The skinny: emis­sions trad­ing

In re­sponse to read­ers’ ques­tions around last month’s car­bon fea­ture, El­e­ment asked Ben Cole­man, di­rec­tor, com­modi­ties, car­bon and en­ergy at West­pac to com­ment on the past, and the fu­ture, of New Zealand’s car­bon mar­ket.

Element - - Architecture Feature -

1: What have we seen in the first two years of the NZ ETS?

West­pac played a crit­i­cal role in the es­tab­lish­ment and com­mence­ment of the New Zealand Emis­sions Trad­ing Scheme (NZ ETS), as the first fi­nan­cial in­sti­tu­tion to make a mar­ket and fa­cil­i­tate trans­par­ent price dis­cov­ery. Trad­ing in the NZETS be­gan in April 2010, with West­pac pub­lish­ing a two-way price for buy­ing or sell­ing New Zealand Units (NZUs). Over the first six months ac­tiv­ity in­volved parcels of spot New Zealand Units (NZUs). As par­tic­i­pants gained more ex­pe­ri­ence in car­bon mar­kets, in­ter­na­tional units such as As­signed Amount Units (AAUs), Cer­ti­fied Emis­sion Re­duc­tions (CERs), Emis­sion Re­duc­tion Units (ERUs) and Re­moval Units (RMUs) were all traded. To­day, mar­ket ac­tiv­ity in­cludes spot and for­ward trans­ac­tions of all el­i­gi­ble units, spot and for­ward swap agree­ments and re­pur­chase agree­ments. Con­sid­er­ing its size, the mar­ket is rea­son­ably ef­fi­cient and liq­uid. Par­tic­i­pants have good indi­ca­tions of where car­bon units are trad­ing and the mar­ket has linked well with the in­ter­na­tional mar­ket.

2. Why has the car­bon price fallen so far?

Par­tic­i­pants who have li­a­bil­i­ties un­der the NZETS have the choice to ei­ther pur­chase and sur­ren­der NZ domestic units such as NZUs or in­ter­na­tional off­set units such as CERs, ERUs and RMUs. As such NZUs are 100% sub­sti­tutable with in­ter­na­tional units and emit­ters will usu­ally pur­chase the low­est cost unit to sur­ren­der for their an­nual emis­sion li­a­bil­i­ties. The price of in­ter­na­tional units trade as a func­tion of sup­ply and de­mand and the in­ter­na­tional mar­ket is cur­rently mas­sively over­sup­plied and hence the price of car­bon has fallen to record lows. There are sev­eral rea­sons for the lower in­ter­na­tional price in­clud­ing slug­gish Euro­pean eco­nomic growth, new en­ergy ef­fi­ciency stan­dards to drive lower emis­sions through­out Europe, more CERs pro­duced through United Na­tions schemes than the mar­ket ex­pected and a mas­sive sup­ply of ERUs coming from coun­tries such as Ukraine and Rus­sia which has flooded the mar­ket. As a re­sult the in­ter­na­tional price has fallen and NZUs have been dragged lower at the same time. NZUs how­ever are trad­ing at a pre­mium to th­ese in­ter­na­tional units as the lo­cal sup­ply of NZUs re­mains tight due to foresters hold­ing their units. In ad­di­tion NZUs re­main the unit with the least risk of on­go­ing reg­u­la­tory change within the NZETS.

3. Crys­tal ball: what will hap­pen to in­ter­na­tional car­bon mar­kets in 5, 10, 20 years?

Cli­mate change is of in­creas­ing im­por­tance to gov­ern­ments around the world due to the im­pact of ris­ing tem­per­a­tures. To re­duce the im­pacts of cli­mate change the world needs to re­duce the amount of green­house gases that are re­leased into the at­mos­phere. The most ef­fec­tive way of re­duc­ing green­house gases is to put a price on them thereby en­sur­ing peo­ple fac­tor the ex­ter­nal­ity into their de­ci­sion mak­ing. On this ba­sis it is rea­son­able to as­sume that 1) the vol­ume of car­bon traded will sig­nif­i­cantly in­crease over the next 20 years as more of the world prices the green­house gas ex­ter­nal­ity; and 2) the price of car­bon will in­crease thereby en­cour­ag­ing emit­ters to re­duce the amount of green­house gas re­leased from their op­er­a­tion by chang­ing the way they do things. James & Wells In­tel­lec­tual Prop­erty has achieved a mas­sive 43 per cent re­duc­tion in emis­sions dur­ing its first year be­ing CEMARS® cer­ti­fied. As the first in­tel­lec­tual prop­erty law firm in the world to achieve cer­ti­fi­ca­tion, this re­duc­tion blitzed the firm’s car­bon foot­print re­duc­tion tar­get by more than eight times. Se­nior as­so­ciate Jonathan Lu­cas, who heads the firm’s Sus­tain­able Busi­ness Com­mit­tee, says the process of mea­sur­ing and un­der­stand­ing James & Wells’ emis­sions and im­pact on the en­vi­ron­ment has been chal­leng­ing but re­ward­ing. The an­nual In­no­va­tor Award from En­vi­ron­men­tal Choice New Zealand has been won by fit­ness cen­tre com­pany Les Mills. Its Christchurch city gym on the edge of the CBD “red zone” was the first in the coun­try to meet a new stan­dard, devel­oped last year for sus­tain­abil­ity and “green” gym op­er­a­tions. The in­no­va­tion award co­in­cides with the an­nounce­ment by the New Zealand Eco­la­belling Trust that three more Les Mills gyms have qual­i­fied to wear the En­vi­ron­men­tal Choice badge. They are based in Hutt City and Auck­land’s New Lynn and Brit­o­mart. *The SBN – or Sus­tain­able Busi­ness Net­work charts a path to profit that ben­e­fits com­mu­ni­ties, em­ploy­ees and the nat­u­ral en­vi­ron­ment as well as share­hold­ers – profit for the 21st cen­tury. This col­umn cov­ers busi­ness from SBN mem­bers.

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