New Zealand's carbon price slumps as confidence cracks

“It takes many good deeds to build a good reputation, and only one bad one to lose it.” - Benjamin Franklin

A cap-and-trade scheme aligned with the Paris Agreement climate targets is the most efficient way of getting to net zero. If market participants trust the governments commitment to cut the annual cap in line with the net zero target, the carbon price will move to a level necessary to incentivise the required emission abatement.

New Zealand is one of only a few carbon pricing mechanisms with an absolute cap on emissions, in which its trajectory is aligned with that jurisdictions legally binding net zero target. The others being the EU ETS, the UK ETS, and the California Cap-and-Invest Program. New Zealand's legal commitment to reach net zero by 2050 is enshrined in the Zero Carbon Act (ZCA) of 2019.

In notice issued late Tuesday evening, the New Zealand government announced a series of changes to the country's climate change law to "ensure it is working well and as intended." However, in a surprise move the government announced that it will remove "the provision within the Act that states the NZ ETS unit volumes and price control regulations must ‘accord with’ our Nationally Determined Contributions [NDCs] under the Paris Agreement."  

By loosening the direct link between the regulations underpinning New Zealand's emissions trading system and its NDC the move opens the door for short-term political or economic considerations to outweigh long-term climate considerations. Essentially this could mean that the government might decide to reduce the annual rate at which the emissions cap declines - if the powers that be see fit that its in their interests.

Remember, that a strong carbon price is a signal that investors, businesspeople, and citizens trust their government’s commitment to combat climate change. A weak carbon price delivers the opposite signal; namely that the market has little trust in the government’s commitment. In the same way that trust in individual currencies supports investment, innovation and trade, trust in the carbon market helps to bring about the capital, skills and long-term planning that is required to help meet decarbonisation goals.

The New Zealand Unit (NZU) is the country's 'Currency of Decarbonisation'.