Government Announces ETS Update

The Government has, last night, announced changes to its ETS auction unit pricing control settings following the recent ruling in the High Court in favor of Lawyers for Climate Action NZ (LCANZI). LCANZI had sought a judicial review of the government’s December 2022 decision to reject the Climate Change Commission’s (CCC) advice on the unit limit and price control settings for 2023 to 2027.

The major changes move to align the quarterly auctions with Climate Commission’s advice.

What’s Changing

       Price floor changes:

From December, the floor price will rise to $60 NZD, increasing to $64 in 2024. This is a substantial change from the existing setting of $33.06.

      Two Tier Cost Containment Reserve (CCR)

The announcement has outlined a new two-tier cost containment reserve function, designed to control potential extreme highs in carbon markets. The December auction will include two pricing levels of $173 and $216 however the full CCR availability will still sit within the first price level for the remainder of the year.

From 2024 the Cost containment pricing will move to $184/$230. The system will ultimately also reduce the number of NZU’s by splitting the total volume of the CCR over two price settings from 2024, with high price settings designed to mean the units are rarely be called upon.

The above chart shows recent carbon price movements and the relationship between price and government price control settings.

What it means for Forestry

The Secondary market in which we operate has for some time been waiting for firm signals from government and the announcement has seen spot pricing rise to $65 per NZU.

This is positive news for Forestry and Forest investors, better aligning the market with our global commitments. Our view remains that Forestry will continue to be a significant contributor to combating climate change and that the fundamental drivers of carbon markets remain positive with this announcement reaffirming our stance on the direction of NZU pricing. 

You can see the full announcement here.

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