed to the upcoming review as the likely cause.
“We would like to see a reduction in policy uncertainty, that could go a long way to addressing some concerns of market participants,” he told reporters.