The quarterly Emissions Trading Scheme auction surprised analysts and policymakers on Wednesday when it failed to clear the confidential reserve price.

This means none of the 4.5 million carbon permits on offer were auctioned off. They will instead roll over to the next auction, in June.

The surprise result came in the context of low carbon prices and the Government’s multi-stage climate policy bonfire.

* Cabinet overrides Shaw and Commission on carbon price
* Lower bar for subsidies for carbon polluters

Lizzie Chambers, the founder and managing director of online carbon trading platform Carbon Match, wrote on Tuesday that the carbon market is “in an uncomfortable space, and has been ever since some unusually timed announcements about ETS settings just after last year’s December auction”.

Those announcements involved Cabinet overriding both Climate Change Minister James Shaw and the advice of the Climate Change Commission to artificially depress the carbon price. Since those decisions, the price of carbon on the spot market has dropped by $20, to $65.

Shaw told Newsroom the failure of the auction to clear demonstrated lack of confidence in the Government’s climate ambition on behalf of the market.

“I think that’s obvious. The price has come down pretty substantially since before that Cabinet decision at the end of last year. That’s led to a price that is lower than the replacement cost of coal and it’s now roughly around where it was in 2021,” he said.

“I think it shows the market’s working as it should, but also that the market reflects a sentiment about the direction of government policy. It should be read as a signal in that sense.”

Finance Minister Grant Robertson rejected that, saying the Government “remains committed to the Emissions Reduction Plan we have and so that is not something I’d agree with”.

Neither minister was too concerned about the impact on the Climate Emergency Response Fund, which sourced from ETS auction revenue and which was topped up by $2.1 billion in December on the basis of a market carbon price of $85.

“I’ve sought some advice from the Treasury on that and their preliminary advice is no, they obviously always knew that there would be fluctuations in the price and they try to work this out across a four-year average,” Robertson said.

Shaw was a bit more cautious in his comments.

“It’s a little too early to tell because, although no units were sold today, the total number of units that are up for auction remains the same. Those units that didn’t clear today will simply get held over for future auctions,” he said. “Across the year, the answer is I don’t know what impact it’s going to have on future revenues because it depends on what happens in future auctions.”

Chambers raised this in her market analysis the day before the auction.

“Any units unsold at tomorrow’s auction will roll forward to the June auction. Insufficient interest at that auction could drive the same roll-forward to September, and so on, until the December auction, at which point no further roll-over is possible this year and the associated 2023 revenues would be foregone,” she wrote.

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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