Carbon market update: Carbon Match

Tuesday 5 Feb 2019

With the government standing by its fixed price option at a level of $25 until at least May, you could be forgiven for thinking that a rational compliance buyer might be unwilling to bid more than about $24.75.

But we all know that the picture is more complicated than that and so right now NZUs remain well bid to the $24.90/$24.95 mark on Carbon Match and we have reasonable volume offered for sale from $25.05. Forest owners and forestry consultants are currently under way filing returns and as units are issued to post-89 foresters on the back of this perhaps we will see further volume come to market.

One issue to bear in mind is that this year's $25 FPO, all else held constant, will have spill over effects into next year's demand and prices. It's currently unclear whether the May 2020 surrender deadline will still involve an FPO of $25, some other number or even be replaced by a new cost containment reserve by then - something officials are currently working on, but which also requires legislative change to take effect.

But what is clear now, at least in respect of compliance year 2018, is that emitters have the right to pay $25 - instead of surrendering the units they've acquired over the last year or more. For some, this will be a legitimate response to regulatory uncertainty. This year's FPO could be next year's safety valve and the extent to which the FPO drives banking this year will determine residual demand in coming compliance periods. This is the problem with price control generally, but we are where we are - snuggled right around that arbitrary $25 fixed price option, with almost every party unsure of the best course of action.

Just out of interest, that's slightly above, say, current prices for California Carbon Allowances of about US $15.50 / $22.50, but well below European Union Allowances, which finished up yesterday at €22.85, or about NZ$38.

Source: Carbon Match

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