Auctioning NZUs Guide

Auctioning NZUs refers to the primary market mechanism within the New Zealand Emissions Trading Scheme (NZ ETS) where the government sells New Zealand Units (NZUs) to market participants. Managed by NZX on behalf of the Ministry for the Environment, these quarterly auctions allow businesses to purchase carbon credits required to surrender for their greenhouse gas emissions, functioning under a cap-and-trade system with specific volume limits and price controls.

The transition to auctioning NZUs marks a pivotal shift in New Zealand’s climate policy, moving away from the fixed-price option to a market-led approach designed to drive decarbonization. Understanding the nuances of the auction calendar, reserve prices, and bidding protocols is essential for compliance entities, investors, and foresters operating within the Zero Carbon Act framework.

What is the NZ ETS Auction Mechanism?

The New Zealand Emissions Trading Scheme (NZ ETS) is the government’s primary tool for meeting domestic and international climate change targets. Since the reforms of 2020, the government has introduced auctioning as the standard method for introducing units into the scheme, replacing the previous fixed-price option (FPO) which acted as a price ceiling.

Auctions are conducted as a single-round, sealed-bid, uniform-price format. This means that all successful bidders pay the same clearing price per unit, regardless of the price they bid, provided their bid was at or above the final clearing price. This structure is designed to encourage truthful bidding and ensure fair market value is achieved for the carbon credits.

The volume of units available is set in advance by the government, based on advice from the Climate Change Commission. This “cap” on emissions is intended to sink over time, reducing the supply of NZUs and theoretically driving the price up to incentivize emission reductions across the economy.

Auction Calendar and Volumes

Auctions are held quarterly, typically in March, June, September, and December. The specific dates and the volume of NZUs available for each auction are gazetted annually by the Minister of Climate Change, providing market certainty for participants.

The Annual Cap and Quarterly Split

The total annual volume of NZUs to be auctioned is determined by the government’s emissions budget. This annual volume is generally divided equally among the four quarterly auctions. However, if an auction fails (i.e., no units are sold because the clearing price did not meet the confidential reserve), the unsold units roll over to the next auction within the same calendar year. If units remain unsold after the final December auction, they are cancelled and do not carry over to the following year, effectively tightening the cap further.

Volume Adjustments

The government sets auction volumes five years in advance to provide long-term signals to the market. However, these settings are reviewed annually. Factors influencing volume adjustments include:

• Projected Emissions: Updates on national greenhouse gas inventories.
• Stockpile Management: The number of units currently held in private accounts (the stockpile) affects decisions on how many new units to release.
• International Obligations: Commitments under the Paris Agreement.

Understanding Reserve Prices

Price stability in the NZ ETS is managed through two primary price control mechanisms: the Auction Reserve Price (hard floor) and the Confidential Reserve Price (variable floor).

What is the Auction Reserve Price?

The Auction Reserve Price is the absolute minimum price at which NZUs can be sold at auction. This figure is publicly announced in advance of the auction. Its primary purpose is to prevent the price of carbon from collapsing to zero, ensuring that the ETS continues to send a price signal for decarbonization even in periods of low demand.

What is the Confidential Reserve Price (CRP)?

The Confidential Reserve Price is a more dynamic mechanism designed to ensure that the auction clearing price reflects the current secondary market value. Unlike the Auction Reserve Price, the CRP is not disclosed to bidders before the auction.

The CRP is calculated using a methodology based on the weighted average price of NZUs in the secondary market over a specific period leading up to the auction. If the auction clearing price (determined by the bids) is lower than the CRP, the auction is declined, and no units are sold. This prevents the government from selling units significantly below market value, which would undermine the integrity of the scheme and devaluation of existing holdings.

When an auction is declined due to the CRP not being met, the unsold volume is added to the next auction’s volume, provided it is in the same calendar year. This mechanism has been triggered in several auctions post-2022, reflecting the tension between regulatory settings and market sentiment.

How to Bid in NZU Auctions

Participation in NZU auctions is open to any registered account holder in the New Zealand Emissions Trading Register (NZETR), but it requires specific registration with the auction operator, currently NZX and the European Energy Exchange (EEX).

Step 1: Registration and Eligibility

Before you can bid, you must have a holding account in the NZETR. Once established, you must register as a participant on the auction platform managed by NZX/EEX. This process involves Know Your Customer (KYC) and Anti-Money Laundering (AML) checks. Entities can register as:

• General Participants: Bidding on their own behalf.
• Agent Participants: Bidding on behalf of other parties.

Step 2: Collateral and Financial Assurance

To ensure the integrity of the auction, participants must provide collateral before they are allowed to bid. This collateral serves as a security deposit. The auction operator accepts cash or bank guarantees. The amount of collateral provided determines the participant’s “bidding limit.” You cannot bid for a value of units that exceeds your provided collateral. Collateral must be deposited several days prior to the auction window opening.

Step 3: The Bidding Process

On the day of the auction, the bidding window is typically open for a short period (e.g., 9:00 AM to 12:00 PM NZT). Bidders submit the quantity of NZUs they wish to purchase and the price they are willing to pay per unit.

• Bids must be in whole units.
• The minimum bid volume is usually 500 NZUs.
• Bidders can submit multiple bids at different price points.

Because it is a sealed-bid auction, participants cannot see what others are bidding. Strategies often involve “laddering” bids—placing smaller volumes at higher prices to ensure some allocation, and larger volumes at lower prices to catch a bargain if the clearing price drops.

Settlement and Secondary Market Interaction

Once the bidding window closes, the auction operator calculates the clearing price. The clearing price is the lowest successful bid price at which the total volume of units available is exhausted. All successful bidders pay this single clearing price.

Settlement Timeline:

• Results Announcement: Usually released in the afternoon of the auction day.
• Financial Settlement: Successful bidders typically have a short window (often until the next business day) to settle the remaining payment if their collateral was cash, or the full amount if using a bank guarantee.
• Unit Transfer: Once payment is confirmed, the NZUs are transferred from the Crown’s account to the successful bidders’ NZETR accounts.

The auction market and the secondary market (where participants trade units between themselves) are deeply interconnected. The auction price often acts as a benchmark for spot prices in the secondary market. Conversely, secondary market trends heavily influence the Confidential Reserve Price set for upcoming auctions.

Market Stability Settings

To prevent extreme volatility, the NZ ETS includes specific mechanisms that activate during auctions if prices go too high or too low.

Cost Containment Reserve (CCR)

The CCR is a reserve volume of units that is released into the auction only if the clearing price reaches a certain “trigger price.” This is designed to prevent the carbon price from skyrocketing to levels that would be economically damaging for businesses. If the trigger price is hit, these extra units are added to the supply to dampen the price rise. The CCR consists of two tiers with different trigger prices, allowing for a graduated release of supply.

Price Floor

As mentioned, the Auction Reserve Price acts as the floor. If demand is so low that bids do not clear this floor, the units are not sold. This guarantees a minimum cost for carbon pollution, ensuring that low-carbon investments remain viable.

Frequently Asked Questions