New Zealand will spend NZ$4.1 million ($3 million) to design a supply strategy for its emissions trading scheme that might lead to an auctioning system for NZUs, the Ministry for Environment said Thursday.

The government added a provision for NZU auctioning into the ETS legislation in 2013 in case it wanted to increase supply of allowances to compensate for the loss of access to UN offsets, but has not since made any moves towards implementing it.

However, amid uncertainty over what a potential international carbon market could look like after 2020, and with up to 100 million NZUs lingering in the national registry with no current route to market, the government is now drawing up a strategy for how to ensure sufficient supply.

The funding “includes consideration and design of an auctioning function, although no decisions have been made about when or if such a system might be implemented,” the ministry said in a statement on its website.

“Any move to introduce auctioning would involve setting annual limits on NZUs, which would transparently act as a ceiling on the number of NZUs that could be auctioned,” it added.

It stressed that developing a system would take at least 18 months, and that any decision would only be made after completing a public consultation process on the NZU limit, the auction design and the start date – meaning this could all be years off.

LOW PRICES

Emitters covered by the scheme have until May 31 to hand over to the government NZUs or UN offsets to cover their 2014 emissions.  This marks the last time they can use CERs or ERUs to meet their domestic targets.

The market expects NZU demand to increase as the units become the only eligible carbon currency for ETS compliance, but there is little indication this will happen in the short term.

Spot NZUs have dropped to NZ$5.20 this week, a six-month low, as emitters show little urgency in buying. Many of them have plenty of NZUs sitting in their accounts that they have either received for free from the government or bought cheaply in the market.

The current NZU surplus circulating in the market is theoretically sufficient to meet the entire market’s demand for the rest of the decade.

However, a lot of the permits are held by forest-owners, and there is a great deal of uncertainty around at what level they would be willing to sell.  This is a concern for the government, which has stated on several occasions that one of its key priorities is to keep the ETS cost down for participating companies.

“Supply management could improve the efficiency and effectiveness of the NZ ETS so it reflects the Government’s desired level of abatement and that costs on the economy are managed,” the ministry said.

SUPPLY SECURITY

But an auctioning system wouldn’t just be to keep prices down. It would also guarantee future supply for compliance companies, said one market observer, who likened the forestry NZUs sitting in the registry to “a gift token that you get for free that you just put in your wallet, but don’t use.”

“If the outcome of Paris (UN climate talks in December) is not as good as hoped it is very uncertain what the future international market might look like. If it is based on a number of bilateral agreements, for example, it may take some time before liquidity builds up,” they said.

If a situation like that was to occur, it would be important to New Zealand to have a supply mechanism in place in its ETS that ensured emitters were able to meet targets, the observer added.

By Stian Reklev – stian@carbon-pulse.com