Grant Robertson seeking ETS advice, as tumbling carbon price lowers cost of pollution

The scheme is not intended to allow polluters to plant trees rather than reduce emissions. Photo / 123RF

Finance Minister Grant Robertson has sought advice on the functioning Emissions Trading Scheme after the price of a unit under the scheme continued to plummet. It has now fallen about $30 in just three months.

After spending a year trading above $70 and reaching as high as $88.50 on the secondary market, ETS units, called NZUs - the equivalent of emitting one tonne of carbon - are now trading at around $55 on the secondary market, although units traded as low as $48 on one secondary market on Monday.

“We keep a minimum price so we’re very well aware of where we want that to be. Clearly the last couple of auctions have seen that occur,” Robertson said.

“I’m taking advice around that issue at the moment. It’s pretty obvious for the Emissions Trading Scheme to do its job you need a carbon price that reflects where the market actually is,” he said.

“We’ve got to look at it as a long-term proposition and what I want to make sure is that the scheme is operating in a way that delivers the outcomes we want. I think getting more advice is a good idea,” Robertson said.

Climate Change Minister James Shaw said he had also clocked the tumbling price of carbon.

”While it’s not my intention or position to comment on the market, I want to reiterate the Government’s strong position on climate change and the ETS being our central mechanism on dealing with climate change,” Shaw said.

National leader Christopher Luxon said “we are big supporters of the ETS scheme”.

His deputy, Nicola Willis said the party was “looking at whether there is a case for a floor in the ETS price - a minimum level. It is really important there continues to be confidence in the Emissions Trading Scheme as the way of pricing carbon in the economy and reducing emissions.”

The effective floor price is currently $33.06, and is set to rise every year of the forecast period, reaching $44.35 in 2027.

Willis said she would like the floor price to be higher.

The ETS price has tumbled since the Government rejected advice from the Climate Change Commission last year to significantly tighten ETS settings by raising the minimum price units were sold on the primary market, and raising the price that triggered the release of units from the “Cost Containment Reserve” - a pool of units that acts as an effective maximum price.

There are fears this price functions as a “magnet” for secondary markets, rather than a valve to release stress when the market malfunctions.

The magnet effect means the Cost Containment trigger price encourages firms to buy units at that price, releasing additional units into the ETS scheme. The Cost Containment Reserve is not just regularly breached - it has twice been emptied of all its reserve units.

The Climate Change Commission recommended a price floor of $62 - almost double the current floor, and a two-tiered Cost Containment Reserve trigger of $176.50 and $221 - well above the current level of $80.64.

While Shaw backed the Commission’s recommendations, Cabinet did not. Treasury advice revealed Cabinet was warned ratcheting up ETS costs would increase the cost of living.

Once this advice was rejected, the price of NZUs began to fall, suggesting a lack of confidence in the market that the Government was serious about meeting its climate commitments.

The Government is shortly to begin a long-signalled review of ETS settings with a view to fixing the system so that it drives gross emissions rather than simply allowing firms to offset pollution with tree planting.

It is not all bad news on the climate front, however.

Data from Stats NZ released todayshowed total greenhouse gas emissions have fallen to their lowest levels in eight years.

“This has been a long time coming, but it shows that what we are doing is working. We just need to keep doing more of it,” Shaw said.