We are pleased to provide a timely Emissions Trading Scheme (ETS) update regarding the recent government announcement for emissions unit limits and price control settings for the period 2025 to 2029.
What’s New?
Following the Government’s consultation on the matter, they have opted to reduce the number of emissions units available through government auctions, a change RDNZ advocated for. This reduction aligns with the broader NZ ETS policy and is expected to drive more demand for secondary market NZ Units and positive development for the industry.
Despite National Party outlining its plan to get the emissions market into some form of stability, the latest auction result is just the latest sign, it may not be delivering. With secondary markets trading at over a 20% discount to the $64 Government floor pricing, it seems New Zealand’s largest emitters weren’t willing to sacrifice the discounted secondary market, despite a sustained period of low liquidity amongst market providers.
Why the Change?
The Minister of Climate Change is required to review and adjust emissions unit limits and price control settings annually. These updates ensure the NZ ETS remains effective in meeting New Zealand’s climate goals. A significant factor influencing this change is a perceived surplus of emissions units held by private ETS participants, which Government estimates could be 68 million NZ Units. The government is concerned that this surplus could lead to lower emission costs, potentially undermining reduction goals. Despite some industry pushback on this concern, the government has decided to act.
What’s Changed?
The National-led government has aligned with its commitment to a “strong and stable” NZ ETS by effectively halving the total number of base NZ Units available through government auctions, reducing the total from 41 million to 21 million units for the entire 2025-2029 period. Importantly, these NZ Units will not be added to reserve volumes, reinforcing the reduction in supply. We expect this pushes emitters to be more active in the secondary market, reducing the number of surplus NZ Units at a greater rate, with a likely price response
There had also been a proposal to concurrently lower the auction price corridor, including the floor price and cost containment reserve pricing. This had led to a disconnection between the secondary market prices and the government’s floor price. However, the recent announcement confirmed no changes to the price settings, which is a positive development for NZ Unit holders, helping to solidify a bounce in the price of a NZU.
Impact on Forestry
The announcement has already had a notable impact on spot prices, which surged near 10% to a price of $59 NZU today. This is a promising sign for the secondary market, providing a much-needed boost after several months of stagnation. As the supply of NZ Units decreases, we can expect prices to rise, potentially driving the secondary market towards this year’s floor price of $64 NZU. We expect the full weight of today’s decision will be felt over the coming years as a deficit of supply becomes more prevalent.
For forestry in the ETS, this impacts the potential cashflows we receive for the carbon sequestered by our forests. We are encouraged by the medium-term outlook based on these recent announcements.
