The Climate Change Commission’s recommended Emissions Trading Scheme (ETS) settings could add anywhere between $85 and $877 to a middle income budget in 2026, according to Treasury modelling.
On Thursday the Commission advised the Government to bring the scheme’s settings “back into step” with the country's emission reduction targets after its previous advice was rejected.
Chairman Rod Carr said current price settings mean the ETS could not function as effectively as it should and would not be sufficient to meet NZ’s emission budget.
The advice was to reduce the number of units auctioned in the next four years by 9.4 million units, increase the auction reserve price by about $30, and the cost containment reserve by more than $85.
Similar advice provided last year was rejected by the Government, which worried letting the carbon price rise would add to the cost of living crisis by increasing energy and fuel costs.
However, modelling by Treasury found a $50 increase in NZ ETS units would only cost middle income households an additional $5.90 per week, or $307 a year.
The work was done in 2022 and estimated the median change in household expenditure on fuel and food, assuming no change in technology or behaviour.
It estimated a $50 increase to the carbon price would cost lower income households between $3.30 and $5 each week, and higher income households between $6.40 and $7.30 each week.
Neither the Climate Change Commission or the Government directly sets the carbon price, rather they set upper and lower boundaries for the market to trade in between.
It is impossible to predict exactly how much NZ ETS units would increase in price if the Government accepted recent advice, but it would likely be between $76 and $205 in 2026.
NZ units on the secondary market were trading at $62 on Friday morning, which means the increase in 2026 could be anywhere between $14 and $143.
The higher price would increase a middle-income household's annual costs by approximately $877, assuming they did nothing to change their consumption patterns.
Of course, NZ units could increase beyond $205 in 2026. The proposed upper bound isn’t a hard limit, rather it is a price at which extra units would be released to meet demand.
The Climate Change Commission has suggested implementing two price triggers in 2026, one at $205 and another at $256. It also said reaching these levels should be rare.
By 2028, the Commission wants the minimum auction price to be $79 and the upper price trigger to be $282. That would add between $95 and $1350 annually to a middle-income household, if Treasury’s modelling was to be believed.
Don’t blink now
The Commission acknowledged the Government’s concern about dumping new costs onto households but warned against rejecting its advice for a second time.
“A fair, inclusive, and equitable transition means that issues of social and economic equity and tackling climate change must be pursued in parallel. One set of issues cannot be used to justify inaction in the other,” it said.
ETS price settings should not be dictated by the impacts on some households or businesses, when the Government can use other policies to directly support those most affected.
New Zealand risks failing to meet its emission budget or experiencing more severe price adjustments in the future. The latter is already happening to an extent.
Having had its previous recommendation ignored, the Commission has had to ratchet up future settings to still meet climate goals.
The Government’s decision in 2022 to set a “relatively high volume of units in the containment reserve at a relatively low price” was likely to increase the surplus already in the system.
“Ultimately, any release of reserve units puts us in debt to the future – we are simply borrowing emissions that will need to be paid back later”.
Of the 144 million units in the scheme, the Commission has estimated that 49 million are surplus, over and above what the emissions budget allows.
It wants to reduce this surplus to zero by 2030 and has lowered auction volume in future years to make up for extra units that could be released in the current period.
To provide certainty for market participants, ETS settings are locked in two years ahead and are unable to be changed. This means new settings would only come into effect in 2026.
But the Commission has recommended a sharp change as soon as possible. The auction and cost containment reserves would almost double, and available units would almost halve.
But this wouldn’t necessarily mean a price shock, as market participants would know the change was coming and be bidding in earlier auctions with that in mind.
The advice alone has pushed up the price of carbon, NZ units fell to an 18-month low of $54 in the secondary market after the failed auction in March. Units were still trading below $60 prior to the release of the Commission’s advice, but have since climbed to $62.50.
Factors that influence market pricing include signals from the Government about its commitment to climate action, information about the costs of decarbonisation, regulatory uncertainty, and price increases in international ETS schemes.
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