New Zealand's carbon allowance unit prices slump to 18-month low, market cautious on ETS review

Prices of New Zealand Units, or NZUs, the country's emission trading carbon allowance unit, dropped to 18-month lows March 24 after a short-lived jump from a failed auction on March 15, while uncertainty over regulatory changes to the system cast a pall on the market, sources told S&P Global Commodity Insights.

Platts assessed NZUs at NZ$62.60/mtCO2e ($38/mtCO2e) March 24, S&P Global data showed, which is an 8% drop from March 15 when it was assessed at NZ$68.10/mtCO2e. The market saw a sudden spike in buying on March 15 after no bid cleared minimum required levels at the first auction for the year, forcing obligatory buyers to scout for units in the secondary market.

That bounce was temporary, despite market sources saying that in principle, even a failed auction should be price positive; the effect did not last.

"That auction effect just seems to have fizzled out," an Auckland-based trader said.

The government said on March 22 it will conduct a review of its emissions trading scheme to explore policies that drive more carbon abatement at sources of pollution, compared with removing carbon through forestry credits. That, however, did not have any positive effect on prices.

"Seems that no one has confidence in the government, despite the review saying it would look to tighten the ETS," a Wellington-based carbon trader said.

A second Wellington-based carbon broker echoed the sentiment saying that things were not looking promising when it came to reassurance from the government's side.

"The NZU is a very confidence-driven market. Unless the govt restores that, we could spend a long time at these levels," the carbon broker said about prevailing price levels.

Additionally, sources said the softer prices could also be aided by less buying interest as companies have enough credits for their May surrender deadline this year.

"The buyers also think that time is on their side as the review result won't likely be out until May (compliance deadline) at the earliest... so, they feel they can wait even if they need to pay," the first carbon trader said.

Price downfall

The NZU price has fallen by about 30% from its market indicated peak of NZ$88.50/mtCo2e on Nov. 16, 2022, a few weeks before a crucial recommendation to boost ETS prices from the country's Climate Change Commission was due for review.

The government okayed significantly weaker price settings for the ETS in December 2022 compared with recommendations from the CCC, which triggered the fall in NZU prices late last year.

"The overhang from that decision can still be seen on the market," the Wellington-based trader said. "Emitters are still sitting on their hands."

The energy sector welcomed the government's decision, citing the potential impact on electricity and fuel prices, while others highlighted the unintended change in land use from farming to forestry due to the higher carbon price.

NZUs remain Asia's costliest carbon price and among the highest in the world. The CCC estimated that a far higher price is needed to decarbonize the economy.