The incoming government is likely to have to contend with a billion-dollar hole in its books, as the fourth and final auction of units under the Emissions Trading Scheme (ETS) for the year isn’t expected to clear on December 6.
While this would be inconvenient for the new government, ETS experts say a failed auction wouldn’t be a “failure”.
In fact, the head of Climate Compass consultancy, Christina Hood, believes it would be good for the climate, and have little impact on the Government’s financials longer-term.
Businesses that participate in the ETS must surrender an “emissions unit” to the Government for every tonne of carbon they emit.
The Government is reducing the number of units it auctions into the market so that over time, a constrained supply of units pushes up the price and incentivises businesses to cut their emissions.
The Government auctions units four times a year. If an auction doesn’t clear, the units get added to the next auction. If all four auctions in a year don’t clear, the units get wiped and the process starts from scratch the following year.
This is what is expected to happen in 2023.
However, carbon market traders say flushing out a year’s worth of units would actually be desirable, as there’s currently an oversupply in the market.
Jarden’s head of commodities Nigel Brunel said the best thing would be for the December auction to fail to give the market an opportunity to right itself.
Tightening the supply of units a little would put upward pressure on the price, better incentivising emissions reductions.
Hood believed a higher price would also benefit the Government longer-term, as it would receive more cash proceeds when it auctioned units.
So while failed auctions in 2023 would leave a gap in the Government’s finances, she said it may all wash out over time if the carbon price tracks north.
This said, Hood noted the point of the ETS was to reduce emissions, not raise money.
While the outgoing government put cash proceeds from ETS auctions into its Climate Emergency Relief Fund – a pot of money ring-fenced for climate-related investments – National and Act want to give these funds back to individuals via a “carbon dividend”.
Their argument is that if the price of carbon rises to the extent it effectively incentivises businesses to cut their emissions, costs will be passed on to households via higher petrol and electricity prices, for example. Accordingly, they believe it’s only fair to help households absorb these costs.
Where the proceeds of ETS auctions end up isn’t as relevant to carbon market traders as what happens to the design of the ETS.
The Ministry for the Environment consulted earlier this year on different ways to change the scheme to encourage businesses to cut their emissions and rely less on forestry offsets.
One of the proposals was to completely disallow forestry offsets under the scheme. Another was to place conditions or restrictions on forestry offsets.
Brunel couldn’t see the incoming government making radical changes to the ETS.
Indeed, NZ First doesn’t share the concerns of outgoing Climate Change Minister James Shaw around there being too much reliance on offsetting emissions.
NZ First is a staunch advocate for the forestry sector, and is particularly mindful of the role it plays in supporting regional and Māori economic development.
Brunel’s view was that both reducing and offsetting emissions using forestry – a “biological vacuum cleaner” – were important.
He conceded it was difficult to figure out how to strike the right balance between the two, but said people should expect the ETS to keep evolving.
ANZ agricultural economist Susan Kilsby believed uncertainty contributed towards this year’s three auctions not clearing.
“It’s hard to trade when the rules are likely to change,” she said.
The issue earlier in the year was that the Government (which was concerned about the cost of living crisis) didn’t let the price of carbon rise in line with Climate Change Commission advice – as widely expected.
It then got back on track with the commission’s advice following a court ruling.
As for the review of the treatment of forestry under the ETS, Kilsby recognised there would be winners and losers.
“Not everyone will be happy. It’s going to be quite controversial, no matter where it goes.”
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.