January 28, 2011 / 7:26 AM / 10 years ago

NZ market falls under CER spell, as offset imports rise

* NZ polluters see opportunity in U.N. offsets

* Lack of cap, low prices, liquidity key lures

By Stian Reklev, Point Carbon News, and Adrian Bathgate

BEIJING/WELLINGTON, Jan 28 (Reuters) - New Zealand refiners and power generators are snapping up U.N. carbon offsets after a flood of supply pushed down prices, making them attractive for trading in New Zealand’s carbon market.

The jump in demand has effectively put a new cap on the price of traded New Zealand pollution permits called NZUs .

The country’s mandatory emission trading scheme is the only national scheme outside the European Union. It is far smaller than the EU programme, which has annual trading worth about $100 billion .

The EU is also the largest buyer of U.N. carbon offsets called certified emissions reductions, or CERs, and European demand effectively sets the price for CERs.

Under the New Zealand scheme, polluters have the option of paying a NZ$25 cap per tonne of emissions or buying NZUs or CERs from the market to cover their carbon pollution. Firms must meet annual emissions reduction targets.

CER prices have dropped to around 11 euros a tonne largely due to increased supply and an economic recession in many European countries. New Zealand firms have been buying the offsets to cover their 2010 or 2011 emissions.

“The NZU price is now capped by the price of a CER instead of the NZ$25 government cap,” Richard Hayes, director of New Zealand carbon brokers EITG, wrote on Friday in Point Carbon News’ publication Carbon Market Australia-New Zealand.

Record CER issuance levels so far this year have seen offset prices fall 18 per cent in four months, leaving the December 2011 CER contract on ICE Futures Europe, the world’s biggest carbon exchange, at just ?10.92 (NZ$19.43) versus ?13.27 in September.

This has put pressure on New Zealand carbon prices, with spot NZUs closed Thursday at NZ$19.30, nearly NZ$2 below their loftiest levels seen in November.

ADVANTAGE

Hayes said CERs held a number of advantages to NZUs.

The U.N. offsets can be used in both emissions trading schemes and liquidity in trading of the U.N. offsets is far greater.

The price of the two credits are also set by different factors — NZUs are normally priced by a simple calculation of the NZ$25 cap minus the holding costs, also known as the cost of carry, which is the opportunity cost of investing that money elsewhere.

CERs also have no price cap in New Zealand, meaning potential upside for New Zealand sellers if the CER price rallies.

The price of CERs is largely dominated by the price of European carbon permits, which have halved in the past two years and have so far been set by the price of switching from burning coal to make electricity to cleaner natural gas.

“CERs and the price cap are the price drivers, that’s it. New Zealand does not have the same coal-to-gas switch capacity as the EU market,” said Stuart Frazer with consultancy Frazer Lindstrom.

Most New Zealand emitters have already bought all the permits they need to comply with their 2010 emissions.

In May 2012 they will need to submit permits to the government to cover for their carbon emissions for 2011, and the liquid and low-priced forward market in CERs provide a good opportunity, said Hayes.

“CERs can be purchased on a forward basis, with delivery in March 2012, still in good time for the May compliance deadline, which reduces holding costs,” Hayes wrote.

Recent data published by the New Zealand government show that 620,000 CERs were imported into accounts in the New Zealand carbon registry from abroad in 2010.

Market observers estimate around the same amount has been purchased in the first four weeks of this year alone, and more is set to come.

“The new cap in town is definitely the CER market,” said Nigel Brunel, a broker with OM Financial.

But cheap carbon credits may not be around forever - Brunel said he suspects the CER market is getting oversold, and could be liable to an upward correction.

“I have a gut feeling the market has got itself a bit short, so it could snap back,” he said.

The CER has traded up in the New Zealand market in recent sessions, tracking the CER bounce-back in Europe this week.

On Thursday, the March 2012 NZU contract changed hands at NZ$20.60, up 80 cents from a week earlier.

Liquidity, however, remains a challenge for those wishing to arbitrage. About 200,000 NZUs were traded in the past week versus over 2 million CERs on a normal day.

(Editing by David Fogarty)

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