NZ carbon auction clearing price falls for first time; market awaits rules for 2023

New Zealand concluded its last carbon allowance auction of the year on Dec. 7, with the auction clearing price falling for the first time ever as the market awaits the government's decision on price setting for 2023.

The auction clearing price for the allowances called New Zealand Units, or NZUs, fell to NZ$79/mtCo2e ($50/mtCo2e) from NZ$85.40/mtCo2e in the September auction, with the revenue generated falling 7.5% to NZ$381 million from a sale of 4.8 million units.

The clearing price has risen consistently since the first auction held in March 2021 and this was the first time it fell.

"There was kind of a debate in the market where it will clear. Many people felt it will clear lower than NZ$79/mtCo2e, so to clear at 79 is a good result," Nigel Brunel, head of commodities and carbon trading at Jarden, said.

Expectations were for lower prices than in the September auction as the spot market price closed at NZ$82/mtCO2e on Dec. 6 and the auction clearing price is usually lower than the previous day's spot price. While the spot price for NZU rose to a record high of NZ$88.50/mtCO2e in November, it has since fallen and has been trading lower for the last few weeks.

"Trading is fairly muted post the auction and was last at NZ$82/mtCO2e. This is almost the worst of all cases in that it gives no real direction," Paul Burgin, trader at Carbon HQ, said.

Another trader said the spot market price was at $82/mtCO2e, but they did not do any deal at that price.

Despite the fall from its peak, the NZU has risen over 20% this year, outpacing allowance prices in Asia with Australia and South Korea down over 35% and 50%, respectively, while the relatively new China ETS price was up nearly 7%.

NZUs are distributed by the government through a mix of free allocations and four auctions in a year. The auction clearing price is the lowest successful bid at which NZUs are sold to all successful bidders.

Each NZU represents one metric ton of carbon dioxide equivalent emissions and can be traded by participants in the secondary market.

2023 reforms, prices

Market participants said the lower price was also the result of the government holding off on its decision to accept recommendations of Climate Change Commission (CCC) regarding ETS price settings for 2023.

CCC, an independent body tasked with advising the government on climate policy, earlier in 2022 recommended steep increases in the ETS price settings, which are expected to push the price of NZUs higher.

It recommended raising the auction reserve price to NZ$60/mtCO2e from NZ$30/mtCO2e currently, and the cost containment reserve trigger price to at least NZ$171/mtCO2e from NZ$70/mtCO2e currently.

The auction reserve price is the minimum price at which the NZUs can be sold to participants. The cost containment reserve trigger price leads to additional units released for sale to balance prices but the reserve has already been exhausted for 2022.

"The government hasn't made its decision about the Climate Change Commission's recommendations and the market got a bit tired waiting, so there was a bit of profit-taking," Brunel said.

The government's decision, due by the end of December, is expected to give a definitive direction to the market for the next year.

"If they don't accept the recommendation, the price will possibly plateau, which will be terrible for the government. If they go with the extreme recommendations, there could be a spike," Harrison Bissell, carbon broker with Carbon Market Solutions, said.

The price of NZUs is already one the highest in the world and the government's decision could have a significant impact on the price trajectory for 2023. The government had last year accepted the CCC's recommendations on price settings for 2022.

Unless there is some signal otherwise, the government is most likely to accept the CCC recommendations for next year, Bissell added. "I suggest the long-term players will be watching like hawks," Burgin said regarding the government's decision.