The outlook for carbon prices in 2023 is looking less certain as more trees enter the Emissions Trading Scheme. Photo / File
The outlook for carbon prices in 2023 is looking less certain as more trees enter the Emissions Trading Scheme. Photo / File
Carbon prices seemed to be heading onward and upward until a move by the Government in mid-December led to an expected fall.
Now, the likely track of carbon prices in 2023 is looking a little less certain.
Under New Zealand’s Emissons Trading Schemde (ETS), businesses emitting carbon must surrender anemissions unit for every tonne of pollution they emit.
New Zealand participants purchase units through Government auctions or on the secondary market.
The Climate Change Commission’s recommendation that 24.4 million NZ carbon units (NZU) be offered for auction next year was not accepted, with the Government instead approving the auction of 25.9m units.
The Cabinet also approved a trigger price for the cost containment reserve – a mechanism aimed at releasing more units – of about $80 a tonne instead of the commission’s proposal to set the initial trigger price at $171 a tonne.
Effectively, the decision increased the supply of NZUs – equivalent to a tonne of carbon in the NZ emissions trading scheme (ETS) – between 2023 and 2027, and made higher prices less likely.
It also sent the spot NZU price lower - to around $76 a tonne from $86 a tonne just before the announcement.
The sudden decline in the spot price is but one risk for carbon prices going into 2023, EY climate change director Matt Cowie said.
While Cowie stopped short of making any predictions, he said there were downside risks for carbon in 2023.
One was the sheer bulk of trees coming into the Emissions Trading Scheme. More than 100,000 hectares of forests were reported in the ETS over 2022.
“There is a lot more forestry coming to the market as a result of higher carbon prices,” he said.
“People should think about that in terms of the NZU’s units coming to the market.”
He said the Government’s move would unleash more units into the system than the market had expected, which was another risk.
“The fact that the cabinet has gone so strongly against the Climate Change Commission advice is a concern to people who think that price will be much higher in the future,” he said.
Meanwhile, the “stockpile” of NZUs continued to build.
“It’s difficult to look at those things and think that there is a strong case for prices to go dramatically higher,” Cowie said.
“It should give some cause for reflection about whether NZU prices are going to inflate in the way that the Climate Change Commission has implied.
“The case for really strong increases in carbon prices in 2023 is more difficult to make now than it would have been a year ago,” he said.
Salt Funds managing director Paul Harrison said the Government’s move would flood the market with NZUs.
“So what it is doing is holding the price back, but also allowing emitters to stock up on more cheaper units than what they might really need.
“The Government has obviously done this to try and reduce the impact (of higher carbon prices) on the cost of living, but all they are really doing is kicking the can down the road.”
Salt Funds set up a carbon fund and listed it on the NZX in 2018.
The fund buys carbon credits in emissions trading schemes in New Zealand and offshore.
