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FRIDAY POLITICS: A Potentially Costly Hole In The Government's Carbon-auctioning Plan

By editor ADELIA HALLETT | Green Party co-leader James Shaw is still in the running to retain his role as the country’s climate minister – but that might mean clearing up a bit of a mess of his own making.

The Government’s surprising decision, reported by Carbon News earlier this month, to press ahead with the auctioning of carbon credits without a technical reserve in place to stop units being sold at below-market-prices opens the door for that very thing to happen.

And the price tag for taxpayers could be in the multi-millions-of-dollars.

The new system, which starts in March, was supposed to include a technical reserve to stop units being sold substantially below the prevailing price on the secondary market.

But the Government now says it can’t pass the required legislation in time.

The technical reserve would have been the lowest price the Government was willing to take for units in any given auction.

It would have been separate from the $20 price floor the Climate Change Response Act, and set using a secret methodology to “prevent it becoming an undesirable focus for bidding strategies and discourage attempts to manipulate the auction clearing price”, as Climate Minister James Shaw said in a paper to Cabinet’s business committee.

NO RESERVE

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Cabinet agreed, with its economic development committee saying in a decision in March that “a technical reserve price must be set for each auction relative to the market price of NZUs, using a prescribed methodology that is kept confidential”.

But in a more recent paper the business committee, Shaw says the auctions will begin without a technical reserve in place.

The first paragraph of the section on the technical reserve has been blacked out in the publicly released version, citing the necessity to “maintain legal professional privilege”.

The second paragraph says Cabinet decided in March this year to set a technical reserve price to stop NZUs being sold at a price significantly below the prevailing secondary market price.

“This would help ensure the primary auction does not significantly influence prices in the secondary market,” it says.

“It protects against the risk of a windfall for participants (if auction prices are substantially below the secondary market price), which comes at the expense of auction proceeds to the Crown.”

In the next paragraph, Shaw explains what a technical reserve is, before going on to say that auctioning would start without one.

“However, (next part redacted) I recommend the proposed regulations be set without providing for a technical reserve price at this time,” he says.

LOW-RISK

Shaw acknowledges there is a risk that without the technical reserve price in place, the clearing price of an auction may be “significantly” below the prevailing secondary market price.

“Officials advise me this risk is low, and that auctions are likely to still clear in line with recent secondary market prices,” he says.

“To put in place the technical reserve price in future will require an amendment to the act. Officials will be monitoring the first auctions in 2021 in order to develop advice for how to fix the technical reserve price in the next amendment bill to the act.”

Cabinet accepted Shaw’s recommendation, and on September 21 “invited the Minister for Climate Change to report back to Cabinet regarding (next bit redacted) the technical reserve price before the third reserve auction in 2021”.

The third auction is scheduled for September 1.

A total of 9.5 million units is expected to be sold in the first two auctions, on March 17 and June 23.

The prices accepted and paid will be determined by the volume bid. If the demand is greater than the 4.75 million units available in each auction, the lowest bids will drop out.

However, the price paid by all successful bidders will be the lowest from the range accepted.

BETTER-THAN-EVEN

So in an auction where demand exceeds supply and with bids ranging from $35 down to $20, the auctioneer will fill demand with the highest bids, by allocating 4.75 million units to the highest bidders.

If those bids fall in a range of, say $30 to $35, the price to be paid by all successful bidders will be set at $30.

That means that all 4.75 million units could, potentially, sell at the $20 price floor.

Spot NZUs are currently trading around $35 on both CommTrade and Carbon Match, so, theoretically at least, taxpayers could lose $71.25 million per auction - $285 million in a year.

Why the Government didn't include the technical reserve in amendments to the Emissions Trading Scheme passed in June is unclear.

IN THE RACE

Nor is it obvious why a new Government with a large majority couldn't pass urgent legislation before the first auction in March.

Meanwhile, sources tell Carbon News that while discussions between the victorious Labour Party and the slightly-less-victorious Green Party are a long way from concluded, the chances of Shaw staying on as the country's climate minister in some sort of co-operation agreement with a Labour Government are better-than-even.

If the portolio falls to Labour, the most likely contenders for it are David Parker or Megan Woods, with Dr Deborah Russell an outside runner.

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