Commodities 2023: Policy realignment in focus for Asian ETS markets after year of mixed prices

Asian carbon prices in 2023 are expected to be driven by policy changes and stronger focus on carbon neutrality within the corporate sector, while continuing to face macroeconomic headwinds such as persistent inflation and slow growth.

The price trajectory in 2022 was mixed across the region, with sustained growth in some markets interrupted by bearishness due to oversupply and uncertain policy signals.

While allowance units in New Zealand, NZUs, had a good run through 2022, rising about 14% and remaining Asia's most expensive carbon price, South Korea's KAU allowance units struggled to find buyers, as oversupply plagued the market, with prices slumping over 50% with downbeat auctions in the second half of 2022.

In Australia, the price of ACCUs are down over 35% in 2022, driven by a supply glut early in the year after the government allowed project developers to sell their credits into the spot market.

The price recovered marginally after a Labor Party victory in federal elections in May, and has since stabilized amid expectations of review and reform of the country's compliance emissions scheme, known as the Safeguard Mechanism.

The China Emission Allowance scheme, where only power generators currently have a compliance obligation, saw modest gains, with the daily average weighted price published by the Shanghai Environment and Energy Exchange up nearly 7% in 2022, with considerable liquidity improvement seen since early-November, as provincial governments confirmed the list of participating companies for the second compliance period.

Oversupply, economic shocks, policy changes

Many industry observers have suggested that Asia's carbon prices remain too low to reach net-zero targets, particularly against a backdrop of soaring inflation and rising energy prices.

"Oversupply of KAUs in the market aligned with economic downturn and increase of fuel prices lead to an overall decline of the K-ETS market," said a Seoul-based market source.

Another source said that, while a decline in operations due to COVID-19 meant likely lower emission projections for certain industries, the Korean government had failed to change its allocation plan in a way that would underline its willingness to strengthen reductions, adding that this would lead to a likely contraction of the market for the next few years.

In New Zealand, the general trend saw prices lifting, said one trading source, adding that the volatility experienced in the market in the final quarter was partly due to uncertainty around government action.

After regular market hours on Dec. 15, the government announced the ETS price settings for 2023 to levels significantly lower than advised by its national climate body, causing a steep drop in prices on Dec. 16. Market sources said the last price seen was around NZ$76.5/mtCO2e on Dec. 16, a significant drop from NZD$83.40-83.50/mtCo2e in the previous day.

The Australian government was expected to publish its highly awaited review of ACCU generation methodologies in late December, clearing uncertainty on the integrity of a large chunk of credits.

Selective buying from a rising number of voluntary buyers has also led to stratification of prices, with credits from certain methodologies -- such as human induced regeneration and savanna burning -- attracting a premium over generic credits.

2023 price outlook

An emitter source meanwhile said that prices in South Korea may dip further and then bottom out, picking up by the second quarter, with market stabilization measures coming into play and as companies approach the mid-year compliance deadline.

In terms of price projections, one market source said: "We are looking at average KAU-22 prices between Won 12,900-18,500 until Q2, and overall prices of Won 16,000-20,000."

Another source said that the "price will be between Won15,000-20,000, not much different from this year."

In New Zealand, market sources said that higher price settings for the auction of carbon allowances within the ETS would likely boost the price of carbon in the secondary market in 2023, but the latest settings were seen by some in the market as weak.

"It is election year in 2023 so that will likely cause some uncertainty in the market which opens the door to possibilities of changes," said a Wellington-based carbon trader.

"Expectations are less clear given the auction announcement....How that will be reflected in price and volume will become clearer in the new year," he added.

ACCU prices are expected to rise in 2023, fueled by voluntary demand from corporate customers to achieve carbon neutrality as well as potential tightening of eligibility of rules of projects, trading sources said.

"We expect to see positive momentum around the release of the Safe Guard Mechanism draft design in January, after which we expect to see prices broadly continue to rise, though the exact nature of the increase will depend on the details of the draft design and final legislation," an Australian carbon analyst said.

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