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Carbon Prices Hit Record High As Shaw Warns About Them Going Lower

First published in Energy and Environment on June 11, 2020.

Carbon markets hit record highs in NZ this week with those interested in the trade trying to figure out what will happen with NZ unit prices in light of changes the Emissions Trading Scheme and what impact the recession will have on emissions.

The NZU market is not very liquid with many sitting on old credits including those who need them to settle their own emissions and foresters who are constantly trying to decide whether to sell or hold.

This week a parcel of 50,000 NZUs were offered and sold at $30, a new high.

The futures market for NZUs, which is not heavily traded, has been selling even higher, which points to some gambling that prices will go higher and there will be no tinkering in a market potentially subject to changes on political whim.

As NZUs go higher, Shaw warns about them going lower

As those trading in NZUs seemed to be thinking prices were going to go up, Cabinet papers show Climate Change Minister James Shaw was telling Cabinet there may be reduced demand and lower carbon prices.

Cabinet papers released around recent decisions around the ETS show how ministers had to relook at many of their decisions in principle due to the impact of covid-19, but Shaw convinced them not to water down the ETS saying it was likely reduced economic activity would reduce emissions and depress carbon prices.

Emissions to fall

Officials conducted analysis on what the potential impacts of covid-19 may be on the national levels of emissions in future years. All scenarios saw a significant drop in emissions in 2020, and somewhat of a recovery in 2021, but all remaining lower than previous projections.

“I propose keeping the same volume for the provisional emissions budget as originally consulted on (354 Mt CO2-e), but with minor adjustments to the annual volumes within the overall period to reflect the likelihood that emissions will be reduced in the short-term based on the impacts of covid-19.”

“If economic conditions were to worsen then (all else being equal) the demand for units will be lower and unit prices would also decline.”

Shaw said setting a floor price ($20), a ceiling price ($50) and a fixed price option ($35 instead of the current $25) would still send the right signals around emissions without overly stressing the economy.

Officials estimated the changes to the ETS will raise $523m a year once fully in place with Ministers yet to say how this money will be used.

Targets not achievable

The papers also make clear the proposed emissions budget and the reductions within the cap will not be sufficient to meet NZ’s commitments under the Paris Agreement (Nationally Determined Contribution) without using international carbon credits.

“Officials have advised me that meeting the NDC entirely with domestic abatement would impose significant costs on the NZ economy.” This was because the NDC signed up by National in government was made with the understanding international credits would be used. Shaw leaves the door open for their use, but not before 2025. He also says other ways to reduce emissions could be made.

Land use change

Ministers were also told “Impacts that the emissions price has on land-use change, such as conversion of farmland to forestry, have the potential to be material. The level of sequestration that could be achieved by planting commercial forestry is significant. The most likely changes in the short- to medium-term are the conversion of sheep and beef farming land to forestry. The scale of such conversions and associated unit supply into the ETS are potentially large in comparison with NZ’s gross emissions. As such, the price at which conversion to forestry becomes cost-effective could set the emissions price in NZ for many years.”

First published in Energy and Environment on June 11, 2020.

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