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ETS decisions to kill NZ carbon market for years

Tuesday 3rd July 2012

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Government decisions to leave the emissions trading scheme at current settings indefinitely means the New Zealand carbon market has been "buried in a six-foot hole," says Nigel Brunel, head of carbon and energy trading at OM Financial.

While Carbon Match principal Lizzie Chambers says "suspended animation" is more accurate, the impact of the government's ETS reform decisions, announced Monday, will likely keep international carbon emissions reduction units (CERs) cheaper than New Zealand-produced Units (NZUs) for the foreseeable future.

Even with a likely drop in the price of NZUs, which are trading between $6.85 and $7.05 per tonne of emitted carbon, offsetting carbon emissions by buying offshore credits will make more sense for a major emitter than investing in NZUs.

A price drop is expected because Monday's announcements left some major emitters in the electricity, heavy industrial and transport sectors holding more NZUs than they need because their ETS will be unchanged, instead of rising as expected.

Brunel said "the premium of NZUs over European carbon has been a bit fake because there's no supply of NZU's to push it to a discount" and major emitters were now sellers.

"The carbon market is now in the lap of Europe and the control of the banks," as the latest changes would discourage active involvement in the New Zealand carbon market by carbon-intensive industrial players and plantation foresters, at least until depressed global prices revived, Brunel said.

Under the ETS as originally announced, major emitters would have faced the full $25-per-tonne maximum price of carbon for every tonne of emissions, instead of the $12.50 a tonne they have faced since the scheme began in 2008.

Global CER prices have fallen below $6 a tonne since then, leading to the unexpected outcome of international units costing less than NZU's. That will only be fixed when a glut created by distortions in the EU carbon market is removed under negotiations requiring unanimity among its 27 member states.

The prospect of such reform before 2016 was "very limited," meaning a four-year wait for New Zealand, which has the only functioning ETS outside Europe, Chambers said. "It seems that our government is happy to let European policy-makers be our masters indefinitely."

Chambers had argued this week's ETS decisions should have included a mandatory proportion of carbon offset purchases to incentivise carbon-reducing action in New Zealand, build a viable carbon market and give the country a source of local carbon units, akin to energy security planning.

Such restrictions are in place in Australia, where a carbon tax was introduced two days ago as a prelude to an ETS in 2015. However, Brunel said it was hard to fault the government's logic in putting an indefinite holding pattern on the ETS's existing, so-called transitional arrangements, and "taking out all the dates," as one carbon market observer put it.

"It's not the government's fault the price of carbon is where it is,” said Brunel. “They've done a bloody good job to date with the ETS, but we thought we were turning a corner, and it's turned out there's another long straight. It's pretty gutting."

Groser justified removing target dates, such as including agriculture in the ETS from 2015, saying dates had created artificial expectations, given the need for greater consensus globally on collective climate change action before New Zealand would commit to more.

The Green and Labour parties slammed the decisions as loading future taxpayers up with liabilities, which is expect to start crystallising later this decade.

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