Spot NZUs broke through the NZ$8 barrier for the first time since Feb. 2012 in Wednesday trade, closing at NZ$8.20 ($5.40) as traders saw the ETS review document released Tuesday as a bullish signal.
The spot contract rose 4.5% on the day, up 35 NZ cents on Tuesday’s close, which was already the highest price seen in the market since Mar. 2012.
“Good volumes” traded throughout the day, market participants said, and at close of market NZUs were bid at NZ$8 on CommTrade and offered at NZ$8.40.
“The response has in my view been more muted than I expected, perhaps because unexpected changes which have been to the downside have happened so many times before. I think the buy side is probably holding back more than they should – if it pans out that they need double what they were planning on as early as May 2016 this market should get a lot more active,” one observer said.
In the review paper, the government made the consideration of whether to drop the 2-for-1 rule a priority issue, and even though the review process will take months, the wording in the document was seen by market players as strongly suggesting the rule should be dropped.
The NZ ETS is currently dragging along a surplus of 140 million allowances, and in addition to making the ETS an inefficient tool to cut GHG emissions, the surplus creates a potential fiscal risk for the government.
If that surplus is banked into the 2020s, ETS companies can use them for compliance, but the government will not be able to use them towards its UN target, meaning the government might be obliged to buy additional international units or drive additional cuts at home, both which would come at a cost.
If the 2-for-1 rule was abolished, market demand would double and the government estimates the surplus would fall to 45 million allowances by 2020, significantly reducing its risk.
In the review paper, the government also seemed hesitant to add supply through NZU auctioning this side of 2020, which observers said added to the bullish signal.
By Stian Reklev – email@example.com