16 September 2011 | Alan Bouquet
Carbon, Forestry and wood products, Legislation, Australia

 

Lyttelton, New Zealand

New Zealand’s fledgling carbon market has just opened an online spot trading platform for carbon instruments under the NZ Emission Trading Scheme (NZ ETS). The scheme has been heavily criticized from a number of quarters, with some saying that the scheme involves great cost to the taxpayer with only minimal emissions cuts.

The weak price signaling, regulatory uncertainty and muddy supply fundamentals have been major challenges for the NZ ETS. Its size, approach to permit allocation, (grandfathering free allocation) and cost mean that it has experienced little liquidity.

The scheme also allows for post 1990 (Kyoto) forests to be part of the ETS, earning credits for storing carbon. Pre 1990 forests are allocated one off allowances, but unfortunately the whole process is held up with bureaucracy.

The problem here is that there is effectively no limit on the issuance of credits in the early stages of the programme, leaving an uncertain market. The over the counter trading also creates poor transparency, which increases broker’s fees and a wide range of price expectations. Price caps and the ‘two tons per credit’ surrender obligation, make the cost extremely low for most companies.

Having said this, the scheme has developed greatly since it came into place in 2010, and the new trading platform will reduce opaque transaction fees and increase price discovery for a scheme which faces supply uncertainties and strong opposition from market participants.

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