Emission Trading Scheme auction fails again - but is that bad?

It is a crucial part of the Government's plans to reduce emissions.
It is a crucial part of the Government's plans to reduce emissions. Photo credit: RNZ

Hamish Cardwell for RNZ

Is it bad that a carbon auction that allows firms to pay to pollute has now failed twice in a row?

The Emissions Trading Scheme (ETS) is an crucial part of the government's plans to reduce emissions, holding quarterly auctions for companies to buy the permission to pollute.

The idea is for prices to rise over time incentivising firms to innovate and pollute less.

What happened yesterday, and why was this second failure expected?

There were not enough large bids to trigger the release of units - so the auction failed. The same thing happened in the previous auction earlier this year.

Units from both failed sales now carry over to the September auction and each failure makes the subsequent auction even less likely as units pile up. One reason for the low demand that that there is an oversupply of units washing around.

Polluters have already brought, or been given for free, enough credits to cover their polluting activities for now. But the likely main driver for the most recent failed auction is that the government is reviewing the ETS's settings.

All eyes on the review

The market is waiting to see what happens.

ANZ agricultural economist Susan Kilsby said the outcome of the review could change the scheme "quite considerably".

"While that's happening people haven't got confidence to trade in the market because we don't really know where those rules are going to end up," she said.

The review is looking at ways to put more emphasis on actually reducing gross emission rather than just planting trees. A draft version of the the review is expected sometime this year.

Forestry and the ETS

New Zealand is an outlier in allowing unlimited units generated from planting trees to be sold in the ETS. This affects the market signals (that could allow the price to rise) by increasing the supply of units.

It makes it much cheaper for firms to buy credits from tree planting than actually reduce their gross emissions.

The Climate Change Commission believes the ETS is currently a threat to achieving the country's reduction targets.

Kilsby said the government should split out forestry from the ETS in some way. It should also look to tilt the balance towards planting more natives - which sequesters carbon more slowly but lasts longer - than exotics, which stop absorbing carbon within decades, she said.

The Commission warns against relying too much on forestry at all - forests can burn or get damaged by storms or pests, releasing carbon back into the atmosphere. There is scepticism in many quarters about the legitimacy of large scale offsets such as tree planting to achieve climate goals.

Cabinet ignores Climate Commission advice - carbon price plummets

Up until this year carbon units were in hot demand, so much so that auction prices rose high enough to trigger the release of extra reserve units. But late last year Cabinet, fearing adding to the cost of living crisis, rejected advice from the Climate Change Commission that could have allowed the carbon price to rise.

Since then the carbon price plummeted, and subsequent auctions have failed. Analysts say it is a sign the market doubts the government's climate commitments.

There is less confidence the government has the political stomach to allow the price rise over time.

Auction failures hit government revenue

The two failed auctions have cost the government half a billion dollars in lost revenue from the ETS.

That means less money going into the Climate Emergency Response Fund which is spent on projects to reduce emissions, and adapt to the changing climate.

What happens next, and is it a low key win for the climate?

The unsold units are carried over until the next quarter's auction, but each failure makes another more likely. After four consecutive failures the unsold units are cancelled.

This is a win for the climate as fewer credits available means less damaging gases emitted. At the least, it eats away at the surplus units out there.

Analysts spoken to by RNZ believed it was better to get the ETS working robustly than relying on failed auctions to reduce emissions.

It is possible for the government to make urgent changes to the auction to give the next two sales a better chance of clearing, but analysts did not believe it was likely.