Failing to clear

Every quarter, the government auctions off a batch of ETS carbon credits. Every tonne emitted in the covered sector has to be covered by an ETS credit. 

This quarter's auction failed to sell any units as the confidential reserve price was not reached. They'll roll this quarter's volume into next quarter's auction. 

We don't know what the confidential reserve price is, but spot NZUs last traded on the secondary market at $67.50. Futures contracts have prices increasing to $86 by April 2027. 

Carbon prices dropped considerably this year; they had reliably been running between $80 and $85/tonne for the second half of last year.

So what's up, other than that the bid that would have cleared the market was obviously below the reserve?

Candidate explanations:

1. The market is no longer credible and that's why nobody's buying any. I've seen that one advanced on twitter. But if that story were true, the spot price wouldn't be at $67.50. 
2. Large traders were trying to game the market and thought the confidential reserve price was lower than it actually was. It's potentially possible. I note that the spot price rose from $67.50 to $68.00 while I was typing (and the April 2027 price jumped to $88.95 from $86). Could be that some traders who were disappointed at the government auction have emissions that they need to cover. 
3. Overall government policy becoming less credible. Government has abandoned a pile of really dumb policies in the climate space, but it's also done other dumb stuff like respond to a petrol excise increase with a very long-lasting subsidy for road use. That, in combination with maintaining a low price ceiling for the cost-containment reserve, might have people wondering about overall commitment to net zero. Which would have to reduce willingness to pay. But futures prices still looking a lot higher than current prices. 
4. Price floor set back when carbon prices were in the $80+ range, and not adjusted down with the drop in carbon prices. 

Perhaps some combination of 2, 3 and 4? In that case we should expect spot prices to lift as those without sufficient reserves and who'd been banking on getting NZU at auction this quarter scramble for units to meet surrender obligations that fall before the next quarter?

I still think National and Labour should agree on the quantum of unbacked NZU that the government should be allowed to auction or allocate between now and 2050. Set that in stone, and write into future NZU contracts so that if government issues more unbacked credits than that amount, holders of existing units can sue. 

Set a carbon dividend out of ETS revenues to make higher prices more politically credible.

Then ditch the current price cap. Replace it with a price cap that follows the volume-weighted average price of carbon in carbon markets that the Climate Change Commission considers credible.

When and if the price cap is triggered, if no better way of backing units at that cap is available, government should buy and retire credits from the cheapest credible international market. It would make money on the deal - they're selling at the weighted average price and buying at cheapest price. Take the difference and stick it into the carbon dividend. Along with any excess dividends the government earns from its stake in the gentailers if high carbon prices feed through into high power prices. 

Problem solved really. And especially if you make sure that the ETS recognises credible CCS and direct air capture solutions as they come though. 

Update: BusinessDesk had a good piece up on this in advance of the auction:

However, the pressure of necessity will be low at this auction. 

Those who have to settle emissions must file accounts in March and hand over NZUs in May. 

It is unlikely any liable parties would have left themselves exposed at this point and probably have a stockpile already. Many would also have taken forward cover fearing higher prices and will be sitting on a loss-making position now. 

As a result, traders may be willing to take a risk and test the market and the confidential reserve price at this week’s auction and even the following, even if just to push the price lower.  

However, they could be unlikely to do so for the entire year. 

In the longer term, the Ministry for the Environment’s recent forecasts of NZU supply predict a decreasing supply and an increasing demand over the coming years.