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The role of fundamentals and policy in New Zealand's carbon prices

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  • Liao, Ling
  • Diaz-Rainey, Ivan
  • Kuruppuarachchi, Duminda
  • Gehricke, Sebastian

Abstract

The New Zealand Emission Trading Scheme (NZ ETS) is unique in that it includes forestry as a carbon sink (a source of unit supply). Further, the 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 offsets 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.

Suggested Citation

  • Liao, Ling & Diaz-Rainey, Ivan & Kuruppuarachchi, Duminda & Gehricke, Sebastian, 2023. "The role of fundamentals and policy in New Zealand's carbon prices," Energy Economics, Elsevier, vol. 124(C).
    • Handle: RePEc:eee:eneeco:v:124:y:2023:i:c:s0140988323002359
    DOI: 10.1016/j.eneco.2023.106737
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    More about this item

    Keywords

    New Zealand Emissions Trading Scheme; Carbon markets; Climate policy; Carbon emissions; Afforestation;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • Q51 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Valuation of Environmental Effects
    • Q52 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Pollution Control Adoption and Costs; Distributional Effects; Employment Effects
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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