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Investors eye carbon credits

Oliver Lewis Senior Journalist: BusinessDesk

Mon, 11 Oct 2021


Retail investors are becoming increasingly interested in carbon funds, a trend driven by the rising carbon price and growing interest in ethical investing.


Salt Funds Management runs the only NZX-listed carbon fund, an investment vehicle to give investors exposure to the price of carbon mainly through New Zealand Units (NZUs) used in the Emissions Trading Scheme (ETS).


Salt managing director Paul Harrison said interest in carbon credits is accelerating, which is helping drive the market capitalisation of the fund from roughly $20 million at the start of the year to about $65m. Units in the fund were recently trading at about $1.97 on the NZX, up 60% on a year ago.


Retail investors had been encouraged by news of the carbon price potentially doubling in the next five years. There's widespread awareness that the carbon price in NZ has been too low, Harrison said. Looking to more mature markets like Europe, it's clear there will have to be further increases here to effectively drive behaviour change.


To reduce emissions, the government plans to release fewer NZUs into the market over time and gradually cut back the number allocated freely to trade-exposed industries.


There are also growing community pressures, here and abroad, for governments to do more to tackle emissions, Harrison said.


“There are a lot of positive influences that would make the cost of carbon continue to rise and drive change, which is a good thing,” he said.


The government this year released new guidance setting the NZU price threshold at which cost containment reserves, used to smooth price increases, would be released at future auctions.


In 2022, the threshold rises to $70. In 2026, it goes to $110, more than double the $50 trigger point which was breached at auction in Sept.


The spot price for NZUs was recently about $64.50 on the secondary market.


Third auction


The Sept auction, only the third of its kind, was notable because all seven million units in the cost containment reserve were exhausted, as well as the original 4.75m allotment, meaning the final 2021 auction in Dec will have no restrictions.


NZUs sold for a clearance price of $53.85 at auction in Sept, netting the government $632.7m.


One buyer bought 37% of all the units on offer at the auction, according to an analysis released by the Ministry for the Environment, paying $234m for more than 4.3m NZUs.


Salt acquires NZUs by participating in the carbon auctions through a broker, as well as buying off the secondary market. also holds some Australian units.


Harrison thought it was possible the big Sept buyer was an intermediary acting on behalf of emitters who wanted to secure NZUs based on current prices, as a hedge to meet their future obligations. He didn’t believe financial speculators were having an outsized impact on carbon prices.


“I think the thing we’ve seen is with financial players coming into this market it’s probably being priced a little bit more fairly now, as opposed to the forestry guys being left at the mercy of the emitters.”


Salt founded its Carbon Fund in 2018. Harrison said listing a fund of its type on the NZX wasn’t typical, but Salt wanted to give investors another avenue to buy in. Fortuitously, it coincided with the rise of online investment platforms like Sharesies.


“In some ways, we’ve sort of ridden the wave of the Sharesies phenomenon,” he said.


“The interesting thing for us is, in the early days we could see some of the earlier investors were people working for some of the emitters. It gives you confidence you’re on the right track.”


There was also growing interest in ethical, or impact investing.


“Climate change has become a really big deal in people’s investment portfolios.”


The minister: markets have reacted


BusinessDesk asked climate change minister James Shaw if he was concerned about recent hikes in the carbon price and the involvement of speculators in the market.


It was the first year of the reformed ETS, Shaw said. Prices had been kept artificially low previously, so recent increases had been a long time coming.


"Market prices have reacted in a consistent way with the changes we have introduced, and most importantly, the ETS is starting to make traction in achieving emission reductions, which was what it was established to do."


As of June 2021, ETS participants held a total of 138.1m NZUs. Of these, about 63.3m had been earned by forestry owners, who were allocated units as their forests grew, but would have to surrender most at harvest.


Asked if he was concerned about participants stockpiling units, Shaw said stockpile reduction was considered when deciding the ETS cap on the volume of units able to be auctioned annually.


The Climate Change Commission was expected to provide further advice on managing the stockpile in 2022, he said.


Commentators, including Keith Woodford, an honorary professor of agri-food systems at Lincoln University, have pointe out the potential for large swathes of rural land to be converted from sheep and beef to forestry due to the rising carbon price.


Speaking to BusinessDesk, Woodford said NZ was on the cusp of a huge change in land use.


"Almost any sheep and beef farm that comes up for sale at the moment, that comes up for auction, the farm will be bough by someone for forestry purposes."


Shaw said potential land-use changes would be considered through the emissions reduction plan. The release of the plan had been pushed out to next year.


"The fact that the higher carbon price is driving change toward afforestation for carbon capture shows the ETS is beginning to do what it was established to achieve, which is reducing emissions in an economically efficient way," he said.


"We have broad consensus that that needs to happen."


*The author owns a small number of units in Salt's carbon fund.




Source: https://businessdesk.co.nz/article/finance/investors-eye-carbon-credits 1/6

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