Carbon Credits hit $18. The Fad is Back.

The price of carbon credits in the New Zealand Emissions Trading Scheme has hit the $18 mark for first time since late 2011. Traders and some foresters well may be licking their lips in anticipation of another cash boost courtesy of this beleaguered government scheme. But is there still money to be made from carbon trading?

The answer to that question depends on how much risk you are willing to take.

Despite starting off well in 2008, the NZ Emissions Trading Scheme has a checkered history littered with allegations of fraud, massive price fluctuations, companies making money from polluting, and the New Zealand government sneaking through unsignalled legislative changes to the detriment of foresters.

NZ Emissions Trading Scheme (NZETS)

The NZ Emissions Trading Scheme was designed for New Zealand to reduce its greenhouse emissions and play our part in mitigating climate change. This scheme was a policy compromise after the failed Fart Tax that saw National MP Shane Ardern drive a tractor up the steps of Parliament in protest against the tax.

In early 2011 prices for carbon credits were pushing $21 per unit. New Zealand foresters were planting more trees and making money from selling carbon credits. Major banks and other financial institutions were trading the credits. Large emitters such as the power and fuel companies were looking at ways of reducing CO2 emissions, and were running around doing deals with landowners to have more trees planted to offset what emissions they couldn’t reduce.

Europe price tanks, NZ follows suit

Then the price of carbon credits tanked in Europe due to slow economic growth and oversupply of a mismanaged carbon market. That saw overseas carbon credits being priced at a meager $0.14. New Zealand companies and foresters who needed carbon credits stopped buying New Zealand credits and purchased everything they needed from overseas. The price for New Zealand credits fell to around $1.50 each.

NZETS achieves the opposite of what it was designed for

Large New Zealand companies and some foresters who had carbon liabilities were engaging in arbitrage deals by buying up cheap overseas credits at $0.14 each to surrender to the government, then selling their New Zealand credits at $1.50 plus, and pocketing the difference. Companies were making money from polluting, and foresters from cutting down trees; the exact opposite of what the NZ Emissions Trading Scheme was designed to achieve. All the while, the taxpayer picked up the bill for this.

Earlier this year Gareth Morgan’s Morgan Foundation accused the National government of being complicit in fraud by allowing the importation of dubious carbon credits from Ukraine, which had been linked to organised crime and projects with little environmental integrity.

Five-year high

Now the price for New Zealand carbon credits has bounced back to a 5-year high of around $18 per unit. This is on the back of the budget announcement from government that it will scrap a subsidy allowing companies to surrender half their required units. This will double demand in the New Zealand carbon market. Also this year New Zealand has signed up to new obligations under the Paris Climate Change Agreement signaling that New Zealand is still interested in maintaining a working carbon market.

Should foresters and landowners be joining the NZ Emissions Trading Scheme to claim carbon credits?

The government sold the NZ Emissions Trading Scheme to foresters then let it fall into disrepair leaving forest owners paying ongoing compliance costs. Most foresters have since left the NZ Emissions Trading Scheme. There has been a major breach of trust between government and the forestry industry over this issue, therefore it would seem unlikely forest owners would want to be bitten twice.

Most farmers have got other issues to worry about. The government is aware of this and has no plans to bring the agricultural sector into the NZ Emissions Trading Scheme.

Companies with obligations under the NZ Emissions Trading Scheme such as Fonterra, New Zealand Aluminum Smelters and the major power and fuel companies have again started to take notice due to the recent carbon price increase.

Is there money to be made?

If your forest is still registered in the NZ Emissions Trading Scheme or you hold carbon credits, the money on offer for selling those credits looks very attractive given the history of the market. If you are a trader, or financial institution, the volumes being traded indicate the New Zealand carbon market is back. For now.