Post auction, the units traded up at $74 but Matthew Cowie, director climate change and sustainability services at EY, said there may be some "fragility" in the carbon price from here on.
But at today's levels, prices have come a long way from early in 2020, when the units traded at just $25.
"It was a good result - stronger than expected," Nigel Brunel, head of commodities at Jarden, said.
The auction offered 4.825 million units but the so-called cost containment reserve (CCR) - which had 7 million units - opened upon reaching the $70 trigger price.
All up, of the 11.825m units on offer, 10.5m were sold, leaving just 1.3m in the CCR for the rest of the year.
Fewer units in reserve lessens the Government's ability to try to take heat out of the market by offering more supply.
Cowie said nearly all participants in the auction gained the volume they were after.
"In contrast to the previous two auctions, where the auction cleared above the prevailing secondary market price, this auction cleared about $2/unit below the secondary market price," he said.
The auction had depleted the CCR by 81 per cent.
He said the pre-auction market price of $72 was not seen as a bargain.
"This auction result must be surprising for participants as we have now broken from a pattern where the auctions 'always' clear above the secondary market price," he said.
"Buyers are likely to have picked up more volume than they expected in this auction, so it will be interesting to see what this means for demand at the remaining auctions this year," he said.
"The market may have some remaining fragility on the demand side after the substantial drop in price seen earlier this year – buyers are not in the same buoyant mood as they were in the middle of last year," he said.
Planting pine trees for carbon sequestration has become a profitable land use. Photo / File
But Cowie said the government now has little remaining firepower to deter prices from rising later this year, if the market wants to take the price further upwards.
High carbon prices have incentivised the planting of pinus radiata in permanent plantations, causing concern in the rural areas where productive pastoral land has been lost to trees.
The Government last month outlined proposals to better manage carbon farming, which could see future permanent plantings of exotics like radiata pine excluded from the ETS.
"We want to balance the risks created by new permanent exotic forests which are not intended for harvest," Forestry Minister Stuart Nash said at the time.
Nash said there was a window to build safeguards into the system, prior to a new ETS framework coming into force next January.
From 2023, under current rules, a new permanent forest category of the ETS would allow both exotic and indigenous forests to be registered in the ETS and to earn New Zealand Units (NZU).
The Government is now proposing to exclude exotic species from the permanent forest category.
The Government's discussion document says the high NZU price means permanent exotic forests provide better economic returns than other rural land uses.
This includes higher returns than other types of forestry – both production forests and indigenous forests, as well as significantly higher economic returns than sheep and beef farming.
The document acknowledges that the financial returns for permanent exotic forests already significantly outperform competing land uses, and the relative profitability of these forests will increase as the NZU prices rise.
In response to the increasing NZU price, the Government estimates the NZ ETS could drive around 350,000 hectares of new permanent exotic forest planting this decade.
At a carbon price of $110, permanent exotic forests can become competitive with lower productivity dairy land, the document says.
"Due to these high economic returns, permanent exotic forests have started to displace other productive land-uses (such as sheep and beef farming and production forests) in some regions," it says.
