6 Dec 2023

Doubt surrounds chances of carbon credits auction selling out

2:27 pm on 6 December 2023
The pipe of a coal power plant with white smoke as a global warming concept.

The three previous auctions this year have all failed to get enough volume of bids above the reserve price, meaning no units were sold. Photo: 123RF

The final government auction of carbon credits for the year has failed to sell any units.

The government could have netted a billion dollars from selling permits to polluters under the Emisisons Trading Scheme, but there were not enough bids above reserve.

That means permits that would have let companies make 15 millions tonnes of greenhouse gas emissions will be cancelled. That could flow on into higher prices and more successful auctions next year.

The government is relying on the auction money to help pay for tax cuts.

The Emissions Trading Scheme requires many big fossil fuel polluters, including petrol and electricity companies, to give up one carbon credit for every tonne of carbon dioxide they emit. The annual supply of credits is capped, and the government sells them at quarterly auctions.

The money used to be ring-fenced for things like retiring coal boilers and helping towns adapt to extreme events, but that won't be the case under the coalition.

After booming in 2022, demand plunged in 2023 due to what government officials say was a mix of falling confidence in the market, and an oversupply of units already stockpiled by polluters when prices were cheaper.

The crisis of confidence happened when the Labour Cabinet initially refused to follow advice from the Climate Change Commission to allow the price to rise further, a decision it later reversed under pressure from a court case.

The three previous auctions this year have all failed to get enough volume of bids above the reserve price, meaning no units were sold.

Perversely, a failed auction today could deliver a better payoff for the government accounts in 2024, by shrinking the supply of permits and keeping the carbon price higher, Compass Climate head and carbon market expert Christina Hood said.

Since they didn't sell, they'll be cancelled, which could help get rid of some of the estimated 49 million surplus units companies are holding on to. That could flow into higher prices at next year's auctions.

"The expectation from carbon market participants is that the auction isn't going to clear," Hood said.

"This is just a hangover from the year that we've had, where there was an initial loss of confidence and that has cascaded through.

"There's obviously a hit in the short term as these auctions don't go through, but it's a little bit swings and roundabouts because ultimately it's the number of units sold over time and what price," she said.

Hood says the market would be watching closely to see if the new government followed the next round of the commission's carbon market advice, something it was legally bound to do unless it thoroughly considered the advice and issued reasons for departing from it.

"It's probably a bit of wait and see phase, to be honest. The market will be looking at this December auction and also looking to next year when the government gets the next round of climate commission advice on the ETS settings."

Reports on websites tracking the carbon market show there has been chatter in the market that the government might set a low reserve, to increase the chances of the auction clearing.

But Hood said although it would be tempting, it would be "exceptionally stupid".

It would risk breaking the ETS rules, and upset confidence all over again, she said.

The reserve price is kept confidential.

"But we will know if the market were to clear for a price significantly lower than units are trading for in the secondary market, that will raise red flags," Hood said.

New Climate Change Minister Simon Watts said as minister he was not able to comment on any aspect of the auctions, including the coalition's approach to setting the reserve price.

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