The cost to emit greenhouse gases in New Zealand is at an all-time high, with New Zealand Unit, or NZU, emissions allowances hitting a record and nearing NZ$90/mtCO2e ($55.26/mtCO2e) on expectations of a major policy reform by end-2022.
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The spot NZU price was in the NZ$88-NZ$88.50/mtCO2e range at the close Nov. 16, market sources said, the highest carbon price in Asia and among the highest in the world.
A rally in NZU prices started in July after the country's Climate Change Commission recommended the government to update New Zealand Emissions Trading Scheme, or NZ ETS, unit limits and price control settings for the next five years.
The recommendations primarily called for caps on emissions, with high emissions activities becoming more expensive and low emissions options more cost effective.
"The market sentiment is that the recommendations will be accepted and announced in December," said a Wellington-based carbon trader. "This reality could see NZU's break NZ$100/mtCO2e."
Some market participants who trade the spread between the EU Emissions Trading System and NZUs said a recovery is underpinning NZUs after European prices declined over recent months.
NZU's climbed nearly 30% in 2022 as of Nov. 16 outperforming Asian peers, including South Korea's allowance units, which are down over 40% during the period, and Australia's Carbon Credit Units, which dropped 37%.
New Zealand follows an output-based emissions scheme through a combination of auctions and free allocations. Businesses that carry out activities covered by the NZ ETS are required to buy and surrender to the government one NZU for every metric ton of carbon dioxide equivalent emissions they produce. These units can be traded among participating entities.
The commission recommends:
- Reducing the limit on the number of units available for auction
- Raising the trigger prices for the cost containment reserve and auction reserve
- Switching to a two-tier cost containment reserve from 2023
The recommendations follow major reforms by the island-nation in 2021 that set a new cap on NZU supply and introduced an auctioning mechanism. New Zealand has also banned the use of international carbon credits for offsetting emissions.
Sources said the reform was crucial as it stemmed from the government's need to define the NZ ETS' role in delivering offshore mitigation required to meet its nationally determined contribution.
Reports suggest the country is looking to secure bilateral agreements with other Asian nations to purchase carbon credits that could contribute to its national climate targets.
New Zealand's national climate goals have been set under the Climate Change Response (Zero Carbon) Amendment Act 2019. The country aims to reach net-zero emissions for long-lived greenhouse gases, mainly CO2 and nitrous oxide, by 2050 and reduce biogenic methane emissions by 10% below 2017 levels by 2030.
Pricing agricultural emissions
The NZ ETS is also the only national carbon market to propose pricing emissions from the agricultural sector for which the government opened consultation Oct. 11. The agricultural sector is the country's biggest source of emissions and a major contributor to its export earnings.
Under the proposed mechanism, the government is planning to pursue a two-pronged approach for pricing emissions from the sector and funneling that revenue to incentivize abatement through new mitigation technologies and practices.
"No other country in the world has yet developed a system for pricing and reducing agricultural emissions, so our farmers are set to benefit from being first movers," a government statement said.
Public consultation on the proposal closes Nov. 18. The country's Climate Change Response Act 2002 requires its climate change minister and minister of agriculture to report on a pricing system by Dec. 31.
Price indications as of Nov. 16 in NZ$
Source: Market sources