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MfE has released its consultation this morning about future NZ ETS auction settings. I think that its contents will be difficult to translate into a clear bull/bear outcome for market participants as you can read a different message into the suggestions that it makes about volume and price settings.
On the volume side the consultation document doesn’t include any options for increasing auction supply above status quo levels. The document only asks if the Commission’s recommendations for reducing volume supply should be implemented from 2025, or if these should be implemented from 2027 onwards. This is actually quite a technical, and maybe legal, question about whether the circumstances for this to be possible within the legislation are justified. So relative to what we knew before this document was released, this news appears supportive of higher market prices.
However, on the price control settings front the consultation document asks if the “price corridor” should be reduced. The price corridor is the combination of the auction reserve price and the Cost Containment Reserve trigger price settings. The Commission advised the Government that the existing price control settings were broadly appropriate, so this option to reduce the auction price settings has been introduced either following advice from government officials or from Ministers. Officials deliver drafts of all consultation documents to their Ministers, but it is Cabinet’s decision about what goes into the final document. Relative to what we knew before this consultation document was available, the price corridor suggestions appear bearish for NZU prices.
Determining which of these proposals will be more important for NZ ETS market participants is more uncertain. The NZU price has a long and storied history of diligently following the most dominant price control settings that the market can find, which has only been broken over recent years. From this perspective, the auction price settings might be judged more important. However, the future NZU price probably has much more to do with the volume drivers in the market than the auction price settings and this might mean that the volume outcomes are more material. The consultation paper indicates that the Government thinks that the suggestions in the consultation paper are supportive of higher price outcomes.
The volume drivers that are the most influential for the market will change over time. The importance of auction volume and price settings is set to decline, and the impact of forestry supply will increase. You can read more about this in this article: https://lnkd.in/gpxGtazV. So while this consultation is important for NZU prices in the short- and medium-term the long-term uncertainty is still all about trees.
