Change ahead for the Emissions Trading Scheme

The uncertainty created by the consultations has had a material impact on the price of New Zealand Units (NZUs). At one point not long before the time of writing, the price was below NZ$40 per unit, though it has since bounced upwards following a Court decision detailed below. In addition, certain participants in the market have been seeking to sell forestry generated NZUs and shift into purchasing NZUs issued at auctions. To this point, NZUs generated from different sources had been ‘fungible’ but the latest consultation could see a wedge develop in the price and demand for different categories of NZUs.

It has also created much angst in the market, with forestry entities voicing their concern around the resulting loss of confidence among investors who had been looking to make long-term carbon forestry investment decisions.

As at the time of writing, the uncertainty continues. A judicial review brought by Lawyers for Climate Action NZ Incorporated against the Minister of Climate Change was successful, with the High Court determining that Cabinet had failed to adequately address whether the NZ ETS unit limit and price control settings announced last year were consistent with the emissions budgets and the Government’s nationally determined contribution under the Paris Agreement.

Uncertainty around the NZ ETS aside, a fund paid for through the scheme has been used to drive two major emissions reduction deals in recent months. The first, announced in May, will see the Government partner with New Zealand Steel for it to build and operate an electric arc furnace at Glenbrook Mill. The second is a partnership between the Government and Fonterra forecast to halve the dairy cooperative’s manufacturing emissions by 2030, which will see Fonterra commit to undertaking a complex range of projects to cut primarily coal use across six manufacturing sites.

The conditional funding agreement with NZ Steel is for up to NZ$140 million co-funding from the NZ$650 million Government Investment in Decarbonising Industry (GIDI) Fund, while the Fonterra deal will see the Government co-fund up to NZ$90 million through GIDI with Fonterra planning to invest approximately NZ$790 million to meet the revised decarbonisation target. GIDI is paid for through the Emissions Trading Scheme and administered by the Energy Efficiency and Conservation Authority (EECA). Bell Gully supported EECA on both projects.

Following this decision, the NZU price had shifted closer to NZ$50.

Most recently, the Government has made further decisions regarding unit limits and price control settings for the NZ ETS auctions for 2024-2028, and has signalled changes to be made to December 2023 auction settings, following a reconsideration of decisions made in 2022 after settlement of the judicial review. These changes may support upward movements in the NZU price.

Regardless, with an election looming, it is unlikely that there will be a swift resolution to the current uncertainty surrounding the market for NZUs.