Spot prices for New Zealand Government-issued carbon credits - NZU - have shown major fluctuations over the past fourteen years. A remarkable 44-fold price increase occurred from 2014 - 2022, then a major drop, rise, and drop during 2022-2024. This price volatility directly followed changes in Government climate policy and New Zealand Emissions Trading Scheme settings, Figure 1.
Figure 1: NZU Spot Prices 2010-2024
If one was an investor in the New Zealand Share Market, it might be interesting to compare NZU credit values with NZSX stock values. NZU are currently worth more than all but one stock - Mainfreight (MFT) - on the NZSX, which has 178 stocks listed. The top five NZSX stocks appear in Figure 2, listed by value together with the current NZU spot price.
Figure 2: Top 5 NZSX Stocks vs NZU
NZU spot prices peaked in November 2022 at $88.50, with Mainfreight's share price peaking at $98.52 in September 2021, Figure 3.
Figure 3: Mainfreight Peak Stock Price 2019-2024
Source: Sharesies 27.04.2024
In terms of capital gain, NZU's past five-year price gain at about 58% lags somewhat behind Mainfreight's 79%, but of course we are not comparing apples with apples. Mainfreight's price is determined by market factors not necessarily immediately influenced by Government climate policy, whereas changes to climate and NZETS policy settings have an instant effect on NZU prices.
These climate and NZETS policy settings are currently in flux at the moment with the release of the draft of the Government's second Emissions Reduction Plan. Notably the draft ERP does not comply with the Zero Carbon Act 2019 imperative that requires it to show how emissions will be reduced to net zero (except for biogenic [livestock] methane) by 2050. Its proposed policy settings will produce an overshoot of about 5 million tonnes per annum (Mtpa) by 2050, excluding biogenic emissions, Figure 4. Note that there is a massive variation (-5 to +20 Mtpa) in this projection, which is to be expected given the complexity of the calculations behind it.
Source: Ministry for the Environment. 2024. New Zealand’s second emissions reduction plan (2026–30): Technical annex to the discussion document. Wellington: Ministry for the Environment.
In absolute emissions terms, which is the scientifically-correct real world scenario, biogenic emissions in Figure 5 need to be added to the total emissions picture.
Source: Ministry for the Environment. 2024. New Zealand’s second emissions reduction plan (2026–30): Technical annex to the discussion document. Wellington: Ministry for the Environment.
Net emissions plus biogenic emissions equal a real-world overshoot of about 40-60 Mtpa by 2050.
Changes will have to be made to the draft ERP to comply with the statutory zero emissions target. Excluding biogenic emissions creates trade, reputational, and very large financial issues because currently there is a significant and obvious gap between New Zealand's stated emission reduction commitments and our future emission trajectories. Based on the current draft ERP, 2050 target overshoots could see monumental carbon liabilities faced by New Zealand taxpayers ranging from 5 Mtpa ($265 million @$53 per unit) to 60 Mtpa ($3.18 billion) depending on whether other countries accept the exclusion of livestock emissions. Indications are probably not, with Denmark the first to institute carbon taxes of $NZD164 per cow from 2030.
Under the draft ERP, NZU prices are predicted to rise to $75 in 2028 and fall to a long-run price of $50 per tonne by 2035 (all in 2023-dollar values). This is unlikely to be enough to prompt large scale tree planting for effective emissions reduction. Currently tree planting is the only proven technology that reduces emissions quickly, cheaply, and at scale. Other carbon capture technologies are nascent, unproven, and very expensive. Most cost well over $100 per tonne of emissions reduction. A nationally-coordinated effort to plant as much carbon forest as possible as fast as possible using a mixture of species in the right locations will go a long way towards reducing New Zealand's carbon bill.
In the meantime, investors might continue to ponder the future of NZSX shares and NZU. An Environmental Futures market is now being created by the Australian Stock Market (ASX) to provide a futures trading service for NZU, ACCU and LGC. How changes to Australian and New Zealand Government emissions policy will affect Environmental Futures markets or how Environmental Futures markets will affect Government policy remains to be seen. Perhaps Governments will start to trade in Environmental Futures themselves.....
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