NZ ETS prices: don’t bank on the bull run continuing

With the passage of the NZ ETS reform Bill through Parliament in 2020, the New Zealand Emissions Trading Scheme (NZ ETS) has moved into a new phase of its life. These changes have raised new questions about how to approach price forecasting for New Zealand Units (NZUs – the unit of trade within the NZ ETS). Many of the strongest price signals that have driven NZU prices in the past, including prices in the Kyoto global marketplace and the fixed price option, have now been removed.

With these strong external price signals gone, this article argues that the supply and demand volumes within the scheme should now matter more. While we no longer have easy external price signals to guide our views on NZU prices, we do have a much clearer idea about where NZU volumes are coming from and going to than we did in the past. It is our forecasts about these volume flows that we should look to more for a view on where NZU prices might go in the future.

While NZU prices have risen nearly continuously for a decade, the analysis in this paper suggests that we shouldn’t assume that this bull run will continue. This is because the NZU market would be well-supplied in both the short-term and medium-term if NZU prices were to remain at their current $75 price level. The short-term supply comes from the existing stockpile of more than 120 million NZUs in private accounts. The most notable source of medium-term supply is from NZUs available from the planting of new exotic forests, which are expected to be economically beneficial in significant volumes at current NZU prices.

The NZU stockpile is bigger than you might think. While many commentators have pointed out that 120 million units could meet roughly three years of non-forestry compliance demand by itself, it will actually last for much longer than this. When we include all of the sources of NZU supply entering into the scheme over the coming years, the current NZU stockpile could last for more than a decade as is evident in Figure 1 below. It is this volume of potential supply that should give market participants pause for thought as they consider whether to take NZU prices even further upwards.

The NZU marketplace is small by international standards and this means that it has lower liquidity levels and participation than overseas markets. This makes it more at risk from market manipulation or the actions of a smaller number of participants. These issues, combined with the very recent policy changes that have been made, mean that there are a lot of drivers outside of supply and demand fundamentals that can be at play.

To read our full analysis download our paper here.