Green initiatives under threat as carbon-credit slump continues
The price of carbon credits has fallen further, casting a shadow over forestry investments and other initiatives to tackle climate change. Investment bank Jarden reported that carbon credits were trading for just $34 on Wednesday, down from their high of more than $88 last year, before recovering sightly to $38 on Thursday. Many polluters need to buy and then surrender a carbon credit for each tonne of carbon emissions they release, so the drop in price means it is now cheaper for them to release greenhouse gases into the atmosphere, and correspondingly harder to justify initiatives to curb emissions. The cost of carbon credits feeds directly into the price of fossil fuels such as petrol, and electricity generated from coal and gas, so their decline has a downward effect on many consumer prices. The collapse in the price of carbon credits began late last year after the Government rejected advice from the Climate Change Commission to further restrict the supply of carbon credits in order to push up their price and put more of a squeeze on emitters. But the price plunge has deepened dramatically in the past month after buyers again stood back from buying credits at a government auction last month, and in the face of uncertainty over the likely outcome of a government review of the Emissions Trading Scheme (ETS ) . Mike Hopkins, chief executive of Carbon and Energy Professionals New Zealand, whose members include people involved in addressing climate change, said carbon-credit prices higher than $40 were needed for the ETS to be effective in encouraging emissions reductions. Carbon credits in the EU that grant a right to emit a tonne of carbon dioxide in Europe are currently trading at about 87 (NZ$158) each. Governments in Europe were in some cases applying a notional price equivalent to hundreds of Euros per credit when weighing up abatement initiatives, Hopkins said. It's a difficult one, because then of course you get into the realms of the cost-of-living crisis. Most of our members would certainly be looking for a price higher than we have today and less volatility. It's important for investment and planning that people have a reasonable idea, within boundaries, as to where the price might go. Salt Asset Management, which runs an NZX-listed fund that lets people invest in carbon credits, said it was not economic for foresters to plants trees at a carbon price of less than $40 and the price slump had taken the pressure off businesses to reduce their emissions. Prue Younger, chief executive of the Forestry Industry Contractors Association, said the forestry industry was facing a once-in-a-generation crisis due to higher costs, lower demand and the decline in the value of carbon credits. It's just another nail in the coffin, really, for diversity of forestry. ANZ agricultural economist Susan Kilsby said all the options the Government was considering in its review of the ETS appeared designed to raise the price of carbon credits. The fact their price is trending down quite sharply when you've got a review going on that's trying to encourage prices to rise is very counterintuitive. A discussion paper released by the Government in June appeared to make clear that it continued to see the ETS as a key mechanism to reduce emissions. But ministers also made clear they wanted to ensure the ETS resulted in more actual abatement, and did not predominantly encourage industries to offset their emissions using carbon credits granted as a result of planting pine trees. Climate Change Minister James Shaw said in a preamble to the paper that while storing carbon in forests was important, weve got to make sure we are also reducing the amount of pollution we produce in the first place. Currently, its cheaper for most companies to pay for their emissions, rather than invest in new technologies to reduce them. The availability of cheaper carbon removals from trees has dulled the incentive for widespread transformation, he said. Kilsby said it was clear from the discussion paper that the Government would consider treating carbon credits generated from forestry differently from other units. That could potentially make existing carbon credits more valuable. But she said carbon prices had been impacted by a current oversupply of units as well as the uncertainty over the settings of the ETS. Kilsby believed the price drop had been exacerbated by speculators who had bought carbon credits with a view to selling them later at a higher price, but who had been quick to bail as prices fell. Typically, when you see a market in which people are speculating, when prices start to go down you often see quite a quick exit of people who were there to follow the market up. I think what we're seeing is a bit of that at present. The price drop has resulted in the Government failing to sell any new carbon credits at auctions in March and June, when 8.95 million units were passed over, after they failed to reach a reserve price . Those units, plus a total of a further 8.95 million units, will be offered for sale in auctions in September and December. But the Ministry of the Environment confirmed that if any of the 17.9 million credits failed to sell in either auction, they would not carry over to auctions next year and would instead disappear from the market. Kilsby said that could help mitigate the oversupply issue. But Salt forecast in a release to the NZX that there would nevertheless be no pressure on emitters to buy in the auctions for the next two years as they will likely be able to source and surrender forestry-removal credits at a discounted price. Kilsby said it would be cynical to suspect the Government had manufactured the uncertainty and the decline in carbon prices in order to ease the cost of living ahead of the election. Even at the start of the year, when they did go against the Climate Change Commissions recommendations, I dont think a lot of the people making those decisions necessarily fully understood how the market was working and some of the implications. The best thing the Government could do now would be to complete its review of the ETS as soon as possible, she said. At the moment there is a heap of uncertainty about what those final outcomes will be. There have been sales of forestry land that had fallen through because no-one really knows what this means, going forward. But Salt said it was now clear there would be no clarity before the October election. It would take time to redesign the ETS to ensure carbon prices were high enough to have their intended effect while avoiding over-stimulating the planting of pine forests, it suggested. The Governments review option were vague ones that would be decided by someone, sometime in the future, it said. We expect there will be minimal trees planted until the uncertainty is resolved which isnt good for encouraging emissions removals and will potentially require a higher carbon price in the future to suppress New Zealands gross emissions.