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Charting the Future: An update on New Zealand's Bold Climate Change Commission Recommendations

On 14 March 2024, New Zealand's Climate Change Commission (CCC) issued recommendations on adjustments to the Emissions Trading Scheme (ETS) pricing and volume controls. These adjustments aim to align New Zealand with its legally binding climate goals.


Key Insights:

  • Climate Pledge Progress: New Zealand is currently off course regarding its 2050 Net Zero commitment. To get back on track, the CCC suggests stricter ETS regulations and a focused strategy on reducing agricultural emissions, which represent about half of the nation's total emissions and are not covered by the ETS.

  • Overhang of ETS Units: A significant surplus of units within the ETS is giving emitters a false sense of security, allowing them to rely on credit purchases rather than actual decarbonization efforts. This surplus, primarily due to an excess of forestry credits, is keeping NZU prices artificially low.

  • Government Control and Forestry Credits: The government lacks direct control over forestry credit supply, making auction supply (and, to a lesser extent, free allocation) the primary tools for tightening the ETS balance over time.


The Latest CCC Recommendations:

The CCC's latest report highlights a greater than anticipated oversupply in the market, recommending substantial reductions in auction volumes for the 2025-2028 period. This proposal includes a significant 10-20% reduction in annual auction supply, which if implemented will have a more pronounced effect in the earlier years.


Projected Impact:

These proposed adjustments are expected to significantly reduce the total banked surplus by 2030, essentially depleting the "available" market supply. This scarcity aims to encourage emission reductions through price increases, aligning with the CCC's objectives.


Market Response and Outlook:

Despite an initial uptick, market response to the CCC's announcement was muted, closing only slightly higher. This tepid reaction may stem from skepticism about the government's commitment to implementing these recommendations, given past precedents. The market is also digesting the CCC's comments on the current oversupply issue, with expectations of a tightening inventory post the May-24 compliance deadline.


The effectiveness of the CCC's proposed cuts will be tested in the March 20th auction, especially after recent changes to the Confidential Reserve Price calculation methodology. The government is expected to respond to the CCC's recommendations by the end of Q3 2024.


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