Carbon price rises as Government called out for kicking climate can down the road

Climate Change Commission chairman Rod Carr recommends the Government gets back on track to meeting emissions reduction targets. Photo / Michael Craig

The carbon price has risen slightly on the back of the Climate Change Commission (CCC) recommending the Government takes more drastic action to lift the price to a level that better incentivises businesses to reduce their emissions.

The CCC has advised the Government adjust Emissions Trading Scheme (ETS) settings to get itself back on track to meeting legislated emissions reduction targets.

The Government, in December last year, ignored the CCC’s advice to limit the number of new units auctioned under the ETS and allow the price to rise, fearing emitters would pass higher costs on to consumers.

Its decision to prioritise the “cost of living” over the CCC’s advice surprised the market and made traders question the Government’s commitment to letting the carbon price rise.

The uncertainty saw the carbon price fall from $85 per unit to a low of around $53, and resulted in a quarterly auction of credits failing to clear in March.

The CCC’s latest round of advice, released on Thursday, recommends the Government makes up for the deviation from the agency’s plan with more drastic changes to ETS settings in the future.

“This year’s advice reflects new data that has emerged, updates to our approach, and the impacts of the Government’s decisions on the NZ ETS settings in 2022,” the CCC said.

“Our recommended adjustments to settings are designed to help bring the NZ ETS back on the path to meeting national emissions reduction targets.

“Without such action, Aotearoa New Zealand risks failing to meet its climate goals or potentially facing higher emissions-related costs in the future.”

Specifically, the CCC recommended reducing the limit on the number of units available for auction under the ETS, raising the trigger prices for the cost containment reserve and auction reserve price, and changing to a two-tier cost containment reserve.

The Government will now consult on the recommendations ahead of making decisions in time for regulations to be updated by September 30.

Salt Funds managing director Paul Harrison wasn’t too surprised the CCC took that position with its latest recommendations.

He said the situation emphasised the fact that “if you keep kicking the can down the road, the hill gets steeper to climb”.

The CCC’s stance gave some traders a sliver of confidence to return to the market. Hence, the carbon price rose from around $59 per unit on Wednesday to $62.50 on Thursday.

Harrison said all eyes were now on whether the Government would adopt the CCC’s advice.

“Unless there is a change in attitude towards the CCC’s recommendations, we could potentially have another failed auction,” he said.

Units under the ETS are next due to be auctioned in June. The credits that didn’t sell in March will be added to this auction

EY climate change and sustainability services director Matthew Cowie believed the failed March auction would increase the likelihood of the Government adopting more of the CCC’s advice, but possibly still not following all of it.

“The oversupply risk in the market is now more visible,” he said.

Climate Change Minister and Green Party co-leader James Shaw welcomed the CCC’s advice, saying, “A well-designed system for pricing emissions is a central part of our government’s climate change policy framework”.

“The advice published today will guide Cabinet in its decisions about how to ensure the ETS cuts climate pollution in line with our targets.”

Nonetheless, Cabinet ignored Shaw’s backing of the CCC’s advice last year.

Finance Minister Grant Robertson last week told the Herald he didn’t regret Cabinet’s decision.

“Our job is to make sure that we have a just and fair transition to the lower emissions economy we need,” he said.

“The carbon price rising at an unfettered rate would have a massive impact on New Zealanders and would in many ways potentially undermine what we’re trying to achieve.”

The CCC made the point, “If the Government sets price controls that keep emissions prices at lower levels, it will need to impose other regulations or policies to compensate for an NZ ETS that does not play a substantial role in lowering emissions.”

Another effect of the carbon price being low is that it affects the Crown accounts.

As reported on Wednesday, the Crown’s operating balance before gains and losses took a $486 million hit in the eight months to February due to the carbon price falling.

This is because a lower carbon price meant the Crown received less revenue from emitters when they surrendered units to account for their emissions.