FARMERS WEEKLY: Fund manager to trade carbon units

AGRIBUSINESS

- 18 October 2018

by  Richard Rennie

As New Zealand’s carbon price hits its cap of $25 a tonne an investment company has launched the country’s first carbon credit investment fund and is optimistic it will find plenty of takers among both investors and emitters.

Salt Funds Management is getting final Financial Markets Authority approval for its carbon credit fund and managing director Paul Harrison is confident the Government has recognised the imposed cap on carbon price needs to be adjusted.

Forest Owners Association president Peter Weir earlier cautioned that holding the $25 a tonne price in place risks turning the market value into a tax instead, with emitters basing costs on that level into the future. 

Meantime, the Productivity Commission in its recent analysis on achieving a low emissions economy estimated prices need to be $150-$200 a tonne by 2050 to initiate major shifts in investment behaviour.

“If you don’t make the adjustment you are effectively shorting the new carbon credits at $25 a tonne and come 2030 if the Government has to make good on its targeted credits, they will have the liability of topping up the difference,” Harrison said. 

Treasury estimates put the figure as high as $37 billion, about the value of the NZ Super Fund in June.

Earlier offshore carbon credits had proved to be almost the undoing of NZ’s carbon market, with millions of junk credits from Eastern Europe that were not backed by any carbon offset activity. 

The impact tanked NZ’s carbon credit price, with values falling as low as 35c a tonne in 2014.

“These are not an issue anymore. Back in 2011 buying of these was stopped and the Europeans have regulated and tidied up those credits,” he said. 

European carbon prices are now about $40 a tonne.

Harrison believes NZ needs to be linked into a wider global carbon market to fully meet its obligations.

“So, ultimately, you would expect to see a common price for carbon.”

With greater clarity around Government policy, including a zero carbon bill and a focus on forestry carbon credits, the time is right for putting the fund to market, Harrison said.

Pressure is on NZ to reduce emissions and with agriculture contributing almost 50% of them it is inevitable agriculture will go into the ETS and create greater institutional interest in such a fund.

The carbon fund offers exposure to the price of carbon credits, which will be bought from the ETS or from offshore carbon markets.

“This fund positions carbon as a new alternative asset and aims to give individuals and organisations a chance to invest in or offset these changes.”

Some investors will simply view the carbon price as an investment option, no different to gold or shares.

Harrison said the fund is not based on the purchase of derivatives such as futures options but on actual carbon units that will be held by the company, with returns shared among investors. 

With larger operators such as fuel companies already managing their carbon credit investments he expects interest will be from smaller tier operators and investors.

“Typically, we look for correlations in asset movements but carbon prices do not look like they are correlated to other asset movements. They don’t always move the same way, adding to the appeal as a possible investment.”

Weir said it is not unexpected to see a fund develop for a unit valued at $25, with the potential to reach about $200.

“So why would a fund not go out and buy units and sit on them?” 

He cautioned about the ability to buy credits offshore, given the Government appears to be focused on being the only buyer of them and pointed to a risk there might not be many countries with many surplus carbon credits available to sell.

Michelle Johnson