Carbon and ETS Update - September 2011

NZUs dipped as low as $13.25 in during August and then climbed to $16.20 but have since slipped to around $14.50. Price is being driven by the NZ$ adjusted CER price on the European exchange as CERs can offer a lower price option for New Zealand compliance buyers. The affordability of CERs is being assisted by the strong cross rate of the NZ$ to Euro. At these lower prices, however, most NZU holders are not prepared to sell and emitters are opting to purchase CERs. The greater liquidity of the CER market and high volatility also provides emitters with potentially profitable arbitrage opportunities, although it is difficult to gauge the extent of this activity.

The main factors influencing CER price in NZ are:

  1. The NZ/EUR exchange rate which has been up and down over the last month.
  2. European energy markets. The price of carbon tends to track energy prices.
  3. European Union instability/European debt issues.
  4. An over supply of CERs on the international market with no restrictions on their use in NZ.

It appears that some NZ emitters are not only purchasing compliance units for the current year, but are also purchasing for years ahead. This could significantly undermine the supply/demand balance for NZUs which cannot be easily sold internationally. The danger is that so many CERs are purchased that in the future lack of demand for NZUs means they get priced at a discount and emitters potentially profit from then selling their CERs and substitute them with lower-priced NZUs. Understandably, there have been calls from the forestry sector for the restriction on the use of CERs within the NZ ETS to prevent the cost of carbon falling to a level whereby new plantings are not financially viable. Any restriction is unlikely to be implemented until after 2012 but may be signaled in the ETS review by Climate Change Minister Nick Smith which is soon to be released.

At the PF Olsen Forest Industries Expo 2011 last week the Ministry of Agriculture and Forestry presented the following statistics on participation in the ETS:

  1. 1,291 post-1989 ETS participants.
  2. 205,000 hectares of post-1989 forest registered (32% of eligible).
  3. 14.4 million NZUs claimed.