As I write this in late January 2022, the carbon price in the open market is $75, with this measured per tonne of carbon dioxide equivalent .
It means that there is a developing consensus among players in the carbon market that, at the next auction on 16 March, the Government’s seven million NZU cost-containment reserve for all of 2022 will be exhausted.
Within the ETS, the demand for NZUs has, at least until recently, been determined primarily by the greenhouse gas emissions of commercial entities.
There is also a very generous supply of free units given by the Government to those industries assessed to be trade exposed.
On the supply side, in addition to approximately eight million free units of carbon, there will be four auctions in 2022, each of 4.825 million units, plus an overall seven million units initially held back in the cost-containment reserve.
The potential supply of units is also increased by allocations, both current and historical, for carbon sequestration activities.
Some of the genuine foresters are holding units because they will have a carbon liability if they harvest their forests, rather than converting to permanent forests.
And as long as they think that way, then they will continue to hold the units and the price will indeed increase.
At the start of this article, I used the term ‘players in the carbon market’.
Prior to 2021, there was essentially a fixed price at which emitters could buy NZUs from the Government.
Currently, the number of units that the Government plans to supply at auction over the next few years is based on the premise that the stockpile of units will decrease as investors cash in on the price.
These are smart people, and apart from knowing a little more about the forestry aspect than most of them do, there is nothing much that I know that they don’t know.
Quite simply, with the NZ dollar reducing in value with inflation, with housing prices topping out, and with share prices slipping, carbon looks an attractive investment.
Even at those prices, a permanent exotic forest stacked up as superior to sheep and beef in most situations.
At those prices, there is nothing other than dairy on the very best land and kiwifruit on specific land types that can compete with long-term forests.
As for harvested timber, I consider it doubtful as to whether New Zealand needs new forests for that purpose.
However, changing the rules could still leave carbon farming as very profitable and that is what many of the investors are betting on.
In the meantime, big decisions have to be made by those owners of post-1989 forests who are not enrolled in the ETS.
I have been an advocate that owners of these forests should register them, claim the credits, and hang on to them until the dust settles.