The price of a tonne of New Zealand carbon in the emissions trading scheme has pushed through $15, in theory creating break-even conditions for forestry planting based on carbon farming.
In the Budget this week, Climate Change Minister Paula Bennett confirmed a widely expected cancellation of subsidies to major emitters over the next three years.
The cancellation immediately improves the prospects of a higher carbon price. A price from $15 a tonne starts to make carbon capture through forest planting commercially viable.
The carbon price collapsed from a high point of $21 in 2011 to trade as low as 35c a tonne in 2014 as cheap eastern European carbon units flooded global markets which were already reducing emissions due to lower industrial activity after the 2008 global financial crisis.
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When New Zealand closed its doors to foreign carbon credits last June, the price of New Zealand Units of carbon began rising and they have traded above $14 a tonne in recent weeks, anticipating the subsidy decision.
The NZU price rose from $14.25 to $14.85 within minutes of the Budget announcement, in which Bennett detailed the phase-out of the so-called "one-for-two" subsidy by January 2019.
A $25 per tonne maximum capped price for NZ Units is to be kept for the foreseeable future, to stop major industrial emitters facing spiking carbon prices, especially in the next four to five years, when New Zealand will have no access to international carbon markets, making NZUs the only carbon emission units obtainable by emitters.
A regulatory impact statement on the announcement, published on the Treasury website yesterday, shows the $25 cap with a phased withdrawal of the subsidy would produce only a "low to moderate risk of NZU price reaching the $25 price cap."
It warns that if NZUs were to trade at the $25 price cap for any length of time, it would effectively become a carbon tax and would have the unwanted policy outcome of causing the Government's liability to a stockpile of NZUs to grow, when one objective of the changes to the ETS is to reduce the Government's liability for meeting New Zealand's obligations under international climate change treaties.