Extra carbon credits released from the Government’s reserve could enable polluters to emit over and above New Zealand’s climate targets, Marc Daalder reports

Analysis: James Shaw says he wants to hear from the Climate Change Commission before making any changes to the price settings of New Zealand’s carbon market.

The first Emissions Trading Scheme (ETS) auction of the year took place on Wednesday and enough bids were above the $70 soft price cap that the Government was forced to release nearly six million extra carbon credits into the market from its cost containment reserve. Each credit – called a New Zealand Unit (NZU) – allows the holder to emit one tonne of carbon dioxide equivalent.

Most of the units released from the reserve on Wednesday represented emissions that the Government has factored into its plan to meet its emissions budgets. Around 300,000 of the extra units, if surrendered to emit greenhouse gases, could see New Zealand emit more than the budgets allow. Their release will force the Government to either find ways to reduce emissions by a corresponding 300,000 tonnes or to hold back 300,000 units from future ETS auctions.

This is the second time in two years that the cost containment reserve was breached, flooding the market with extra units that allow companies to release greenhouse gas emissions. The first time, in September, saw the entire reserve of seven million units emptied in a single auction. After Wednesday’s event, there are just over a million units remaining in the cost containment reserve for the three auctions left in 2022.

Climate change legislation doesn’t allow Shaw to tweak the settings for this year, but he could raise the reserve’s trigger price for 2023. Right now, that benchmark is $78.40. The spot price for NZUs has already exceeded this value earlier in the year, but has since fallen back to hover just above $70. Still, market analysts think the current dip is temporary and prices could certainly rise another $5-$8 in the next year.

Shaw told Newsroom he's not in a position to make any decisions right this instant.

"I can't and don't want to speculate. The advice from the commission on unit supply settings is a statutory requirement under the Zero Carbon Act and this will be the first time that they have offered that advice in," he said. "I sort of want to give that process an opportunity to work."

But he did say the release of units from the cost containment reserve puts the spotlight on the enormous stockpile of NZUs held by forestry companies, industrial polluters and price speculators.

"Any cost containment reserve units above the cap will essentially add to the stockpile. The stockpile is something like 130 million units at the moment, that are kind of sitting there," he said. "You do need some liquidity in the system. There should always be a stockpile. It's probably a bit big at the moment."

An official briefing to Shaw from September, right after the reserve was first breached, said that about 51 million NZUs in the stockpile were being held by foresters who planned to surrender them when they harvested their trees.

Since that briefing, statistics from the Environmental Protection Authority show the stockpile has grown to 157 million units, meaning companies hold the right to emit as much as 106 million tonnes in unexpected emissions.

"The challenge of having a big stockpile is that it can make it harder to stay without your emissions budgets because you've got all these units that people can surrender rather than reduce their emissions," Shaw said. "It makes it harder to achieve the budgets."

This mismatch between the ETS, which is happy to allow emissions so long as an NZU is surrendered, and the emissions budgets, which care about limiting the emissions that take place in a certain period of time, represents a significant obstacle to the Government actually fulfilling its obligations.

"The advice that the commission are going to give us in the second half of this year has got to take into account all of these things," Shaw said.

"It's got to take into account NZUs that are generated from forestry, NZUs from free allocation, NZUs that are auctioned, NZUs that are in the cost containment reserve in addition to the option. It's got to map all that out and provide advice on how do we manage the market so that we increase the chances that we'll hit the targets."

The potential 300,000 tonnes of unplanned emissions that were released from the cost containment reserve yesterday add further to the gap between the Government's climate policies and its budgets. Last year, 1.6 million NZUs that weren't factored into the ETS cap were released from the reserve. While the Government isn't required to back those units with emissions reductions because they were released before the first emissions budget period began in 2022, Shaw has pledged to do so anyways.

Even without ETS shenanigans, the policies in the Government's draft Emissions Reduction Plan fell between 2.1 and 5.1 million tonnes short of meeting the first budget. That budget may also be revised after Stuff reported the Government planned to allow two million tonnes of extra emissions due to "human error".

Shaw said he had to consult with other parties before forming a view on readjusting the budgets to exclude those extra two million tonnes.

"We also need to be assured that the emissions budgets are achievable, otherwise we're essentially setting ourselves up for failure."

In all, the Government could have nine million tonnes of emissions reductions to find, on top of the policies it has already mooted.

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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