ETS going vertical

From Carbon News ($), the carbon price on the ETS is going vertical, up 27% this year and fast approaching the $50 price cap in the ETS.

Eric Crampton and I recorded a podcast yesterday on the consequences of hitting the ETS price cap. I would expect to see the government raise the cap to $70 before the next auction of NZUs on 1 September.

Reforms to the ETS last mean each NZU sold by the government at the price cap has to be “backed,” which means for each unit sold at the price cap the government takes an action so that overall emissions do not rise. One way to sanitise units is to buy emissions units on a credible scheme like the EU ETS and shred them so nobody else can use them.

The problem is the government has not put in place the systems it needs to open up access to other markets. To be fair, that raises a complicated set of problems that go well beyond just the funding and machinery to give effect to an offshore transaction. And officials are incredibly busy on other things right now.

However, until the government has the systems and agreements in place to back the units it sells at the price cap, it is hard to see how the ETS price cap is credible: each time NZU prices go near the price cap, the government appears to have only limited options besides raising the price cap. Which rather defeats the purpose of having a price cap at all.