Carbon credit 'mistake' could cost Government $1.3 billion if left unfixed

Wednesday, 5 April 2023

Uncertainty over the settings for the Emissions Trading Scheme could have a “chilling effect” on forestry, a fund manager says.

A slump in the value of carbon credits is the result of the Government getting itself in a tangle and undermining confidence in the Emissions Trading Scheme, the National Party’s energy spokesperson Stuart Smith says.

Climate Change Minister James Shaw responded by saying that was “a bit rich coming from the party that neutered the Emissions Trading Scheme for a decade and drove carbon prices to less than a dollar”.

Salt Funds Management carbon fund manager Paul Harrison said the price of carbon credits dropped to $54.50 last week, before recovering to $58 on Wednesday, which was down from a peak $88.50 late last year.

There is speculation the size of the price drop took the Government by surprise, and that it may take the opportunity presented by a new Climate Change Commission report to try to shore up confidence in the Emissions Trading Scheme (ETS) later this month.

1News Jordyn Rudd takes a look at the Emissions Trading Scheme.

* New ETS plan concerns Māori leaders, but gagging order stops them talking about it

The drop in the price of carbon credits – which bestow the right to emit a tonne of carbon emissions into the atmosphere – reduces the incentive on businesses to curb emissions.

Harrison said the main reason for the price drop was that the Government had created uncertainty around the rules of the Emissions Trading Scheme (ETS) and its “commitment to a solid carbon price”.

The broad concern has been that the Government could seek to prevent carbon prices rising to the degree needed to effectively curb emissions, in order to avoid further worsening the cost of living, especially during an election year.

The Government did not take up a recommendation made by the Climate Change Commission late last year that it should raise the minimum price at which it issues credits and tighten their supply to further discourage emissions.

That saw it fail to sell any credits at an auction in mid-March.

It has also announced a review of the ETS, though there are indications that at least a part of the focus of that review may be on making it harder for businesses to earn carbon credits from the planting of non-native forests.

Harrison said the uncertainty had “taken the urgency away from the emitters” in terms of buying carbon credits.

“They are sitting on their hands waiting to see what happens.”

National’s energy spokesperson Stuart Smith says the Government got itself in a tangle.

He believed the Government had made a mistake.

“New Zealand has still got a long way to go in terms of meeting its Paris commitments.

”It's probably going to have a bit of a chilling effect on new investment into forestry in terms of creating carbon credits, so it's not good from an ‘NZ Inc’ point of view in terms of ensuring it can meet its emissions targets.”

If the Government didn’t straighten out the situation it also risked not receiving any income from the sale of carbon credits this year, which would mean it could miss out on about “$1.3 billion to $1.5b” of revenue, he said.

Harrison believed that, “more than anything”, would focus the minds of ministers on addressing the current uncertainty in the carbon market.

Smith said National was a “great fan” of the ETS, which it saw as the main policy tool to reduce emissions.

The Government had “got itself tangled up in a situation” and the next carbon-credit auction in June would be critical, he said.

Smith said it was wrong to claim National neutered the ETS for a decade.

“We gradually phased the scheme up and it was working well, as evidenced by an increase in renewables and uncoupling emissions from growth. Shaw did not amend our scheme from 2017-20 as it was functioning well,” he said.

The carbon price crashed in “the early years” of the ETS between 2010 and 2014 due to a flood of cheap units from overseas, he said. “We blocked these units by amendments to the scheme in 2014.”

Some pre-existing cheap credits with a dubious pedigree were not cancelled and continued to cause controversy for their owners, which included BP.

Harrison did not believe the carbon market was in danger of collapse from the latest wobble.

“If the Government fails to action off units off this year, it just means it's tighter going into the future, because the Government is the main supplier of units into this market.”

There were other technical factors that had weighed on carbon pricing aside from government comments, he said.

“The carbon price crashed in the early years of the ETS (2010-2014) due to a flood of cheap units from offshore. These units were allowed under the legislation passed under Labour in 2008 and supported by Greens. We blocked these units by amendments to the scheme in 2014

Higher interest rates had increased the cost of holding carbon credits for future redemption, and businesses would have wanted to minimise debt on their balance sheets ahead of their year-end accounts, Harrison said.

He also believed forest owners were selling credits into the market, due to a couple of different timing factors.

“It's almost been the perfect storm.”