Dairy companies pricing massive ETS changes

Changes to the ETS are still some time away, but companies are doing their own forecasting, pricing in much higher carbon prices.

Some of New Zealand’s largest companies are already pricing in a six-fold increase in the price of carbon, ahead of long-signalled Emissions Trading Scheme changes.

Carbon prices are set by the price of New Zealand Units (NZU), which are traded under the current ETS. The system has effectively capped the price of NZUs through a “Fixed Price Option,” which allows polluters to purchase credits for a fixed $25. This means that the price of floating credits does not exceed $25.

Climate Change Minister James Shaw has said the $25 cap will be lifted no later than 31 December 2022.

Dairy co-op Fonterra is projecting the price of carbon to rise to between $75 and $150 a tonne by 2030. Synlait, another dairy firm, said that it had begun making decisions based on a carbon price of $40 dollars per tonne in 2023. It has not yet forecast a 2030 price. 

A 2018 Productivity Commission report found the $25 cap put a brake on the effectiveness of the scheme as the low price failed to offer a strong incentive for companies to invest in solutions to reduce emissions, as it was cheaper to simply cough up and carry on polluting.

The Commission said to reach a “low emissions” economy by 2050, the price of emissions would have to rise from around $21 to between $75 and $152 per tonne of carbon. To reach “net zero emissions” the price needed to rise even further: to between $200 and $250 a tonne. 

Fonterra and Synlait said forecasting carbon prices was used when making long-term investment decisions about plant like boilers. As this machinery would likely be operational when the $25 cap has been lifted, it makes sense to price a higher price of carbon into their decision making. 

Synlait sustainability director Hamish Reid told Newsroom the company had made its decision to install New Zealand’s first large scale electrode boiler based on 2023 carbon price of $40 per tonne.

“The rate of increase is likely to accelerate beyond that date,” he said. 

But other New Zealand businesses with high emissions have not yet followed suit, transport firm Mainfreight said it was not pricing emissions above the $25 cap, while KiwiRail said it was looking at the Productivity Commission’s report for signals on pricing, but had yet to implement a price itself. 

Businesses who fail to account for a higher price could be in for a shock, should prices suddenly rise when the cap is removed. 

Shaw it would be inappropriate for him to comment on the issue, comparing it to the Minister of Finance speaking out about interest rates. 

“You don’t do it,” he said. 

Motu Policy Fellow Catherine Leining said changes to the ETS announced by Shaw last month were vaguely worded, opening the door to the cap rising in 2020, before the cap is removed altogether in 2023.

Shaw said the $25 fixed price option would remain in place in 2019, which opens the door for the FPO price to rise in subsequent years before being removed completely.

A report last month ... found that investment in renewable energy fell for the second consecutive year in 2018, while spending on fossil fuel extraction was rising. 

One thing still up in the air is how the ETS will incorporate methane emissions, which will be reduced to between 24 percent to 47 percent by 2050 under the Zero Carbon Bill. A revamped ETS could choose to create a separate scheme for trading emissions from biological methane. 

Another option would be to use the existing scheme, but incorporate methane emissions using an exchange rate-style tool that would allow methane credits and carbon credits to be traded for one another. 

Meanwhile, some of the investment that trading schemes was meant to encourage has mysteriously slowed. 

A report last month from the International Energy Agency found that investment in renewable energy fell for the second consecutive year in 2018, while spending on fossil fuel extraction was rising. 

Spending on renewable power fell 1 percent in real terms to $304 billion in 2018, the lowest level since 2014 — the year before the landmark Paris Climate Accord was signed. 

Investment in oil and gas extraction rose 3.7 percent to $477 billion. 

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