Wood Matters

Many ETS participants will have been following the decline in the carbon price in recent weeks with some concern. At the time of writing, the NZU spot price is about $68, down $20 from its peak price only a few months ago. We have received a lot of questions from our clients wondering why this has happened and what the future might hold. While we can offer up some compelling reasons for the price drop, we cannot predict the future. We can, however, list some of the factors that are pushing and pulling the NZU spot price in either direction:

Factors holding back the carbon price:

 The Climate Change Commission’s recommendations, a number of which were intended to encourage a higher carbon price, were not followed by Cabinet. This has shaken market confidence.
 

 Emitters may well have stocked up on NZUs last year in expectation of prices increases in 2023. The price increases haven’t materialised so far.
 

 NZU supply from forestry sector is expected to increase through allocations for the 2018-2022 reporting period, which will be issued from February through July 2023.
 

 High interest rates increase the cost of holding NZU reserves, dampening buyer interest.
 

 The next auction on 15 March will release up to 4.475 million NZUs if the confidential reserve price is met.
 

Factors favouring a higher carbon price:

 The auction cost containment reserve (CCR) price of just over $80 is unlikely to be met at the upcoming auction. If this happens, additional units won’t be released into the market.
 

 Any unsold CCR units will be rolled over to subsequent auctions this year, but not to 2024, when the CCR price will rise to just over $91.
 

 The market will be short of supply in coming years because emissions are expected to remain flat while auction supplies will be incrementally reduced.