Is the New Zealand emissions trading system dominated by CER prices?

NZETS began in July 2010 with the fossil fuel and electricity sector committing to supply NZU units to cover 50% of their CO2 emissions or to pay the government $ 25. Certified Emissions Reductions or CER are fungible with NZU and acceptable in NZETS.

Risk areas are either exempt or have received or received a “free” allocation of NZU shares. The fishing industry has received around 685,000 NZU units. Forest owners before 1990 receive units to compensate for land use losses or around 16 million NZUs before 2012. Allocation is slower than expected. Sectors must monetize these loans to make up for losses.

NZU sales in July represented post-1989 forest owners who owned NZU units from forest growth in 2008 and 2009. A limited percentage of eligible forests after 1989 was registered. Forest owners are careful when registering because the risks are just becoming known.

Sellers in July received around $ 17 for their NZU units. The bulk of these sales were made by forest managers who received high commissions. A bank moved in as a market maker and bought NZU in lots of just 100 units. This was marketed as commission-free. In our view, it was just a buy / sell with a margin, but it led to a more transparent price. Commentators suggest that the NZU price is limited to $ 25 less holding costs. When buying for buyback commitments in May 2011, holding costs for issuers are incurred. The spot prices of NZU shares rose to a high of USD 21.

In the meantime, the NZD euro base rate has improved to around 0.58. European confidence in the CER of projects in developing countries has been removed. This has led to price fluctuations in CER shares in the EUETS. In December 2010, the combination of these factors resulted in the price of a CER being below the NZU spot rate. Emitters started buying CER instead of NZU units. The NZU spot fell to around $ 19.

The NZU price is now limited by the price of a CER instead of the government ceiling of $ 25. Buyers of New Zealand compliance are initially based on the price that results from the costs of a compliance unit plus the holding costs. The CER delivery can be scheduled for the next delivery round in March 2011. This reduces the holding costs. The CER market is significantly more liquid than the NZETS. This gives issuers the opportunity to hedge and a clearer exit option. CER units are not subject to government restrictions on the sale of NZUs. Coupled with transaction costs, the underlying credit in NZU is often forestry and the fact that the CER is the denomination currency of the internationally traded market, given the price parity with an NZU, which option would a cautious buyer take?

What will happen in the long term? The NZETS review with effect from 2013 is expected to lift the $ 25 price cap and require the supply of one unit for every tonne of CO2 emitted. CERs from industrial projects were classified as unacceptable according to the EUETS in May 2013 and can also be excluded from the NZETS. Otherwise, there will be millions of CERs after 2012 with the only market, NZETS. China's minimum exchange rate of 9 euros for a CER would increase the price of a CER and thus compliance with the NZETS to 9 euros or 15.51 NZD.

Barclays recently downgraded the CER from 14.50 to 13.50 euros. Point Carbon forecasts 15.60 for 2011 and rises to EUR 18.40 for 2012. At the current exchange rate, Barclays suggests a CER of NZD 23 and Point Carbon of NZD 26.90. Both forecasts significantly exceed the current NZU price, and the latter exceeds the New Zealand government's $ 25 ceiling.

Is the NZETS phenomenon temporarily dominated by the CER price? If the European projections prove correct, the answer is yes.

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