Posted: 13 Jul 2021
As the price nears $50, the trigger level for releasing a flood of new units into the market to depress the carbon price, the Government says its hands are tied about raising the cap this year.
Climate Change Minister James Shaw told Newsroom he'd been advised that he couldn't raise that $50 cap until the end of the calendar year. Given the speed at which prices are rising, the threshold is likely to be breached well before then - possibly in the next government auction, scheduled for September 1.
The effective cap is not based on the market or spot price, but only on the clearing price in the quarterly ETS auctions. That means there's still some time before the new units are released into the market even if the spot price rises above $50 in the next few weeks. Those units would come from the cost containment reserve (CCR), which holds enough units to allow seven million more tonnes of emissions this year.
While a MfE spokesperson emphasised that the market price and the auction clearing price are not necessarily the same, the two have been close for the first two auctions. In March, 4.75 million units were auctioned for $36 per unit, when the spot price was $38.75. The market price fell $1.50 the next day. In the June auction, the opposite happened - the auction cleared at $41.70, just above the market price of $40.90. The next day, the spot price jumped $2.35.
This indicates the cost containment reserve is likely to be opened up, if not completely emptied, in September's auction. This situation raises questions that go beyond the details of the settings as outlined by the commission and could pose a threat to New Zealand's ability to meet its carbon budgets: Namely, what to do about the enormous, existing stockpile of carbon credits.
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