On the 27th of July the NZ Climate Commission published its advice to the government relating to our Emission Trading Scheme (NZETS) settings.
Limits and price control settings for emissions units in NZ are updated annually to ensure there is a five-year look ahead period at any point in time. The Climate Change Minister has responsibility for these regulation updates, having regard to the “proper functioning” of the NZ ETS, the level and trajectory of international emissions prices, inflation, and the advice of the Climate Commission. If the government chooses not to proceed with the Commission’s recommendations and adopts limits and price control settings that differ from the recommendations, they must explain why.
The key take away from the Climate Commission’s recommendation is an increase in the Reserve Price for each quarterly NZ Carbon Unit (NZCU) auction, increase in the Trigger Price for activating the Cost Containment Reserve at each auction, and reducing the number of NZCUs available at each auction.
A reduction in units available without a corresponding proportionate drop in emissions, should support the existing trend of an increasing NZCU price, which will increase the value of The Carbon Fund. We obtained the following table from Carbon Match, which clearly outlines the recommended changes to unit availability and pricing.
In summary, the Commission is proposing the following:
- Restructuring the existing trigger price mechanism with a two tiered cost containment reserve for NZCUs. Tier One would be priced at $171 (+120% increase on the existing trigger price), and tier two priced at $214 (274% increase on the existing trigger price). The “Proposed tier 1 trigger price” in the table above relates to the “Proposed Reserve Volume Tier 1”, and “Proposed Tier 2 trigger price” relates to “Proposed Reserve Volume Tier 2”.
- Increasing the minimum auction reserve price from $32.10 to $60 (+87%).
- Reducing the number of Carbon Units available via auction each year from 25.6m units to 24.4m units in 2023, (-4.7%), and further cuts to come.
The graph below shows the trajectories of the Commission’s recommended settings out to 2030 (in 2022 dollars). Overlaid on this is the path of emissions values in their updated demonstration path, which is consistent with meeting emissions budgets.
We expect to see a consultation document emerge from the Ministry for the Environment by the end of September and the next advice by the Commission on the NZ ETS unit limits and price control settings will be due in the first quarter of 2023 and every year thereafter.
The publicly traded unit price for The Carbon Fund is up 14% for the year to date.
The Cost Containment Reserve NZCUs was exhausted at the June auction, which may place further pressure on NZCU pricing for the rest of the year. The Climate Commission’s recommendations provide further support for increasing NZCU prices, which should support continued appreciation in the value of The Carbon Fund.