The Role of Fundamentals and Policy in New Zealand’s Carbon Prices

42 Pages Posted: 16 Aug 2022

See all articles by LING LIAO

LING LIAO

University of Otago

Ivan Diaz-Rainey

CEFGroup & Department of Accountancy and Finance, University of Otago

Sebastian Gehricke

University of Otago

Duminda Kuruppuarachchi

University of Otago

Date Written: August 15, 2022

Abstract

The New Zealand Emission Trading Scheme (NZ ETS) is the second oldest national ETS in the world and is unique in that it includes forestry as a carbon sink (a source of unit supply). Further, NZ ETS has been subject to many policy changes including a switch from allowing unlimited importation of units to becoming completely autarkic. In this context, we analyse the pricing dynamics for New Zealand Units (NZUs) driven by the interaction between allowances supply and demand between 2010 and 2019 and for two sets of subperiods divided by the official and actual de-link dates. Our empirical models find that international offset negatively affected NZU returns before the actual de-link date, domestic supply after the official de-link date, and banked units between the official and actual de-link dates, and that green (mainly forestry) offsets, surprisingly, positively affected NZU returns before the actual de-link date. Our results also highlight that from a demand perspective, sectoral effects had significant relationships with NZU returns with different dynamics. Namely, manufacturing and construction activities shifted to negatively affect NZU returns after the official de-link date, implying that fixed allocative baselines have resulted in over-allocation over time. Stationary energy sector activities shifted from negatively to positively affecting NZU returns after the official de-link date probably due to their exploitation of unlimited international offset during the linking period.

Keywords: New Zealand Emissions Trading Scheme, Carbon Markets, Climate Policy, Carbon Emissions, Afforestation

JEL Classification: G12, G14, Q51, Q52, Q54, Q58

Suggested Citation

LIAO, LING and Diaz-Rainey, Ivan and Gehricke, Sebastian and Kuruppuarachchi, Duminda, The Role of Fundamentals and Policy in New Zealand’s Carbon Prices (August 15, 2022). USAEE Working Paper No. 22-561, 2022, Available at SSRN: https://ssrn.com/abstract=4190792 or http://dx.doi.org/10.2139/ssrn.4190792

LING LIAO (Contact Author)

University of Otago ( email )

Ivan Diaz-Rainey

CEFGroup & Department of Accountancy and Finance, University of Otago ( email )

Dunedin
New Zealand

Sebastian Gehricke

University of Otago ( email )

P.O. Box 56
Dunedin, Otago 9010
New Zealand

Duminda Kuruppuarachchi

University of Otago ( email )

P.O. Box 56
Dunedin, 9010
New Zealand

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