ETS revisons: Carbon Match comment

Wednesday 16 Jan 2019

ETS revisions announced - On 12 December the Government made a much anticipated (but perhaps less enthusiastically received) announcement of the “first tranche” of ETS changes.

Those hoping for a higher carbon price and traders looking for a simple signal - for example a raising of the fixed price option to some higher level - will have been disappointed.

Instead, Acting Climate Change Minister Julie Anne Genter confirmed that the fixed price option of $25 will continue for surrenders due in 2019 “in order to maintain regulatory predictability.” It is not clear whether it will still be available for surrenders that take place in early 2020, ie for the 2019 compliance year, however.

NZU prices had firmed some 75 cents over the first few days of this week in anticipation of the announcement, which had been foreshadowed by a formal “pre- announcement” communication from the MfE on Monday.

As of market close yesterday, NZUs had last traded on Carbon Match at $25.75 and remained bid at that level, but bids were pulled on the announcement, all the way back to $24.80.

So the fizz has fizzled, for the moment. Certainly the sugar high is missing. But if you look at what else is in the diet, you might feel more positive about the mid-term and the intent to deliver a credible market.

First, the fixed price option is going. Not for the 2018 compliance year, but soon, and not just to some higher level but altogether - it is to be replaced by the much heralded but little understood “cost containment reserve”.

As an emitter, what would I rather have - a $50 or $100 fixed price option as a painful, but genuine and easily understood backstop? Or the more nebulous, yet- to-be-negotiated “cost containment reserve”, whose size relative to the size of the NZ market next year - 40 million tonnes, could be small?

Work on the Paris rule book continues this week at COP 24. Finalising this is key to how international emissions trading will work in future and NZ Climate Change Minister James Shaw is one of the Ministers who has been asked to chair this work this week.

But for the moment, and perhaps for quite some time, New Zealand remains an isolated ETS with the FPO the only real safety valve on prices.

Yesterday’s announcement still firmly signalled that the days of the FPO are numbered. So many emitters may find themselves feeling less secure in their abilities to manage carbon in 2019 than they have to date, and this is likely to keep engagement high.

Second, don’t underestimate the importance of having an actual cap on emissions under the ETS. Without this any ETS can only ever be imperfectly aligned with our international - and domestic - targets. And it’s been sorely lacking in the NZETS. But it’s unlikely to sit easily with the current basis of free allocation to industry and again, that is likely to keep engagement high.

Thirdly, Julie Ann Genter has reiterated comments already made by Minister Shaw in the past - that International units would “not be a first choice”, underlining the need for domestic action in our own backyards, not just a willingness to pay. That’s not to say we won’t see linkage - indeed today Carbon Pulse reported that New Zealand officials have been continuing talks with Quebec and California about potential linkage opportunities after spending more than a year discussing each other’s carbon schemes. But it’s clear that lessons have been learned from past experiences and the focus on environmental integrity is key to any future linkage.

Finally, as a further factor that may see prices supported over the mid term, the Government has also said that it will investigate the potential introduction of a price floor in the scheme. Opinions are divided as to whether this is a good idea, or another distortion, but certainly we would not have seen the collapse in new planting for carbon that we witnessed in 2012-2014 had we had this then. Incidentally, the floor price in the California scheme for 2019 has been set at US$15.62, or about NZ$22.70.

Source: Carbon Match

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