Carbon market update

Wednesday 16 Dec 2020

NZU Update - NZU prices soared almost 10% over the course of November/first week of December, trading a Carbon Match high last week of $38.10 before appearing finally to ease a little as selling interest emerged around the $38 mark, last trade $37.75.

People keep asking what on earth has seen carbon move up to $38. From a buyer's perspective, here are all the factors we see at play - in no particular order:

> The ETS is not really only a domestic market, in that a compliance entity has no ability to comply using international units, but international capital can most certainly access and hold on to New Zealand Units. > The fixed price option is on its way out and the cost containment reserve is in no way shape or form a replacement for the simple basic assurance that the FPO has provided to compliance entities for the last ten years.

> The ETS now has very big penalties for non-compliance.

> While the auctions will inject further liquidity, there is no certainty for a compliance buyer that they will get what they need.

> They also come with other complexities that buying spot carbon does not impose - for example the requirement to lodge collateral and educate oneself about how to use the auction system.

None of the above factors are new. But there's quite alot to think about. And minds are becoming more focused on the challenge - indeed, for some entities, the existential challenge - that is posed by a strengthened ETS.

On the other hand, NZU holders, especially the natural sellers, see news almost every day that they're able to interpret as justification for holding on; reasons for thinking that even $38 is not nearly a high enough carbon price to drive our transition.

Our Planet is Broken - One example is New Zealand's recently declared climate emergency. Perhaps even more significant is the announcement that the public sector will go carbon neutral by 2025. The relative nearness of this target only adds to bullish sentiment.

We have also heard the Secretary General of the United Nations, Antonio Guterres warning that “our planet is broken” in his State of the Planet speech at Columbia University.

Guterres' speech packed a punch and he said that humanity is waging a suicidal war on nature which is destroying ecosystems, causing biodiversity to collapse and reducing and degrading wetlands, coral reefs and forests.

He also pointed to the issue of increasing exposure of humans and livestock to viruses and disease as we encroach further into the natural habitats of wild animals.

2020 is currently set to be one of the three warmest years globally on record, despite the cooling impact of this year’s La Nina weather pattern.

Guterres is highly pessimistic about the worlds’ ability to limit temperature rise to 1.5 degrees Celsius above pre-industrial levels (we are already at 1.2 degrees above).

Rather he says we are heading for a 3 to 5 degree rise this century, with carbon dioxide and methane at record levels and rising; fossil fuel production needs to decrease by approx. 6 percent a year from now till 2030, however, it is due to increase at an annual rate of 2 percent.

Guterres called on international institutions, governments and the private sector to move investments away from fossil fuels and into renewables, put a price on carbon and to support developing countries in reaching their climate goals. He said a central objective for the United Nations for 2021 is to build a truly global coalition for carbon neutrality.

We Are Still Waiting for a Plan - Over the weekend, another significant event took place - the Climate Ambition Summit, which was hosted virtually by the UN, UK and France.

Despite our recent declaration of a climate emergency, no one from the New Zealand government spoke - according to Climate Change Minister James Shaw, New Zealand had been invited to “tender” an application to attend, but it seems that we didn’t yet have anything significant enough to announce or add to the Summit.

New Zealand’s absence, and the perception that we haven’t done enough to tackle climate change, will be an embarrassment for the Prime Minister and her government.

In contrast, Boris Johnson boldly touted the UK’s credentials in one of the main addresses, despite having been somewhat of a climate sceptic in the past.

He reaffirmed commitment to a 10 point plan for a "green industrial revolution" and to cut the UK's emissions by 68% by 2030.

Australia was barred from speaking given the widely held view that they have lacked ambition to curb fossil fuel use.

Source: Carbon Match (where NZUs currently bid $37.75 and offered $38.00)

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