By Liz Kivi
The carbon price rebounded briefly in what looked like a ‘dead cat bounce’ last week, following the Government’s announcement it was unlinking the Emissions Trading Scheme from international climate targets.
Like a dead cat dropping to the pavement from a great height, prices on the secondary market plummeted then rebounded somewhat before slumping again, with the immediate resurgence giving way to an ongoing declining trend.
The announcement had clearly sent shockwaves through the market, with broker Jarden reporting early morning trades dropped 20%, to as low as $41.50, down $10 on the previous day.
While prices recovered somewhat throughout the day, closing at about 10% down, the overall trend is negative, with the Carbon News Index down even further on Friday to $44.33 – the lowest it’s been since we started collecting data in January 2024.
Yesterday’s settlement price of $45.33, while up slightly from Friday’s low, is still a significant drop on prices from just over a week ago.
Interestingly, the carbon price had already begun to decline just days before the Government’s announcement.
With demand for pollution permits still predicted to be consistent, it remains to be seen how many of its nine lives the compliance carbon market cat has left.
Exaggeration?
Speaking to Carbon News earlier this week, Climate Change Minister Simon Watts claimed it was “a bit of an exaggeration” that the price had tanked following the announcement.
However a quick glance at the NZU Index graph shows the price falling off a cliff, with extreme volatility returning to a hitherto rangebound market.
Watts also suggested that the market might have moved on small volumes accounting for the initial 20% drop, and claimed that the government can’t consult on market sensitive news.
However, the Government has consulted on market-sensitive information in the past, with the previous Labour-led Government consulting Iwi over possible forestry changes in the ETS.
Watts seems to be entering into a kind of mental gymnastics, which have been a hallmark of the coalition government’s climate policy so far (see meeting the 2030 Paris Agreement climate targets, without forking out for offshore mitigation).
Nigel Brunel, managing director of Marex New Zealand, told Carbon News that Watts doesn’t seem to know what he’s talking about. “Of course they can consult some people on sensitive news. People get ‘wall crossed’ all the time where they have inside information – it’s a crime to tell anyone [else]. They should have market expertise guiding them.”
Brunel said it was “funny” that Watts was claiming the announcement didn’t impact the market. “But in the same breath, he’s calling it market sensitive – which is it?”
Writing on Linkedin, Brunel said that, with the Government removing the legal link between ETS settings and our Paris commitments, the carbon market had naturally re-priced the risk.
“Confidence in long-term policy direction is what anchors carbon prices, change that, and volatility is inevitable.
“Markets respond to signals. Pretending otherwise only undermines credibility.”
Cap-and-trade – with no cap
Troy Baisden, co-president of the New Zealand Association of Scientists and principal investigator at Te Pūnaha Matatini Centre of Research, told Carbon News that a cap and trade scheme that keeps losing its cap is never going to develop prices high enough to deliver meaningful emissions reductions.
“As a scientist watching the development of cap and trade schemes for almost thirty years, it seems to me that nothing matters more than the clarity and integrity of the cap.”
Only when there is enduring commitment to a meaningful cap on emissions does the price signal from an ETS become effective, Baisden said.
“Sadly, there’s been no shortage of ways to undermine a cap. Past pain from events like the unlimited inclusion of ‘hot air’ units creates lasting memory which fuels skepticism.”
Baisden said the latest Government announcements had obviously undermined the cap. “Suggesting the cap can be delinked from our NDC is perhaps the most blatant we’ve seen.
“Worse, our already fragile ability to use models to build scenarios and project the future of land use and the energy system will fall away further at each stage when the role of the Climate Change Commission is weakened or removed. We are unique among nations in having a research system that hasn’t been funded to shine light into what the 2030s can look like.
“As the market continues to consider the recent announcements, we’ll see continual price weakness and collapse if we don’t know the cap will remain tied to a clear emissions target with high integrity,” Baisden said.
“What we’re really finding out now is whether or not the market is well developed and informed enough to send a signal to the government. Or will market participants only discover the weakness at each point where further slippage looks appealing to politicians?”
Baisden said New Zealand was previously a leader in creating the ETS. “But it perhaps has been so complex that we’re slower to learn lessons apparent from comparable schemes internationally, as well as from our limited attempts to apply cap-and-trade to nitrogen impacts in freshwater.
“Perhaps there’s no better time to contemplate where we stand than during COP30?”
Not serious about Paris?
John O’Brien, director at Carbon Market Solutions, said the planned changes to climate law undermine the Government’s claims it is committed to its international climate targets. “The fact that the Emissions Reduction Plan now has no link to the NDC or nationally determined contribution is basically like saying New Zealand is not serious about its Paris Agreement target.”
Dropping the Climate Change Commission’s obligation to advise on Emission Reduction Plans also raised questions about the Commission’s purpose, O’Brien said. “Why bother to even have an Independent Climate Change Commission?”
“We would not have to put up with posts anymore on Linkedin from the CEO of the Climate Change Commission talking about critical risks that are being addressed or New Zealand’s climate change leadership, which I believe to be very cynical indeed.”
With multiple Fossil of the Day awards from COPS under NZ’s belt, O’Brien said such claims were disingenuous. “The last thing we need is NZ government officials saying we are a ‘leader.”
Disclosure: Nigel Brunel is part-owner of Carbon News.