Auction Settings Update Prompts Sharp Rise in Carbon Price
Following a successful legal challenge by Lawyers for Climate Action, the New Zealand Government has announced that it will align the auction price control settings with the Climate Change Commission’s (CCC) recommendations, starting with the last auction for 2023 on 6 December. Key changes are as follows:
• Auction reserve price (price floor) to increase from $33.06 to $60.00
• Tier 1 cost containment reserve trigger price to increase from $82 to $173
• Auction supply volume to be reduced from 17.9 million to 15 million NZUs
Under the new settings, future years will see a further gradual increase in the price floor and trigger prices, coupled with a gradual reduction in the auction supply volume, in line with CCC recommendations. The intention is to increase the financial incentive to cut emissions, but at a controlled rate that emitters can comply with. Following Tuesday evening’s announcement, the NZU spot price jumped 27% to $65. Since then, it has settled back to around $60, which also happens to be the new auction price floor as of 6 December.
How does the auction system work?
The Government’s quarterly auctions release millions of “new” carbon credits into the market, provided minimum price thresholds are met. While auctions are separate from the secondary market, auction reserve pricing is informed by secondary market pricing at the time – more on that below. Two key mechanisms help ensure that auctions do not “drag down” the secondary market price on the one hand, or result in excessive NZU price increases on the other:
• The confidential reserve price is set with reference to the secondary market price (spot price) near the time of the relevant auction if NZUs are trading above the price floor. If an auction does not clear at the confidential reserve price or price floor, the auction fails and no NZUs are sold. In 2022, none of the quarterly auctions failed, whereas this year, the first two auctions have failed and the probability of the third and fourth auctions failing also is regarded as significant.
• If auction bids reach the cost containment reserve (CCR) trigger price, additional NZUs are made available for sale. In 2022, the CCR was triggered and the full auction supply volume for the year was sold. As of December, the government will operate a two-tier CCR system, with the Tier 1 and 2 trigger prices set at $173 and $216, respectively.
A third, less direct mechanism is the auction supply volume, which is the number of NZUs the Government offers for sale in a given calendar year. The auction supply volume will be gradually reduced, as shown in the table below.
• Auction reserve price (price floor) to increase from $33.06 to $60.00
• Tier 1 cost containment reserve trigger price to increase from $82 to $173
• Auction supply volume to be reduced from 17.9 million to 15 million NZUs
Under the new settings, future years will see a further gradual increase in the price floor and trigger prices, coupled with a gradual reduction in the auction supply volume, in line with CCC recommendations. The intention is to increase the financial incentive to cut emissions, but at a controlled rate that emitters can comply with. Following Tuesday evening’s announcement, the NZU spot price jumped 27% to $65. Since then, it has settled back to around $60, which also happens to be the new auction price floor as of 6 December.
How does the auction system work?
The Government’s quarterly auctions release millions of “new” carbon credits into the market, provided minimum price thresholds are met. While auctions are separate from the secondary market, auction reserve pricing is informed by secondary market pricing at the time – more on that below. Two key mechanisms help ensure that auctions do not “drag down” the secondary market price on the one hand, or result in excessive NZU price increases on the other:
• The confidential reserve price is set with reference to the secondary market price (spot price) near the time of the relevant auction if NZUs are trading above the price floor. If an auction does not clear at the confidential reserve price or price floor, the auction fails and no NZUs are sold. In 2022, none of the quarterly auctions failed, whereas this year, the first two auctions have failed and the probability of the third and fourth auctions failing also is regarded as significant.
• If auction bids reach the cost containment reserve (CCR) trigger price, additional NZUs are made available for sale. In 2022, the CCR was triggered and the full auction supply volume for the year was sold. As of December, the government will operate a two-tier CCR system, with the Tier 1 and 2 trigger prices set at $173 and $216, respectively.
A third, less direct mechanism is the auction supply volume, which is the number of NZUs the Government offers for sale in a given calendar year. The auction supply volume will be gradually reduced, as shown in the table below.
The NZU spot price chart below illustrates just how volatile the carbon price has been since the start of the year.
