Govt Abandons NZ Carbon Market- Will Europe Save the Day?

Government Abandons NZ Carbon Market- Will Europe Save the Day?

25 July 2012

The New Zealand Government’s recent decision not to restrict the use of international carbon credits in the NZ Emissions Trading Scheme means the local NZ carbon market is likely to stay subdued for years to come.

Due to oversupply the international carbon price has plummeted over 70% in the last 12 months, and because these units are eligible to be used in the NZ Emissions Trading Scheme, the NZ domestic unit price has followed the fall.

Compared with other carbon schemes NZ has few limits on international units. The European and Australian trading schemes, and the upcoming Californian scheme all place far more restrictions on the type and the quantity of international carbon credits that can be used.

Limits on the use of international units leads to higher domestic carbon prices. In Europe, for example, the EU carbon permit is trading 60% above the price of the international carbon price.

By comparison the NZ carbon market has ground to a halt and large amounts of capital is being exported offshore to purchase cheap Chinese and Eastern European credits instead of being invested in local forests or clean technologies.

Many NZ carbon commentators are talking up the proposed set aside of up to 1.2 billion European carbon permits (known as EUAs) as saving the NZ carbon price. However, such an outcome is not guaranteed. The European Commission is due to make an announcement tonight, and while a set aside will no doubt push the NZ price up in the short term the longer term fundamentals remains bleak. The margin of the European carbon permits will increase, however the price of international units that are used in NZ will more than likely continue to slide over the longer term and drag the NZ price down with it.

This is because only around 1.8 billion international units can be used in the EU ETS during 2008- 2020 and this cap could be reached as early as 2015. Europe has also imposed further restrictions on the use of international units in their scheme for their next phase of trading (2013-2020). During this next period the EU will only allow international credits from new projects located in the world’s least developed countries (LDCs). The effect of these two rules means there will be a lot of international carbon excluded from the EU ETS looking for a home in New Zealand.

New Zealand is a minnow in the world of carbon, with annual emission obligations under the ETS of around 16 million tonnes. This compares with the annual issuance of over 200 million international credits. New Zealand has already become the dumping ground for units which are banned from other trading schemes and being such a small market is vulnerable to oversupply. Last year alone, 3.9M Eastern European forestry units (RMUs) were brought into NZ which equates to over 20% of the entire annual emission obligations presently covered by the NZ ETS.

Instead of halting the problem the majority of the recently proposed amendments to the NZ ETS will further weaken the NZ carbon price. Under the changes demand is significantly reduced through the continuation of the 1 for 2 surrender obligation (until at least 2015 emitters are only responsible for 50% of their emissions), and the delayed entry of Agriculture. However supply is also set to increase through the government entering the market and auctioning credits. Cheap offshore units will be the price cap at the NZ Auction, meaning auctions are likely to be bid lower than the international price.

International units are already swamping our shores, but the real wave is yet to come. Without Government intervention the fledgling NZ carbon scheme will languish for the foreseeable future.

ENDS

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