The cost containment reserve trigger price essentially acts as a price cap for the quarterly NZ ETS auctions. If secondary market prices follow suit, the change has the potential to mean a significant increase in the cost of compliance for emitters, while strengthening the case for investment linked to decarbonisation.
The price increases announced Monday are consistent with the Climate Change Commission's (CCC) recommendations in its final report Inaia Tonu Nei - A Low Emissions Future for Aotearoa. The CCC recommended the Government increase the cost containment reserve trigger price for NZ ETS auctions to $70 “at the first possible opportunity and then every year by at least 10% plus inflation". At the same time, the CCC also recommended the auction reserve trigger price (which essentially acts as a floor price for the NZ ETS auctions) be increased to $30 as soon as possible and then increased further annually by 5% plus inflation.
In its recent consultation on Proposed NZ ETS Changes and SGG Levy Regulations 2021, MfE outlined the CCC's draft recommendations – signalling the possibility it would implement pricing changes to meet such recommendations. This morning's announcement provides for a minor increase in the number of New Zealand Units (NZUs) that will be available for auction each year, along with price increases that mean a doubling of the current specified cost containment reserve trigger price by 2026.
The change to the price control settings for the NZ ETS auctions from 2022 are as follows:
| Minimum price below which units must not be sold by auction ($) | Trigger price for sale of reserve amount of New Zealand units ($) | Reserve amount of New Zealand units (millions) | ||||
|
Calendar year |
Current |
Updated |
Current |
Updated |
Current |
Updated |
|
2022 |
$20.40 |
$30.00 |
$51.00 |
$70.00 |
7.0 |
7.0 |
|
2023 |
$20.81 |
$32.20 |
$52.02 |
$78.40 |
7.0 |
7.0 |
|
2024 |
$21.22 |
$34.35 |
$53.06 |
$87.81 |
7.0 |
7.0 |
|
2025 |
$21.56 |
$36.75 |
$54.12 |
$98.34 |
6.9 |
6.8 |
|
2026 |
|
$39.32 |
|
$110.15 |
|
6.7 |
The cost containment reserve trigger price, and associated auction reserve price do not apply to the secondary market, but we expect the secondary market will react to the changes. This year, market prices in the secondary market tracked up close to the newly established cost containment reserve trigger price and as evidenced on Jarden CommTrade's website1 the market responded to announcements around an increasing cost containment reserve price with spot trades recorded as surpassing $50 per NZU.
If market prices track over time in line with the increasing cost containment reserve, the cost of compliance for emitters will increase materially (unless they have locked in long-term bilateral trades at a lower price or have a significant stockpile). It will also strengthen business cases for transition investments and abatement decisions required to achieve the 2050 target. The CCC was hopeful a markedly increased cost containment reserve price would act to reduce the risk of the cost containment reserve NZUs being released at auction, adding to the NZU stockpile.
While the market will spend some time responding to MfE's changes to the price control settings for 2022 to 2026, MfE will now be focusing on its latest consultation around market regulation – some of the market regulation options being considered could see significant changes for trading and traders. For more information, see our recent publication on the changes afoot to the NZ ETS and market governance that will impact NZ ETS participants, NZU advisors and NZU traders alike.
Disclaimer: This publication is necessarily brief and general in nature. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.