The secretive auction designed to cut our climate pollution

ANALYSIS: Have $20,000 lying around? Today you could purchase the rights to create 500 tonnes of carbon dioxide.
The countrys first-ever emissions trading scheme auction is taking place this morning. To participate, youll need to place a secret bid, alongside carbon-intensive companies (the likes of NZ Steel, Fonterra and Fletcher Concrete) and finance traders.

Plenty of bidders could drive up the price that big companies must pay to add greenhouse gas to the atmosphere since everyone will be competing for a limited supply of NZ Units, which is the official Government permission to release greenhouse gas.

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Once you get your hands on NZ Units, you call sell them possibly for a profit, if the carbon price rises.

Thats why finance traders will be placing bids today. Theyll be competing with the carbon-creating companies, who need to turn over one NZ Unit for every tonne of carbon dioxide they release each year.

Theyve needed to hand over units since 2010, but until this year they could buy an unlimited number from the Government at a set price.

If you purchase NZ Units today, itll pay to hang on to them until at least May 2021, as thats the deadline for the emissions that companies create this year. But theres no expiry date and the longer you hold on to them, the higher the price should get.

By design, theres not enough to go around each year, so some companies should decide its cheaper and easier to ditch fossil fuels and replace them with clean energy.

Although big companies were estimated to create up to 39 million tonnes of carbon dioxide (excluding farming emissions) this year, NZ Units for the equivalent of just 19m tonnes will be available to purchase.

Todays auction will (unless prices skyrocket) sell the equivalent of just 4.75m tonnes. Another 14.25m tonnes will be up for auction later in the year, so youll get three other chances in June, September and December to pick NZ Units.

The emissions trading scheme auction is different from a typical auction for example, all winning bidders are a secret.

Some companies are banking units theyve purchased in the past. Others that export goods or create lots of pollution receive a bunch of units free of charge from the Government. Together, these will account for another roughly 14m tonnes this year, according to the Ministry for the Environment.

Based on projections, companies will need to prevent between 2m and 6m tonnes of carbon dioxide from being emitted.

Their other option is offsetting emissions with newly planted trees. Owners of forests receive NZ Units for the carbon their trees suck up. Because this is independent of the auction process, landowners can currently create as many of these units as theyre able to, provided the forests are permanent or are replanted.

NZ Units are going to get scarcer. The Government was already planning to progressively cut back on the number of NZ Units auctioned each year from 2023. The Climate Change Commission has proposed to reduce the supply at a slightly faster rate in its draft carbon budgets.

A limited supply means the price will keep rising, said Nigel Brunel of investment company Jarden.

The emissions trading scheme is a stick. You either wear it or avoid it, he said. The higher the price of carbon, the more expensive it is for polluters to be in business Companies like Genesis and Fonterra that burn coal are going to say: Carbons getting really expensive, were going to stop.

Behind closed doors, the government auctioneer will put all the bids received in order from the highest offer. From the top down, the offer for the 4.75-millionth unit will become the price they and everyone above them will pay as long as it meets the reserve, he said.

The reserve price is also a secret, Brunel added. And if the bid for the 4.75-millionth unit falls below this reserve, everyone will walk away empty-handed. Thats one buffer to ensure the price remains high.

At the end of the auction, well know how many units sold and for what price but not who they went to, Brunel added.

Thanks to last years reforms, we now have a proper emissions trading scheme, he said, as the old scheme put no limit on how much greenhouse pollution the country could produce each year.

This is all about trying to price fossil fuels out of the equation.

Anyone is free to bid at the auction, Brunel says, provided they have a registered account and can buy at least 500 NZ Units (about $20,000 worth).

Brunel guesstimates the government should raise at least $200 million from the auction. Theres been some debate on how this cash should be spent, from being added to the general government coffers to being directed to policies that cut greenhouse gas or protect communities from the effects of climate change.

From July, the public will, for the first time, see the annual emissions data from every company that must participate in the emissions trading scheme and which arent complying with the rules and face penalties.

Rosa Woods/Stuff
Climate Change Minister James Shaw said without a limit on NZ Units the emissions trading scheme was ineffective.

Climate Change Minister James Shaw said the first auction was an exciting moment, the culmination of work that began in 2016 with the National Government.

It is a big deal. It is quite a significant day, he added. Weve had what I call a cap-and-trade scheme without a cap for the better part of a dozen years now. During that time, our emissions have risen, which is hardly surprising.

The effects would flow beyond the companies that must hand over NZ Units, since some will pass on the extra costs of buying NZ Units to consumers, Shaw said.

But the price of a NZ Unit has been steadily rising in recent years from a few dollars, when Shaw became an MP in 2014, to nearly $39 today. That adds about 9 cents to a litre of petrol.

From here, the cost of a litre of petrol could rise another 30 cents by 2035 due to the cost of NZ Units, the Climate Change Commission estimated.

But the whole point of the scheme is that companies and people change their behaviour, Shaw said.

So at the same time, the public should also see a steady stream of announcements that companies are ditching fossil fuels. Companies, including dairy processor Synlait, are already citing the rising carbon price as one reason theyve switched to green energy.

I think youll start to see many more such decisions, he added.

Shaws team will continue to evaluate and reform the emissions trading scheme, including any changes required by the final advice of the Climate Change Commission.


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