The likelihood of the auctions clearing is falling as the number of units accumulated for sale grows.
Because the cash the Government receives from the auctions is ring-fenced and used to fund climate-related initiatives, a year’s worth of unsettled auctions would mean it would either need to find the money it was planning to receive elsewhere (ie borrow more) or cut its investment plans.
Neither option is ideal, but the situation isn’t all bad.
Indeed, neither Climate Change Minister James Shaw, Jarden head of commodities Nigel Brunel nor ANZ agricultural economist Susan Kilsby are particularly worried.
Brunel and Kilsby noted there are currently too many units in the market.
This was one of the reasons Wednesday’s auction didn’t settle. Emitters simply didn’t need the units, Brunel said.
If all the units up for auction in 2023 were extinguished, this would reduce the number available in the market.
All else being equal, this would put upward pressure on the price, which would create more of an incentive for emitters to try to reduce their carbon footprints.
Govt won’t intervene in September and December auctions
Asked if he was worried about this year’s auctions not clearing, Shaw said, “No. Markets fluctuate all the time.”
He said he wasn’t planning to change ETS settings specifically to help the September and December auctions go through.
“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,” Shaw said.
“This is the market working as it should.”
What about the impact on the Government’s books?
Finance Minister Grant Robertson accepted the Government might need to top up its Climate Emergency Response Fund, as it did via Budget 2023.
Regulatory risk
Kilsby and Brunel said uncertainty around how ETS settings will change as New Zealand ups its efforts to meet emissions reduction targets is the biggest issue at play.
A review is under way into how forestry can be used to offset emissions.
Kilsby said that currently, it can be cheaper for businesses to invest in trees to offset their emissions, rather than technology to actually reduce their emissions.
She believed the outcome of the review, which will be publicly consulted on in the coming weeks, would be controversial.
Brunel suspected any policy decisions made before the September or December auctions wouldn’t push them to settle – again, because of the sheer volume of units in the market.
This year’s two auctions didn’t garner enough support despite the carbon price being at rock bottom.
It plummeted on the back of Cabinet’s decision in December to not change ETS settings, in line with both Climate Change Commission advice and market expectations, to let the carbon price rise.
Cabinet made the call (which Shaw and other climate advocates disagreed with) to prevent a higher carbon price exacerbating inflation.
The carbon price rose a little after Wednesday’s failed auction, to $60.50 per unit. While this is above the low point of around $55 it had sunk to, it’s still well below the $85 mark it was at before Cabinet’s December decision.
Brunel concluded that while there would be some gyrations in the carbon price, as New Zealand goes through the processes of decarbonising the economy, it ultimately needed to rise.
Jenée Tibshraeny is the Herald’s Wellington Business Editor, based in the parliamentary press gallery. She specialises in government and Reserve Bank policymaking, economics and banking.
