Testing Times for Carbon Market

Several developments in Europe resulted in a rapid and large drop in the price of carbon on the European Union emissions trading market in June. Some commentators are calling this the biggest test for the European Union Emissions Trading Scheme since its inception.

There were two main triggers:

  1. The European Commission announced plans to sell an extra 300 million emissions permits (EAUs) on the market to raise funds for "green" energy projects.
  2. The Greek debt crisis called into question not only the solvency of the European banking system, but also the structural integrity of the Eurozone and Euro currency.

The ironic consequence of 1. above is that the big drop in carbon price makes running coal-fired power stations more economic and these will be favoured over more expensive alternatives such as gas. The immediate result will be more green house gas emissions (in contrast to the intended consequence of stimulating "green" energy projects).

The result was EUAs and CERs (certified emission reductions) plummeted quickly in price with the units losing up to a third of their value. EUAs traded down to below €13 and CERs to below €10.75 (for Dec 11 delivery).

In early July, Dec 11 EUAs were selling for €13.20.

Since CERs can be used in the NZ Emissions Trading Scheme for compliance obligations, this has a direct bearing on the price and demand for NZUs. At a Euro exchange rate of 0.58, the above CER price translates to NZD17.00. Therefore to sell NZUs the price needs to be below this; NZUs are currently trading around $16.50.

Although NZ emitters are not required to submit their next returns until next year, we expect that they could be taking the opportunity to benefit from the price drop.