Carbon market update

Wednesday 19 Jun 2019

Carbon Match Market Update - Life is what happens to you when you’re busy making other plans.

This has been the experience of some last week as push came to shove and the market traded down to $23 flat on reasonable volume late last week - something that might have seemed inconceivable to most mere days before.

Bids had already been falling away on the back of negative market commentary following the apparent failure of government to raise the FPO in the most recent Budget, and concern that this could see a fixed price of $25 persist until potentially as late as 2022. The key question the market is grappling with is the likelihood of that being the case.

Yesterday, we asked many buyers to take a view where they’d be comfortable on Carbon Match in an attempt to rebuild confidence. We had a reasonable show of confidence in the low $23s. However late in the afternoon all bids were sold into decisively.

It's fair to say that thanks to the availability and recent uptake of that fixed price option, that appetite among some emitters is likely to be dull for some time.

And with surrenders due late May for many emitters, June is in any event often a month of low activity in the carbon market.

Is this cause for further panic? It doesn't seem rational on the basis of the facts as we understand them. Back to those:

1. Yes the government has provided assurance that for surrenders due in 2019, the FPO stays at $25. For most emitters May 2019 was the key date. Foresters may still have liabilities they intend to address this year, potentially using the fixed price option of $25 if that makes sense at the time.

2. After December this year, it is not at all clear that $25 will be the relevant number for May 2020 surrenders. It might, or it might not be, but no specific statement has been made in relation to what the fixed price option will be for surrenders due in May 2020 and emitters may want to bear that in mind as they survey the spot buying opportunities they see in coming weeks.

3. The auctions are targeted to be operational in late 2020. The replacement for the FPO is intended to be a cost containment reserve attached to the auctions, but with parameters yet to be specified. Again, this unknown and somewhat nebulous concept today is unlikely to give emitters much security in their planning.

4. In the event that there are delays the Government has committed in any event to get rid of the fixed price option by the end of 2022, also a risk that buyers may want to bear in mind.

5. Climate Change Minister James Shaw’s announcement on these matters last month also referred to a possible price floor in future.

Added to the above, just two weeks ago millions of tonnes were paid at the fixed price option of $25 - clear evidence that many in the market saw that as a prudent approach.

And while the Budget may have disappointed some, buried in the details of Vote Environment there is evidence of the Government's own need to be conscious of price risks to the upside, with some NZU-related estimates for the 2018/19 year increased "due to an increase in the upper limit of the appropriation from $25 per unit to $30 per unit to accommodate the uncertainty in the market price of New Zealand units".

So, we ask once again, buyers with appetite might want to run the numbers and see where they'd be happy to show interest today.

Carbon Match - every weekday from 1-5pm.


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