Carbon Match Market Update

Wednesday 11 Aug 2021

The Fear – The last month has seen extreme weather events around the globe. Severe floods have hit western Germany and Belgium, China's city of Zhengzhou and of course created major havoc on the west coast of our own South Island as well.

Meanwhile wildfires raged elsewhere in the world. California, Oregon. Siberia - indeed Russia has resorted to seeding artificial rain to combat numerous uncontrolled fires in that country.

Turn off Netflix, switch on the news and watch the next apocalyptic event from the comfort of that armchair. These events, however far removed they may feel to us right now, should add to a growing sense of urgency.

With COP26 just around the corner there is an expectation that every country must lift its game. Keeping the 1.5 degree threshold within reach is a key focus of the next COP. Over the weekend UN climate chief Patricia Espinosa reiterated that "collective efforts fall far short of what is required by science to limit a global temperature rise by the end of the century of 2C, let alone the desired objective of less than 1.5C."

That means a ramping up of NDCs (Nationally Determined Contributions) all round. Revised NDCs were due last week in order to be included in a new synthesis report ahead of COP26. But just 58% of countries submitted them. New Zealand was not yet among that group and is still working on it.

Balancing Act – The final report of the Climate Change Commission has already found that our current NDC is not compatible with contributing to global efforts to limit global warming to 1.5C. We're going to have to step it up.

On the one hand, as NDCs get tougher, so comes increasing pressure on all Governments to intervene. Indeed combating climate change is the dream of regulators and indeed any politician bent on intervention and/or grand plans. It doesn't have to be, but probably will be, the perfect catalyst for bigger government. Right when we need all the help we can get from private sector investors to decarbonise our economy and pursue far greater low-carbon and renewable electrification. It's going to be the finest balancing act.

On the other hand, we just can't move fast enough. A New Zealand group of lawyers, Lawyers for Climate Action NZ, have already called the Commission out, filing for judicial review of the Commission's plan. The Commission's proposed budgets were more generous in their final report than in the draft on which they originally consulted.

We are still yet to see the Government's own emission reduction plan - a whole of Government multi- agency effort, which must be released by year end. It's bound to be confronting.

The ETS is Not Enough – Back when NZ created its ETS, the idea was very much that the carbon pricing would be the key lever for delivering a lower carbon economy. A carbon price had the advantage of simplicity. Now the carbon price is just one part of the tool kit with some policy makers viewing the ETS as a very blunt tool.

Global carbon prices still vary widely, the global carbon market very much a patchwork quilt, a work in progress.

Mid-July finally saw the launch of China's National carbon market, initially covering the Chinese power sector, which accounts for about 40% of the country's emissions. Chinese Carbon Emissions Allowances, known as CCEAs, are reported to be around USD$8 mark.

That's a fair way off the recent prices seen out of the 15 year old EU ETS, where European Allowance front year contracts finished up last week round €53.

NZU Prices – NZUs still appear to be modestly priced compared to that scheme. They continue their strong rise and over the last week have continued to creep north, last trade $48.75 this afternoon on Carbon Match.

With another Government auction just around the corner (1 September) we're interested to see whether NZUs test the $50 mark ahead of the auction, or on the day, bringing the cost containment reserve into play. With changes to regulations expected to raise the trigger price of this pot from $50 to $70 for 2022, there will be a strong temptation not to forgo the opportunity.

Not the Time for Backroom Deals – To this end, a note to foresters and all NZU holders. If you are a seller, we do not believe this is the time for quiet one to one deals. If you are looking to monetise carbon, please test the market, not just the phone. Get set up if you aren't already, log in, name your asking price and see what happens.

Your sale can contribute to price discovery in the wider market. Unless of course nobody knows about it except you and your buyer.

If you don't want to be a seller south of $50, fine. If it doesn't get there you won't sell and nobody from Carbon Match will beat you down. But if you do want to turn NZUs into cash imminently, why not figure out where you are comfortable and consider putting up your asking price where our buyers can see it loud and clear. See what happens.

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