Carbon Match - Carbon market update

Wednesday 28 Apr 2021

Last week, another weighty ETS consultation document was published by the Ministry for Environment - It sets out a raft of potential adjustments to default emissions factors with the aim of giving effect to greenhouse warming potentials under the UN’s 5th Assessment Report (AR5). If taken up, these could affect ETS obligations for many sectors, from waste to synthetic gas users, to users of geothermal fluid and coal miners.

It also contains a number of other proposals which, if implemented, could have significant implications for business and for NZU holders generally. In particular, price control settings and unit limits on auction volumes are tipped for an overhaul.

Perhaps the most critical proposal is one which would give effect to a key time sensitive recommendation made by the Climate Change Commission in its draft advice. That was, to increase the trigger price for the cost containment reserve to $70 from 1 January 2022.

Another, more symbolic proposal is to raise the hard floor price on volume auctioned by the Government from $20 to $30. Thereafter, the idea is that each of these bounds is increased by 10 and 5 percent (plus inflation) respectively, year on year.

The result would be a much higher and wider price corridor for auction volume than the status quo ($20 to $50). The intent is that within that corridor, the ETS would contrive to deliver its precise "market" price on any given day, although higher or lower secondary market prices are certainly possible in theory.

Meanwhile, a significant recast of the Electricity Allocation Factor is also signalled. That factor is used to calculate how many NZUs are allocated to compensate the most emissions intensive and trade exposed industries for increased electricity costs experienced as a result of the ETS.

Accounting for about a third of the free allocation to industry, according to the MfE, it was set at 0.52 tonnes per MWh when the ETS began and lifted to 0.537 thereafter.

But some electricity sector experts have long suspected that it could be too generous, and analysis conducted for the Ministry and referred to in the consultation document implies that the difference could be material, depending on assumptions about competitive behaviour in the electricity market.

If this factor is reduced, so would the volume of NZUs given out to eligible industrials, all else held constant. However, NZU holders should hold their excitement, as in fact all that means is that more room is potentially freed up under the cap for the Government to auction off units it no longer has to give out to industry for free. The same approach is indicated when/if the NZ Aluminium Smelter is closed in 2025.

The full consultation document and its appendices can be found here.

Consultation closes at 5pm on Friday 28 May 2021 and the intent is that any new regulations or amendments will be gazetted by 31 September 2021.

NZUs - last/settle $37.25 on Carbon Match … but log in and check back on our open at 10am for live pricing.

Source: Carbon Match

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