Carbon Match market update

Wednesday 18 Dec 2019

Market Update: Getting there on markets - NZUs are fairly well bid to $24.65/$24.70, best offered at $24.75 with light volume trading over the past week.

COP25 is still underway in Madrid and one of the key issues outstanding is to develop a "rule book" for how to implement Article 6 of the Paris Agreement, which is the part of the Paris agreement that would enable international co-operation and the potential recognition or use of international carbon markets.

Article 6 was the only part of the Paris rulebook that could not be agreed at COP24 in December 2018 and there is considerable pressure to finalise the rule book for Article 6 this year in Madrid.

In particular one of the big challenges is accounting guidance on the operation of Article 6.2, which provides for country to country transfers of mitigation. Likewise controversy abounds over Article 6.4, which would provide a new centralised mechanism - effectively a new international carbon market.

With New Zealand's projected emissions over the 2021-2030 period likely to significantly overshoot its current NDC (target) under the Paris Agreement, the issue of how to access, recognise and account for international emissions is very important.

With a likely overshoot of our Paris budget of some 200 million tonnes, we have three ways of closing the gap: grow it, buy it from someone else, or do some really significant dieting so that we can tighten our own domestic belt.

Ideally we would do all three. But currently the NZ ETS is a something of a desert island, a domestic-only market.

Meanwhile the whole idea of international trading of carbon reductions remains fraught. To the economic purist, the concept enables least cost abatement to take place first and is consistent with a more efficient transition to lower carbon economies.

But many parties are concerned that the concept potentially undermines the whole ambition, by creating incentives to assume lower targets in the hope of being able to receive recognition for mitigation transfered to others. To some, the whole idea is just downright distasteful.

Even within New Zealand we can witness a change of approach. It was not long ago that the previous National government exhibited total unwillingness to limit the import of international Kyoto units into the NZ ETS, (even as real carbon prices fell to a matter of cents per tonne). That stance rested on the grounds that a tonne of CO2 and its equivalents removed from the atmoshere was a tonne, no matter where the reduction came from.

But things have changed. Fast forward to recent Select Committee input and it is very clear that the appetite to rely on international carbon markets is tentative on all sides of the house. Indeed the CCRA Zero Carbon Amendment Act states that "Emissions budgets must be met, as far as possible, through domestic emissions reductions and domestic removals."

The question is, at what cost of carbon? Very little has happened at $25 and below.

As it stands today, we don't seem to have a plan to source any significant domestic reductions other than from forestry, whose contribution can scale up only slowly. Sequestration from forestry might at best close 25% of the gap between BAU and the budget implied by our current Paris target.

And then only if confidence among forest owners and other would-be forest landowners is preserved. Instead, landowners who are interested in carbon face toxic politics, cross neighbours and ever greater complexity. Bring out the kid gloves.

NZUs - bid $24.70, offered $24.75.
Carbon Match - every weekday from 1-5pm.

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