There is a high risk of the carbon auction failing to achieve its objectives

According to Nigel Brunel, Jarden's head of commodities, it is likely that the government's carbon auction this week will not succeed in selling all available units. There is also a possibility that the rest of the auctions scheduled for this year will face a similar outcome.

The upcoming auction offers 4.475 million New Zealand Units (NZUs), and if sold, an equal amount from the previous auction that didn't clear will also become available.

Additionally, there are 8 million NZUs in the cost containment reserve (CCR) that can be accessed if the trigger price of $80.64 is reached.

However, given that NZUs traded around $56/57 on secondary platforms, it is unlikely that the CCR will be triggered. The market's volumes are lower than usual, making it somewhat fragile. Brunel believes that the auction is unlikely to clear unless there are changes in how the Confidential Reserve Price (CRP) is set. If this auction does not clear, it appears unlikely that any auction this year will succeed.

This situation presents a double-edged sword for ministers as it means the loss of expected auction proceeds, impacting the funding of emissions reduction projects. It also eliminates the possibility of allocating a 'carbon dividend' to households.

However, the government may benefit from a reduction in the supply of units in 2024 if no auctions clear this year. Despite this, market confidence remains low, and there are concerns about potential changes in ETS rules and policy direction. The timing of decisions related to the ETS in the past has raised suspicions among market participants, leading to a general distrust of government actions.

Furthermore, there is ongoing uncertainty regarding the role of forestry in creating carbon credits and how agricultural emissions will be priced.

The delayed release of a discussion document on ETS reform has also contributed to market hesitation. The engagement of various stakeholders, including Māori, remains a delicate balancing act for ministers and officials.

Overall, these factors contribute to a cautious approach among traders in participating in the carbon market.