New Zealand carbon prices rally as government strengthens ETS price settings

New Zealand's carbon prices rallied about 32% on the day to scale a four-month high July 26 after the government made an about-turn following a court reprimand and accepted the national climate body's price control settings for the emission trading scheme.

Platts, part of S&P Global Commodity Insights, assessed the New Zealand Unit price at NZ$64.50/mtCO2e ($40.35/mtCO2e) on July 26, a 31.6% jump day on day and the highest level seen since March 23.

The government late July 25 updated the New Zealand Emissions Trading Scheme auction settings for the years 2023-2028, with higher and wider price control settings and lower auction supply to be effective from the Dec. 6, 2023, auction.

This was a complete U-turn from the December 2022 decision to disregard the Climate Change Commission's advice and came just a week after a court ruling had come down harshly on the government and ordered it to reconsider ETS settings by the end of September.

"The CCC recommendations is positive for gentailers, as it increases the likelihood that the carbon price tracks toward NZ$100/mtCO2e by 2030, increasing the incentive to decarbonize energy and heat and supporting electricity demand growth expectations," said Auckland-based carbon brokerage firm Jarden.

The NZU price, which has been on a downward spiral since the government implemented the earlier settings on Dec. 15, 2022, fell 59% since then to a multiyear low at NZ$35/mtCO2e July 5.

In the last two weeks alone after the court decision and this announcement, the price has risen by 72%, Platts data showed.

"What they have done is definitely a good first step. It will clearly send the price up, with people jumping back in now that you have got potential restriction on future supply," a Christchurch-based carbon broker said.

Liquidity spruces up

As the announcement seemed favorable for the NZU prices, liquidity also picked up significantly with several bids seen for 10,000 mt parcels and the bid-offer spread tightening.

"[We] have not had these many inquiries in a while," a Tauranga-based trader said. "We were always long for NZUs, but the volatility kept good offers from coming in, that may hopefully get better now."

Trades were heard for both 5,000 mt and 10,000 mt parcels through the July 26 trading day at several levels from NZ$63.50/mtCO2e to NZ$65/mtCO2e, with one market source saying at least three 10,000 mt parcels traded at the Platts assessed price of NZ$64.50/mtCO2e.

Caution remains

Although the announcement boded well for the ETS, market participants said there were uncertainties that could derail this momentum.

The prime among those was an ongoing consultation on new rules to increase the effectiveness of the ETS. The consultation seeks to redesign the regulation for issuing carbon allowances to the forestry sector based on concerns that current settings were diverting investments more into offsets rather than abatement at source.

There were also concerns that current ETS rules incentivize the growth of pine-based exotic forests, leaving lesser room for other exotic as well as indigenous trees.

"It's going to be very hard to exclude ETS from forestry. If we look at what happened in past three months, they tried to exclude exotic species from the ETS and they got huge pushback from landowners," the Christchurch broker said.

Secondly, market sources said the upcoming national elections were leading to concerns around the impact on the climate policy due to a potential change in the government.

The opposition National party in June released its climate policy under which the party plans to delay pricing emissions from agricultural sector from 2025 to 2030 and restrict the conversion of farmland to carbon-based forestry.

"Elections could be a turning point," a Wellington-based carbon trader said. "These guys [current government] were supposed to be the greener party and look how much pain they have caused, do we really expect anything better from the Nationals."

While the NZU price has seen bouts of volatility, it remains the highest carbon price in Asia and an attractive driver for landowners to divert land to forestry.