Carbon Match Market Update

Wednesday 21 Jul 2021

NZUs pushed through to trade $46 on Carbon Match late last week - NZU holders across the board appear to have reduced selling interest. We see this as a temporary response to a number of factors. In the 23 June auction, the majority of buyers failed to secure any volume at all. Clearing at $41.70 - above prior secondary market levels, some sellers who went before have expressed regret.

Meanwhile the market has steamed on, with buyers paying asking prices, and sellers pulling back or lifting their asking prices. This isn't simple greed - many have raised concerns that they may have sold "too low", with caution causing them to pull back from sales programs to reassess the market and its policy settings.

Some natural sellers point to the strength of the log market, with many forest owners telling us they're not under pressure to sell NZUs right now anyway. And for those that are in the market to sell, the much higher carbon price has seen budgeted NZU volumes get scaled back in response.

Another factor that contributes significantly to sentiment on both sides of the market are the proposals made in the April/May consultation on ETS settings. The final Climate Change Commission's report remained constant in its recommendation to lift the trigger price for the cost containment reserve (CCR) from $50 (now not far off current secondary market levels) to $70, as soon as practicable. We are yet to see regulation but few doubt the strength of this Government's conviction.

To that end, two further ETS-related consultations on market governance and the industrial allocation are expected to commenced last Friday. So, what do the buyers do for now? In addition to whatever volumes are brought to market by private account holders, another 9.5 million units are scheduled to be auctioned by year end.

There is also a pool of an additional 7 million units - the CCR - that becomes available if either the September or December auction clears at $50 or above. That pool does not roll over to next year. The $50 CCR could be a one-time opportunity.

With next year's cost containment reserve expected to cost more, and therefore be less "containing", buyers are keen to be well covered. There's no clear backstop anymore. Penalties for non-compliance seem scary. But sellers don't face such urgency. In fact, it's almost the reverse. Higher prices + tougher penalties = slow down.

Whoever you are, being an NZU holder shouldn't be an excuse for having no plan. The world can change and while the direction might feel clear enough to you now, stuff happens.

$46 dollars hasn't been seen before and sellers, if you haven't already, you should agree a strategy and a plan, rather than simply counting your paper gains. The market has been moving fast. Will it get to your nirvana in a time frame that matters to you? Or will it get the speed wobbles?

If you've an asking price in mind, put it up on Carbon Match and see what happens next.

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Source: Carbon Match - open every weekday 10am-5pm.

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