Motorists losers, environment winner from $1 billion carbon auction flop
The rights to emit 15 million tonnes of carbon dioxide into the atmosphere have gone up in virtual smoke after the Environment Ministry failed to sell any carbon credits in a government auction.
Salt Funds director Paul Harrison said the failure of the auction was positive for the environment as it could be expected to help underpin higher prices for carbon credits over the next four to five years.
With the supply of 15 million new credits nixed, polluters would need to speed up the pace at which they ate into an estimated oversupply of about 49 million credits already in the market, he said.
“The Government probably put 14 million too many credits into the system over the previous two years. Now we are tidying that up a bit.”
ANZ agricultural economist Susan Kilsby agreed carbon markets had been oversupplied for some time, “so the fact that no additional units were taken up by the market this year will help address the oversupply situation”.
Under the Emissions Trading Scheme many emitters need to surrender a carbon credit, which is then cancelled, for each tonne of carbon-dioxide they release into the atmosphere.
New Zealand’s total emissions were last measured at about 77 million tonnes by Stats NZ.
A tighter market for carbon credits and a higher price should discourage emissions by pushing up the price of petrol, gas and coal-generated electricity and a wide range of other products responsible for greenhouse gases.
But Harrison said that given there were many other factors that determined prices paid by consumers, the impact of movements in the carbon price would not necessarily be easily discernible.
Connor Molloy, campaigns director for the Taxpayers’ Union lobby group, believed consumers would feel a pinch.
The failed auction would put pressure on the carbon price “further adding strain to the cost of living”, he said.
But Harrison noted the emissions trading scheme was designed to reduce emissions by changing behaviours.
“The Climate Change Commission has talked about a carbon price of $150 by 2030.
“A lot of our emissions come from transport, so a question is at what point do people
have second thoughts about how much they use their fossil-fuel driven car.”
At their current market price of about $71, carbon credits add about 20 cents to the price of a litre of petrol.
The auction held by the Environment Ministry, at which polluters and investors bid for the right to buy carbon credits freshly minted by the Government, was the fourth and most important this year.
Businesses and investors passed over buying more than 15 million carbon credits at a secret reserve price determined by the Environment Ministry that is believed to have valued them at a total of a little over $1 billion.
Carbon credits that had failed to sell at three previous auctions this year rolled into Wednesday’s auction, but the auction rules mean the credits now expire and there can be no jackpot for the Treasury.
The previous government used proceeds from the sale of carbon credits to pay for initiatives to reduce emissions, but the Government has signalled it will instead use them to help fund its $14.6b package of tax relief.
Ultimately, the volume of carbon credits issued by the Government is based on advice from the Climate Change Commission, which aims to set the cap at the level it judges necessary to ensure the country discourages enough emissions to meet its international climate change commitments.
The Government is not the only source of carbon credits. They can be earned and on-sold by forestry companies as their new plantations grow, and credits – some of questionable provenance – have in the past been sourced from overseas.
Counter-intuitively, the spot price for carbon credits dropped a few dollars to $71 in the immediate wake of the auction failing to clear.
Harrison believed that was a short-term phenomenon caused by traders who had bet big on an immediate fillip from the auction failure unwinding their positions.
The auction rules meant that bids above $60 would need to have been received for all of the 15 million credits in order for any of them to sell.
But there were only bids for 3,622,000. Harrison believed a general assumption that the auction would fail because of the large number of carry-over credits on offer contributed to the lacklustre interest.