Carbon Match NZU update

Wednesday 15 Aug 2018

On a Regulatory Roll - NZUs have firmed considerably in the last two months, woohoo for sellers, last trading just earlier today at $22.95.

A consultation document on future ETS settings is expected imminently and the $25 fixed price, the government's use of an auction mechanism and international linkages are all in scope.

The fixed price is front and centre for many sellers of carbon. Several options for change have already been identified by policy-makers.

In order of "most to least ability to control the potential shift of cost to the Government" they are:
1) a volume-limited auction cost containment reserve with a trigger price of higher than $25;
2) putting the fixed price option into regulations, but at a higher value than $25;
3) keeping the fixed price option in legislation as it is now, but at a higher value than $25.

According to information released under the OIA, for now regulators have discounted the possibility of getting rid of the fixed price altogether, citing continued volatility in international carbon markets and uncertainty about future unit supply into the NZ ETS.

A cost-containment reserve certainly might not sound as exciting to a seller as simply raising the fixed price. And the Government has said that the fixed price option of $25 will stay until an alternative is available - which means waiting for auction design and/or international linkages to emerge. But all of the above options could be helpful to price in isolation, as long as a cost-containment reserve doesn't herald misplaced market meddling.

Meanwhile, EU carbon reforms have seen prices for EUAs - not linked to our market, but relevant nonetheless to sentiment- firm to hold above 17 euros - or around NZ$30.

High Hopes - Our Paris targets look so lofty as to be unattainable. For NZ, forestry is the main tool in the box; the high hope of our Zero Carbon future - however that might ultimately be defined.

But for forestry to deliver, for the playing field to even between land-uses, let alone for capital to be mobilised towards investing in a lower carbon infrastructure, the carbon price needs to do the heavy lifting. Price formation matters.

Disclosure breeds confidence. Not just for the sellers coming behind you, but for the buyers - not all of whom are "traders" - who wish to feel confident that they are paying a fair price, especially in a rapidly rising market.

Many parties have private commercial arrangements which need to stay that way. But these all peg off the current value of an NZU and spot NZUs can easily be traded online.

When you sell spot NZUs using the Carbon Match platform the price you achieved is disclosed, albeit on an anonymous basis. All other participants can see with transparency and ease that a particular price has been achieved and set their sights accordingly. This helps the wider market as well as yourself.

Source: Carbon Match

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