Emissions trading scheme has created a 14 billion dollar asset for big emitting businesses

Last week the web site Carbon News pointed out two seemingly unrelated records achieved by New Zealand's emissions trading scheme.

On 15 November 2022, the New Zealand secondary carbon market reached a new record maximum price of $88.50 per emission unit.

On 19 October 2022, the Environmental Protection Authority released an update of the total number of privately owned emissions units held in the Emissions Unit Register. It was also a new record. Private firms who must mostly be ETS 'participants' (i.e. emitters) held 158,897,263 emission units.

This chart of NZU spot prices shows what we already know: that prices have tripled in the last 24 months.

I put the NZU price movements down to two factors.

First: the emissions trading scheme price cap of the "fixed price option" (unlimited units could be surrendered for $25.00 until the end of 2019 and then $35 for 2020) was replaced by quarterly auctions of units from 17 March 2021 onwards.

Second: the Climate Change Commission keeps advising the Government that the price floor and price caps should consistently track upwards. The most recent example is the July 2022 Climate Change Commission advice NZ ETS unit limits and price control settings. It again recommended an upward trajectory for the carbon price floors for the emission unit auctions. This is Figure 7 from page 56.

Conventional thinking might be that a higher emission unit price is a good thing. A sign of the emissions trading scheme being finally fixed so that it reduces emissions. However, that is unlikely if the 'stockpile' of privately held emission units keeps growing. As this bar chart shows.

These holdings of units are current investment assets in the balance sheets of firms. That can be easily marked to market value by the latest record NZU price in the spot market. Which has just broken a record in reaching more than $88 per unit. And 158,897,263 privately held emission units valued at $88 each equals $14 billion dollars!

The stockpile of emissions units isn't a good thing as it threatens climate targets and the potential supply of emissions units to the market is just one of the many reasons why the emissions trading scheme does not cap emissions.

Conventional thinking might be that a higher emission unit price should incentivise firms to sell their units. Thus reducing the stockpile. However, this is not happening. The stockpile is growing and is now worth a whopping 14 billion dollars! This $14 billion will be an investment asset on the balance sheets of firms participating in the emissions trading scheme.

Recall my recent post about New Zealand Steel Limited consistently being allocated more units than they surrender. Their holding of units is always accumulating.

They don't sell any of their units for two reasons:

1. they don't need to because of the continual annual over-allocation of units under Industrial Allocation and,
2. NZ Steel Limited, having read the Climate Change Commission's advice to Government, expects the price to continue to rise - further boosting the market value of their "investment asset".

So why sell an investment asset when you expect it to appreciate? You don't. Your strategy is "hold"