After the third Emissions Trading Scheme auction saw too many bids over $50, the Government has had to release additional credits into the market and must now find ways to back them with real emissions cuts, Marc Daalder reports

The third auction of carbon credits under the reformed Emissions Trading Scheme should have gone unnoticed on Wednesday, while most of the country celebrated the return of takeaways, a small number of MPs gathered at Parliament and Aucklanders hunkered down for two more weeks at Level 4.

Instead, Climate Change Minister James Shaw had to put out a press release explaining what had happened at the auction, as high bids forced the Government to release an extra seven million credits from the cost containment reserve into the market.

Some of these new carbon credits – 1.6 million, to be precise – weren’t part of the emissions budget and weren’t backed by real emissions cuts, meaning we could surpass our emissions budgets if reductions aren’t found to back them up.

Read more: Newsroom’s explainer on the Emissions Trading Scheme

Speaking to Newsroom after the auction, Shaw said he wasn’t too worried by this. While some commentators had suggested the Government might have to go out and buy units from another carbon market (the EU carbon price is currently NZ$101 per credit, nearly double what the Government got for its extra units), he said other options were available. That included the possibility of reducing the number of units on auction in a future year by 1.6 million.

The remaining 5.4 million units released on Wednesday were part of the ETS cap but had been held back in an attempt to get polluters to reduce their stockpile of units.

The current stockpile of NZUs sits at 134 million, as of March. These aren't all held by big emitters - about 71 million tonnes' worth is held by foresters, many of whom are planning to turn in credits to cover the emissions released when they harvest their trees.

Shaw declined to speculate on whether the cost containment reserve would be breached next year as well. The trigger price for opening the CCR in any given auction this year was $50 but it will be $70 next year.

"The fixed price option and then the cost containment reserve have started acting as a marker, for the market. Sort of an expectation setter. Actually it shouldn't. It should sit so high above the market price that it's largely meaningless," he told Newsroom. The issue was that people had been taking the CCR trigger as a target.

"They shouldn't be. That is one of the reasons the [Climate Change] Commission have recommended that the cost containment reserve moves up fairly steeply, year-by-year. Actually what needs to happen at some point is it needs to just rise above the natural price where supply and demand even out and then to act as just that regulatory lever at the top end."

However, Shaw indicated the cost containment reserve's current prices were still useful for giving people predictability and certainty.

"In an ideal world, the [market] price would float of its own accord. The whole idea of having a cost containment reserve is, it really is a transition mechanism," he said.

"As the country goes from facing effectively a zero price or a negligible price on carbon to a meaningful price, companies that have got those obligations and pass those through to consumers need to have some predictability about what that transition's going to look like. That's the sole reason for having a cost containment reserve at all."

Nigel Brunel, who heads up Jarden's carbon trading, said the commission's advice would also see the distance between the price floor and the CCR trigger price (which could be seen as a rough cap) widen. Right now, there's a $30 gap between the floor ($20) and the CCR trigger ($50). That will widen significantly over the next few years, because the floor will rise by 5 percent plus inflation a year, compared to 10 percent plus inflation for the CCR trigger price.

"By 2025, maybe 2026, you're sort of looking at a $38 to $110 kind of track. That's what you need it to be," he said.

"Probably $20 and $50 was too narrow."

Brunel wasn't sure whether the cost containment reserve would be hit next year - or whether it would be emptied if it was. Units are only released from the CCR to everyone who bid above the trigger price.

Ahead of this auction, it seemed likely that the CCR would be opened up (after all, the sport price was above $50), but the market wasn't sure whether it would release a flood of units or only a trickle.

"It wasn't entirely a surprise that some, if not all, of that cost containment reserve was going to come out or be emptied. It was probably a 50/50 call in the market if it was going to be all or some. But some of us were not surprised that it got all taken out," Brunel said.

"The price at $53.85 was probably toward the top end of expectations."

The market price was still likely to rise, Brunel said, with it hitting $59 on Wednesday afternoon.

Marc Daalder is a senior political reporter based in Wellington who covers climate change, health, energy and violent extremism. Twitter/Bluesky: @marcdaalder

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