The carbon market, a system for trading carbon credits to reduce greenhouse gas emissions, is one of our most powerful tools for achieving decarbonisation goals. In this blog, we'll dive into key developments in the New Zealand carbon market since the start of the year, including changes to the Emissions Trading Scheme (ETS) and agricultural policies. We'll explore the implications of these changes and highlight important trends to watch in the coming months.
Recent Developments in the Carbon Market
ETS Reviews
The New Zealand Emissions Trading Scheme (ETS) underwent reviews in the first half of this year. The government conducted multiple public consultations focusing on two key areas:
General changes to ETS regulations
Updates to ETS limits and price control settings
These reviews aim to fine-tune the ETS's effectiveness. While the general regulatory changes have broad implications, they should have minimal impact on forestry. The updates to limits and price control settings are particularly important for forestry participants to be on top of, as these adjustments directly influence the carbon market.
Curious about the details of these consultations and their potential impacts? We've got you covered. Check out our blog post on this topic here.
ETS Auction Outcomes
ETS auctions, where the government sells carbon credits to market participants, have recently hit some roadblocks. These auctions act as a guide setting carbon prices and generating revenue for climate initiatives.
All auctions failed last year, and the trend seems to continuing this year with the two 2024 auctions underperforming:
March auction: Partially cleared
June auction: Failed, with no qualifying bids.
Why are we seeing these challenges?
There seem to be two key factors at play:
Auction floor price: Bids below the set floor price of $64 are not accepted.
Secondary market competition: Forestry credits are trading for less than the floor price in the secondary market, making auction participation less attractive.
Looking ahead to the September auction, the outlook remains uncertain. Given the current market conditions and legislative constraints, a significant price recovery seems unlikely in the short term. There's a real possibility that the September auction might face similar challenges to those we've seen recently.
It's not all doom and gloom. The government has recognised these issues and appears to be actively working to restore market confidence. Their goal is to create conditions that will allow these auctions to do what they're intended for and generate revenue. We'll be watching closely for any policy changes or market interventions that could shift this dynamic in the coming months.
He Waka Eke Noa Developments
Historically, agriculture doesn’t face any surrender obligations under the ETS in association with its emissions. He Waka Eke Noa was originally intended as an alternative to the inclusion of agriculture within the Emissions Trading Scheme.
Recent developments have significantly altered this landscape:
Phasing out of He Waka Eke Noa: In early June, the government announced it would discontinue this initiative.
No immediate alternative: The outputs from He Waka Eke Noa will not be used as an alternative emissions reduction strategy for agriculture.
Legislative changes: The government is amending legislation to explicitly exempt agriculture from the ETS, even without an alternative emissions pricing mechanism in place.
These changes have implications, such as:
Agricultural emissions remain unpriced: The sector continues to operate outside the ETS framework.
Policy vacuum: There's currently no clear replacement for He Waka Eke Noa, so we’re seeing some uncertainty in the agricultural sector.
Shift in focus: The government is now looking into the reduction of biogenic methane emissions, a key greenhouse gas produced by livestock.This new approach is still in its early stages.
The lack of an immediate alternative framework means that agricultural emissions policy remains a critical area to watch for future development.
ETS Reserve Price Methodology
The ETS reserve price, currently set at $64, acts as a floor price in carbon credit auctions. This price plays an important role in:
Setting a minimum value for carbon credits within the compliance market
Providing price stability in the market
Influencing auction outcomes and market participation
Recent auction failures have prompted a reassessment of this methodology. The government is now exploring potential adjustments to improve market conditions:
Lowering the floor price This could increase participation in auctions but might reduce the incentive for emissions reductions.
Altering the calculation method A more dynamic approach could better reflect market conditions and economic factors.
The goal of these potential changes is to create a more stable and predictable market environment and to encourage broader participation. While specific proposals haven't been announced, any changes to the reserve price methodology could have significant impacts on market liquidity and trading volumes, and on the overall effectiveness of the ETS in driving decarbonisation.
Climate Change Commission (CCC) Recommendations
The Climate Change Commission, an independent advisory body to the government, plays a crucial role in shaping New Zealand's climate policy.
The CCC made two key recommendations:
Tightening unit limits
Raising cost containment reserve (CCR) thresholds
These recommendations aimed to create a stronger price signal for emissions reductions, but the government chose a different approach. This decision had several notable impacts:
Carbon price drop: The increased supply and lower thresholds have put downward pressure on carbon prices.
Market uncertainty: The divergence from CCC recommendations has created uncertainty among market participants.
Long-term implications: There are concerns about whether these decisions will provide sufficient incentives for emissions reductions in the long term.
This situation highlights the complex balancing act between maintaining market stability, providing strong incentives for emissions reductions, and protecting businesses from excessive costs.
Looking forward
As of July 2024, the carbon price stands at around $51 per unit, down from ~$70 last year. For market participants, staying informed is key to navigating the evolving landscape..
Areas to watch include:
Upcoming ETS auctions and their outcomes
Potential adjustments to the ETS reserve price methodology
New climate policy announcements, especially regarding agricultural emissions
The carbon market is continuously evolving, with recent developments and future outlooks offering both challenges and opportunities. Watch the recording of the CarbonCurious session for more details.
To stay informed about the latest developments in the carbon market subscribe to the CarbonCrop newsletter, or explore our resources for further reading on forest carbon removals and key updates to the carbon market.
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