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Emission control: why the new ETS could fire up carbon investment options

22 June 2020


Carbon-offset investments could see a boost under the new NZ emission trading scheme (ETS) regime that passed into law last week.


Paul Harrison, Salt Funds managing director, said the new ETS legislation – currently awaiting Royal Assent – goes further in setting a more realistic market price for carbon lifting the current cap of $25 per unit and opening the door to auctions in the near future.


“The fixed [ETS unit] price cap is moving to $35 with the next stop $50,” Harrison said. “And there is some speculation that auctions will come in earlier than initially expected.”


Salt runs the only fund in NZ, or perhaps anywhere, that offers retail investors exposure to the carbon pricing market.


Launched late in 2018, the Salt Carbon Fund trades in NZ ETS units (NZU), although it can include similar offshore securities if the manager desires.


As well as dealing in an unusual asset, Salt deviated from the norm by listing the carbon product on the NZX.


The fund aims “to provide investors with a total return exposure to the price of carbon credits”, Salt disclosure information says.


After raising about $1 million at listing, the open-ended fund has grown to about $6 million with interest from a wide range of investors, according to Harrison.


“We see a lot of trades from Sharesies, for example,” he said.


The carbon fund unit price has edged up from $1.06 at the beginning of this year to about $1.16 last week.


Harrison said the new ETS legislation should create renewed impetus for carbon reduction strategies generally and a stronger NZU market.


Officially the Climate Change Response (Emissions Trading Reform) Amendment Act, the new law sets a limit on NZU supply, removes the long-standing $25 cap on the carbon unit price, targets an ETS auction start date for 2023, and brings in the NZ agriculture sector into the regime.


Under the auction provision, firms will be able to bid for outstanding NZUs to cover carbon offset obligations (or for investment purposes). In the present system, NZUs are allocated (some for free) to affected industries each year or earned through carbon reduction activities such as planting trees.


The contentious ETS scheme has already been through major changes since it was first introduced in 2008 with generous incentives for those caught by the rules and the notable absence of NZ’s agricultural industry.


Excluding agriculture, about half of the country’s carbon-emitting industries were captured by the ETS system that requires them to either cut greenhouse gas emissions (a list that goes beyond carbon dioxide) or redeem NZUs with the government.


Along with many other jurisdictions, NZ introduced the ETS to help meet climate change goals set down under UN global agreements.


But a government ‘explainer’ of the regime says there is a “growing realisation that no ETS alone will come near in reducing these emissions”.


“When the ETS was first envisaged many believed it would be the primary tool to reduce emissions by putting a price on carbon and letting the resulting signals sort out the most efficient means to do so,” the government guide says. “The problem with this was always that the carbon price needed to achieve this would cause enormous political and economic shocks.”


Regardless of its goals, the NZ ETS is a complex system with many moving parts that operates beyond the purview of most New Zealanders – and with no obvious side-effects.


The new legislation, however, comes with new explicit costs that will flow on to the price of daily consumer items like fuel and, weirdly, tomatoes.


Introducing the ETS bill’s third reading in parliament last week Climate Change Minister and Green Party co-leader, James Shaw, outlined the long list of other related initiatives now underway.


“We have the zero-carbon Act; the Climate Change Commission; the first set of emissions Budgets; the first national climate change adaptation risk assessment; the billions that we are investing in rail, light rail, buses, walking and cycling infrastructure; the billion trees programme; the Green Investment Fund; climate impact assessments on Government policy; related risk reporting for large companies and organisations; the electrification of the Public Service car fleet; the end of new offshore oil and gas exploration,” he said. “And now, finally we have a limit on emissions and a proper price on pollution.”


Source: Investment News

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