Soaring demand to pollute blows Government’s first national carbon limit

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The country’s first domestic carbon dioxide limit has been blown, due to our galloping carbon price.

This year, the Government put a limit on the sales of official permits to create greenhouse gas required of all sectors apart from agriculture – 19m tonnes. It’s using a rising carbon cost to encourage polluters to baulk and switch to green fuels.

But the Government effectively stepped back first, by releasing 7 million additional units into the Emissions Trading Scheme, after the auction price topped $50 per tonne.

The Government set a guardrail – $50 for the remainder of the year – to prevent prices from skyrocketing. The extra release of units was triggered after plenty of businesses were prepared to pay more than $50 for permission to release a tonne of carbon dioxide, boosting the price past this point.

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The Government said this additional pollution would be balanced out by cuts in future. It will reduce the number of units available in future years’ auctions.

The price protection didn’t fully cushion the blow. Auction participants ended up paying $53.85 per tonne – about $20 more than a year ago. There’s also another auction to be held in December. Since all 7m extra units were sold this time around, there is no additional safety mechanism, so the bidding could rise further still.

This soaring price is a feature of the Government’s plan to cut carbon, not a bug. It set a greenhouse budget for the whole country: no more than 71.8 million tonnes of carbon dioxide-equivalent in 2021.

Agriculture, which doesn’t yet have a cap or an emissions price, is expected to make 39m tonnes – leaving 32.8m tonnes.

From there, the Government subtracted the units it gives away for free each year to heavy emitters and exporters, such as NZ Steel’s factory, Rio Tinto’s Tiwai Point aluminium smelter and Methanex’s chemical plants.

That left 24.4m tonnes. But there are already plenty of units floating in the system, which have been banked before the cap kicked in by big polluters and forest owners. To encourage these to be traded and surrendered, the Government chose to sell only 19m units, evenly split across four auctions this year.

The Government only wanted to sell the rights to emit 19m tonnes of carbon dioxide in 2021, but this limit has been blown.

Gina Sanders/123RF

The Government only wanted to sell the rights to emit 19m tonnes of carbon dioxide in 2021, but this limit has been blown.

The carbon price was expected to rise in response to the newly limited supply. But to stop the price from getting too high or too low, the Government introduced guardrails. The upper guardrail was set at $50, and up to 7 million additional units could be sold if bids exceeded this amount.

AUT climate change researcher David Hall​ said price stability gives businesses confidence in their decisions, such as purchasing an expensive zero-carbon asset.

“Then there’s the reason of political economy. Politicians are anxious that, if the price was allowed to run away, they would face the electoral consequences.”

Even so, this mechanism was intended to be triggered only rarely.

To Hall, the fact the release was triggered at just the third auction shows the Emissions Trading Scheme isn’t working as intended. “It seems deeply problematic if it’s not behaving in the way the regulators themselves were anticipating. It’s just got more and more complicated.”

Some auction participants don’t create carbon pollution, Hall said. These could be intermediaries for emitters or investors looking to make a profit. “It’s hard to tell – is this speculative behaviour?”

There are still 4.5m units to be sold in December.

“The next auction could be a truer reflection of what the market is aiming for,” Hall said. “Now that there’s 7m extra units, which means 7m extra rights to emit, it may well be enough supply… and the price might actually come back.”

The additional sales put the country on track to go over the 32.8m cap, though this won’t be confirmed until all polluters submit a report next year.

It also scuppers the Government’s plans to reduce the current stockpile of units by 5.4m.

But Climate Change Minister James Shaw said he was committed to balancing this out. “Officials are currently looking into the best way to achieve this, including by changing the volume of units available to purchase at future auctions.”

Next year, 26.3m units will be sold at auction, based on the Climate Change Commission’s proposed carbon budgets, with another 7m held in reserve. In January, the upper price guardrail will shift from $50 to $70, and will steadily increase each year.

By 2026, it will sit at $110.15.

If the upper price guardrail is triggered from 2022 onwards, and the annual carbon budget is exceeded, the Government is on the hook to find emissions savings elsewhere, Shaw said.

It could plant trees on Crown land, or, in theory, buy emissions savings from other countries. The world can’t agree on the rules for this kind of trading, though a UN climate summit in November is aiming to negotiate an arrangement.

Therefore, as well as masking the effectiveness of the Emissions Trading Scheme, the guardrail is likely to financially cost taxpayers, Hall said.

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