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Carbon Pricing in New Zealands Emissions Trading Scheme Stranded Assets, CAPEX and Investment Consultants Dr. Daniel J. Tulloch Email: Daniel J. Tulloch Smith School of Enterprise and the Environment daniel.tulloch@smithschool.ox.ac.uk

slide-1
SLIDE 1

Stranded Assets, CAPEX and Investment Consultants

Daniel J. Tulloch

Research Associate and SARN Coordinator Smith School of Enterprise and the Environment University of Oxford

Email daniel.tulloch@smithschool.ox.ac.uk Twitter @djtulloch

Carbon Pricing in New Zealand’s Emissions Trading Scheme

  • Dr. Daniel J. Tulloch

Smith School of Enterprise and the Environment University of Oxford With: Dr. Ivan Diaz-Rainey (University of Otago)

Email: daniel.tulloch@smithschool.ox.ac.uk Twitter: @djtulloch

slide-2
SLIDE 2

NZ ETS

OUTLINE

  • 1. Introduction
  • 2. Theoretical Framework and

Hypotheses

  • 3. Methodology
  • 4. Results
  • 5. Conclusions
slide-3
SLIDE 3
  • 1. INTRODUCTION
  • What: What are the determinants of NZU prices? (local market

fundamentals/policy vs. imports)

  • Why: NZ ETS unique
  • Second oldest national scheme
  • No hard cap: intensity based scheme
  • Highly international (unlimited offsets)
  • Forestry incorporated
  • Originally agriculture expected
  • Low domestic carbon price
  • Prior analyses not explored price determinants and impact of

import/export (need registry data)

  • How: Structural breaks; Vector Autoregression (VAR), Granger

NZ ETS 3

slide-4
SLIDE 4

NEW ZEALAND'S TOTAL GHG EMISSIONS BY SECTOR

NZ ETS 4

  • 40,000
  • 20,000

20,000 40,000 60,000 80,000 100,000 Emissions (Gg CO2-e) LULUCF Agriculture Energy Industrial Processes Waste Solvent and Other Product Use

slide-5
SLIDE 5

NZ ETS: AN OVERVIEW

  • Introduced in 2008 as the first ETS to encompass all sectors

and all six Kyoto greenhouse gases.

  • Only ETS to include forestry sector, able to generate carbon

credits (Moyes, 2008, ELQ; Adams & Turner, 2012, FPE; Bullock, 2012, EnP).

  • Not a cap-and-trade, but a mandatory surrender of carbon

credits (Richter & Mundaca, 2013, NCC).

  • Government provides free allocation of units to at-risk

sectors (Kerr & Zhang, 2009, Motu).

NZ ETS 5

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SLIDE 6

NZ ETS: AN OVERVIEW

  • Unlike other ETSs, the NZ ETS had no restrictions on
  • verseas carbon credits.
  • 2009 - National government’s amendments argued to be

cost-containment measures.

  • Transition Period (01 July 2010 to 31 December 2012)
  • Delayed entry, ‘one-for-two’ scheme, $25 fixed price (MfE, 2011;

Sinclair, 2011; MfE, 2012a; Bullock, 2012, EnP).

  • Doubles the utility of each carbon credit ($12.50 per unit) (Moyes,

2008, ELQ).

  • Cannot convert domestic NZUs for offshore sales.

NZ ETS 6

slide-7
SLIDE 7

THE IMPORTANCE OF FORESTRY

  • Forestry expected to generate 79 million units

during CP1 (MfET, 2007)

  • Selling surplus was expected to generate NZ$430

million (MfE, 2005)

  • Net contribution to the NZ economy
  • Encourage afforestation
  • However, low NZU prices and a push towards

farming intensification lead to deforestation

Carbon Pricing in NZ’s ETS 7

slide-8
SLIDE 8

LINKING SYSTEMS AND POLICY CHANGES

  • Linking Systems increases liquidity and acts as a safety

value on price

  • From mid-2011, NZ ETS became a ‘price taker’
  • Declining CER prices and large imports ‘dragged down’ the

price of NZUs

  • New Zealand banned certain international units
  • Questions over CER integrity (HFC-23 and HCFC-22

controversy).

  • New Zealand withdrew from CP2 but pledged to reduce

emissions to 11% below 1990 levels.

  • The NZ ETS will remain the main instrument achieving climate

change mitigation.

Carbon Pricing in NZ’s ETS 8

slide-9
SLIDE 9
  • 2. THEORETICAL FRAMEWORK: LINKING SYSTEMS

NZ ETS 9

p 𝑁𝐵𝐷1 𝑞1 𝑁𝐵𝐷2 𝑞′ 𝑞2 𝑨1

′ 𝑨1 𝑨2 𝑨2 ′

Z (CO2 abated)

b'’ b' b a’’ a’ a

  • Minimise MAC =

unrestricted trading welfare maximising

  • Models where trading does

not maximise welfare

  • Terms of trade effects
  • Intensity based

systems

  • Other critiques
  • Loss of control
  • Distortions e.g “hot

air”

  • Market integrity issues

e.g HFC-23 Marginal Abatement Curves (MAC) and the Incentives and Benefits of Emissions Trading

slide-10
SLIDE 10

HYPOTHESES

  • H1: Domestic NZU prices will experience a negative

structural shift in returns during the period at which international CER prices become relatively cheaper and are eligible for surrender obligations.

  • H2: There will be an interdependent relationship

between the NZU and CER returns, with CERs leading and NZUs following.

  • CERs are Clean Development Mechanism units
  • H3: Increasing net import of units will negatively

impact NZUs returns

NZ ETS 10

slide-11
SLIDE 11
  • 3. LITERATURE REVIEW – EU ETS FUNDAMENTALS

NZ ETS 11

Fundamental Positive Impact Negative Impact No Impact Oil Mansanet-Bataller et al. (2007) – 1 lag Alberola et al. (2008)A Natural Gas Mansanet-Bataller et al. (2007) – 1 lag Alberola et al. (2008)A Hintermann (2010)B - 1 lag Hintermann (2010)B Coal Hintermann (2010)B Alberola et al. (2008)A Mansanet-Bataller et al. (2007) Hintermann (2010)B Electricity Price Alberola et al. (2008) Weather* Dry - Benz & Trück (2006) Dry - Benz & Trück (2009) Temp – Christiansen et al. (2005) Temp - Mansanet-Bataller et al. (2007) wind - Mansanet-Bataller et al. (2007) Temp - Hintermann (2010)AB Rain- Hintermann (2010)A Temp - Alberola et al. (2008)A Rain and temp - Hintermann (2010) AB Rain - Mansanet-Bataller et al. (2007)

A Varies across time. B Varies depending on model specification.

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SLIDE 12
  • 3. METHODOLOGY - DATA

12

  • Data
  • Market data: ICE, Bloomberg etc.
  • NZ Registry: FOI to get daily registry data of import and exports.
  • All data is daily, between 01 July 2010 and 31 December 2013.
  • Quoted in NZD$ to better represent import and export costs to NZ

participants.

  • Returns are calculated using first log-difference.
slide-13
SLIDE 13
  • 3. METHODOLOGY - DATA

13

Variable Definition NZU price (Domestic) Daily spot prices (1 Jul 2010 to 31 Dec 2013; 914 obs) CER price (International) Daily futures (shortest strip) from ICE Oil price Arabian Gulf Dubai Fateh Crude Oil Spot Price Natural Gas price Henry Hub Natural Gas Spot Price Index Coal price European coal (API2YR1) Electricity price NZ Potah Temperature Auckland Extreme temperatures Upper and lower 95% and 5% (dummies) Import volume Sum of AAUs, CERs, RMU, and ERUs

slide-14
SLIDE 14
  • 3. METHODOLOGY - MODELS
  • Structural Breakpoint tests
  • Bai-Perron (2003) dynamic algorithm.
  • Minimizes sum of squared residuals.
  • Identifies multiple breakpoints.
  • Vector Autoregression
  • Captures linear interdependencies among variables.
  • Granger Causality
  • Determines when one series is useful in forecasting another.
  • Flow of time plays a central role – Does lagged Y forecast X?

NZ ETS 14

slide-15
SLIDE 15
  • 4. RESULTS – VAR (SPECIFICATION)
  • The VAR regressions are presented in regression notation below:

(A) 𝑠

1,𝑢 = 𝛽𝑗 + σ𝑘=1 2

𝛾1,1

𝑘 𝑠 1,𝑢−𝑘 + σ𝑘=1 2

𝛾1,2

𝑘 𝐷𝐹𝑆2,𝑢−𝑘 + σ𝑘=1 2

𝛾1,3

𝑘 𝑂𝑓𝑢𝐽𝑛𝑞𝑝𝑠𝑢3,𝑢−𝑘 +

𝛾1,4𝑃𝑗𝑚4,𝑢 + 𝛾1,5𝐻𝑏𝑡5,𝑢 + 𝛾1,6𝐷𝑝𝑏𝑚6,𝑢 + 𝛾1,7𝐹𝑚𝑓𝑑7,𝑢 + 𝛾1,8𝑈𝑓𝑛𝑞8,𝑢 + 𝛾1,9𝐷𝑝𝑚𝑒9,𝑢 + 𝛾1,10𝐼𝑝𝑢10,𝑢 + 𝜁1,𝑢 (B) 𝐷𝐹𝑆2,𝑢 = 𝛽𝑗 + σ𝑘=1

2

𝛾2,1

𝑘 𝑠 1,𝑢−𝑘 + σ𝑘=1 2

𝛾2,2

𝑘 𝐷𝐹𝑆2,𝑢−𝑘 + σ𝑘=1 2

𝛾2,3

𝑘 𝑂𝑓𝑢𝐽𝑛𝑞𝑝𝑠𝑢3,𝑢−𝑘 +

𝛾2,4𝑃𝑗𝑚4,𝑢 + 𝛾2,5𝐻𝑏𝑡5,𝑢 + 𝛾2,6𝐷𝑝𝑏𝑚6,𝑢 + 𝛾2,7𝐹𝑚𝑓𝑑7,𝑢 + 𝛾2,8𝑈𝑓𝑛𝑞8,𝑢 + 𝛾2,9𝐷𝑝𝑚𝑒9,𝑢 + 𝛾2,10𝐼𝑝𝑢10,𝑢 + 𝜁2,𝑢 (C) 𝑂𝑓𝑢𝐽𝑛𝑞𝑝𝑠𝑢3,𝑢 = 𝛽𝑗 + σ𝑘=1

2

𝛾3,1

𝑘 𝑠 1,𝑢−𝑘 + σ𝑘=1 2

𝛾3,2

𝑘 𝐷𝐹𝑆2,𝑢−𝑘 +

σ𝑘=1

2

𝛾3,3

𝑘 𝑂𝑓𝑢𝐽𝑛𝑞𝑝𝑠𝑢3,𝑢−𝑘 + 𝛾3,4𝑃𝑗𝑚4,𝑢 + 𝛾3,5𝐻𝑏𝑡5,𝑢 + 𝛾3,6𝐷𝑝𝑏𝑚6,𝑢 + 𝛾3,7𝐹𝑚𝑓𝑑7,𝑢 +

𝛾3,8𝑈𝑓𝑛𝑞8,𝑢 + 𝛾3,9𝐷𝑝𝑚𝑒9,𝑢 + 𝛾3,10𝐼𝑝𝑢10,𝑢 + 𝜁3,𝑢

15

slide-16
SLIDE 16
  • 4. RESULTS
  • 10

10 20 30 40 50 60 70 80 90 100 5 10 15 20 25 30 2010 2011 2012 2013 Net Volume Imported (Millions) Unit Cost ($NZD) Net Import CER NZU

  • 10
  • 5

5 2010 2011 2012 2013 Spread (NZU-CER)

Daily Close Prices for NZ NZUs and CERs. Sources: ICE (2014) and the EPA.

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SLIDE 17

Carbon Pricing in NZ’s ETS 17

5 10 15 20 25 30 2010 2011 2012 Total Units Surrendered (Millions) Forestry NZUs Other NZUs NZ AAUs CERs ERUs RMUs NZ$25 Fixed Price

Total Units Surrendered by Unit Type, 2010-2012.

slide-18
SLIDE 18
  • 4. RESULTS: STRUCTURAL BREAKS
  • Structural Breaks (Bai-Perron, 2003)
  • Expected:
  • Tues 21 June 2011 – CERs drop below NZUs
  • Mon 11 February 2013 – surrender of some international CERs and

ERUs (Joint Implementation/Annex 1: developed and transition) banned (effective banning date)

  • Results:
  • Mon 20 June 2011 and
  • Tues 19 February 2013.
  • Support for H1 – a significant negative intercept shifts when CERs

fell below NZUs (while eligible for surrender purposes).

NZ ETS 18

slide-19
SLIDE 19

19

Break type calculated using 2 fixed globally determined breaks. Dependent variable: daily NZU returns. Method: least squares with breaks. Based on 914 observations between 01 July 2010 and 31 December 2013. Specified using HAC standard errors and covariance (Bartlett kernels and Newey-West fixed bandwidth). 𝑆2 0.0131 Mean dependent variable

  • 0.0019

Adjusted 𝑆2 0.0110 S.D. dependent variable 0.0354 S.E. of regression 0.0352 Akaike info criterion

  • 3.8519

Sum squared residuals 1.1292 Schwarz criterion

  • 3.8361

Log likelihood 1763.3280 Hannan-Quinn criterion

  • 3.8459

F-statistic 6.0650 Durbin-Watson statistic 1.8408 Prob (F-statistic) 0.0024 Variable Coefficient

  • Std. Error

t-Statistic Prob. First Period: 7/01/2010 - 6/17/2011 (252 obs) Intercept 0.0003 0.0008 (0.46) 0.6462 Second Period: 6/20/2011 - 2/18/2013 (436 obs) Intercept

  • 0.0060

0.0020 (-3.05) 0.0023 Third Period: 2/19/2013 - 12/31/2013 (226 obs) Intercept 0.0034 0.0031 (1.11) 0.2670

Structural breaks using Global Information Criterion (GIC) tests

slide-20
SLIDE 20
  • 4. RESULTS
  • 10

10 20 30 40 50 60 70 80 90 100 5 10 15 20 25 30 2010 2011 2012 2013 Net Volume Imported (Millions) Unit Cost ($NZD) Net Import CER NZU

  • 10
  • 5

5 2010 2011 2012 2013 Spread (NZU-CER)

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SLIDE 21

Full Period (01 Jul 2010 to 31 Dec 2013) First Period (01 Jul 2010 to 17 Jun 2011) Second Period (20 Jun 2011 to 18 Feb 2013) Third Period (19 Feb 2013 to 31 Dec 2013) Specification (A) (B) (C) (A) (B) (C) (A) (B) (C) (A) (B) (C) 𝑺𝑵𝑻𝑭 0.0349 0.0876 0.5306 0.0138 0.0150 0.0313 0.0393 0.0688 0.3703 0.0398 0.1468 0.9275 𝑺𝟑 0.0417 0.0715 0.0404 0.0679 0.2185 0.0681 0.0891 0.0488 0.0226 0.0755 0.1233 0.0768 𝒀𝟑 39.6740*** 70.2361*** 38.4423*** 18.2173 69.8801*** 18.2776 42.6487*** 22.3704* 10.0759 18.4465 31.7784*** 18.8106 𝒔𝒖 𝒔𝑫𝑭𝑺𝒖 𝑶𝒇𝒖𝑱𝒏𝒒𝒑𝒔𝒖𝒖 𝒔𝒖 𝒔𝑫𝑭𝑺𝒖 𝑶𝒇𝒖𝑱𝒏𝒒𝒑𝒔𝒖𝒖 𝒔𝒖 𝒔𝑫𝑭𝑺𝒖 𝑶𝒇𝒖𝑱𝒏𝒒𝒑𝒔𝒖𝒖 𝒔𝒖 𝒔𝑫𝑭𝑺𝒖 𝑶𝒇𝒖𝑱𝒏𝒒𝒑𝒔𝒖𝒖 𝒔𝒖−𝟐 0.0894

  • 0.1530
  • 0.1583
  • 0.1744

0.0305 0.0123 0.0127

  • 0.2048
  • 0.0083

0.1858

  • 0.2291
  • 0.3005

(2.72)** (-1.86) (-0.32) (-2.74)** (0.44) (0.09) (0.27) (-2.47)* (-0.02) (2.81)** (-0.94) (-0.20) 𝒔𝒖−𝟑 0.0203

  • 0.0394
  • 0.1077
  • 0.1008
  • 0.0943

0.0312

  • 0.0336
  • 0.0700

0.0145 0.0832 0.1494

  • 0.1996

(0.62) (-0.48) (-0.22) (-1.61) (-1.39) (0.22) (-0.68) (-0.81) (0.03) (1.31) (0.64) (-0.14) 𝒔𝑫𝑭𝑺𝒖−𝟐 0.0520

  • 0.1920
  • 0.1871
  • 0.0459
  • 0.0005
  • 0.1166

0.1265

  • 0.0157

0.0291 0.0191

  • 0.2774
  • 0.1413

(3.97)*** (-5.84)*** (-0.94) (-0.87) (-0.01) (-0.98) (4.61)*** (-0.33) (0.11) (1.06) (-4.17)*** (-0.34) 𝒔𝑫𝑭𝑺𝒖−𝟑 0.0274 0.0772 1.0800 0.0483 0.0705

  • 0.1026

0.0654 0.0150 0.1865 0.0015 0.0836 1.3569 (2.08)* (2.33)* (5.39)*** (0.92) (1.24) (-0.87) (2.35)* (0.31) (0.71) (0.08) (1.25) (3.21)*** 𝑶𝒇𝒖𝑱𝒏𝒒𝒑𝒔𝒖𝒖−𝟐 0.0060 0.0063 0.0513 0.0455

  • 0.0246

0.1657 0.0086

  • 0.0018

0.0338 0.0044 0.0083 0.0408 (2.79)** (1.16) (1.57) (1.62) (-0.81) (2.62)*** (1.69) (-0.20) (0.71) (1.55) (0.80) (0.62) 𝑶𝒇𝒖𝑱𝒏𝒒𝒑𝒔𝒖𝒖−𝟑

  • 0.0026

0.0137 0.0193

  • 0.0177
  • 0.0452

0.0122

  • 0.0024

0.0061 0.0506

  • 0.0037

0.0159

  • 0.0179

(-1.22) (2.52)* (0.59) (-0.63) (-1.49) (0.19) (-0.46) (0.68) (1.05) (-1.32) (1.53) (-0.27) 𝑷𝒋𝒎𝒖 0.1166

  • 0.0586

0.8950 0.0304 0.0094 0.0545 0.2167

  • 0.0924
  • 1.0526
  • 0.0052
  • 0.7690

7.3769 (1.35) (-0.27) (0.68) (0.59) (0.17) (0.47) (1.45) (-0.35) (-0.75) (-0.02) (-0.83) (1.25) 𝑯𝒃𝒕𝒖 0.0499

  • 0.1872

0.0948

  • 0.0095
  • 0.0128
  • 0.0701

0.0493

  • 0.1802

0.9810 0.0850

  • 0.6235
  • 3.9479

(1.11) (-1.66) (0.14) (-0.29) (-0.36) (-0.94) (0.75) (-1.57) (1.59) (0.58) (-1.15) (-1.15) 𝑫𝒑𝒃𝒎𝒖

  • 0.0061

1.0554

  • 2.0866
  • 0.0515

0.6030 0.1687 0.1863 0.9627

  • 2.3764
  • 0.1093

2.6766

  • 3.0638

(-0.05) (3.34)*** (-1.09) (-0.62) (6.74)*** (0.90) (0.89) (2.62)** (-1.20) (-0.32) (2.11)* (-0.38) 𝑭𝒎𝒇𝒅𝒖

  • 0.0043

0.0007 0.0390 0.0016

  • 0.0023

0.0008

  • 0.0204
  • 0.0082

0.0006

  • 0.0059

0.0079 0.1787 (-1.45) (0.10) (0.86) (1.05) (-1.37) (0.23) (-2.83)** (-0.65) (0.01) (-0.78) (0.28) (1.02) 𝑼𝒇𝒏𝒒𝒖 0.0015 0.0208 0.1056 0.0103 0.0124 0.0081

  • 0.0151
  • 0.0007
  • 0.0691

0.0075 0.0571 0.4329 (0.15) (0.82) (0.69) (1.32) (1.46) (0.46) (-0.92) (-0.02) (-0.45) (0.33) (0.67) (0.81) 𝑫𝒑𝒎𝒆𝒖 0.0011 0.0068

  • 0.0141
  • 0.0001

0.0029

  • 0.0002
  • 0.0004

0.0054

  • 0.0703

0.0077 0.0164 0.0638 (0.19) (0.45) (-0.15) (-0.02) (0.55) (-0.02) (-0.04) (0.33) (-0.81) (0.54) (0.31) (0.19) 𝑰𝒑𝒖𝒖 0.0056

  • 0.0177

0.0137

  • 0.0032
  • 0.0002

0.0163 0.0104

  • 0.0396

0.1625 0.0412 0.0517

  • 0.0393

(1.00) (-1.26) (0.16) (-1.02) (-0.05) (2.28)* (1.05) (-2.27)* (1.73) (1.73) (0.59) (-0.07) 𝜷𝒋 (𝒋𝒐𝒖𝒇𝒔𝒅𝒇𝒒𝒖)

  • 0.0020
  • 0.0061

0.0925 0.0007

  • 0.0008
  • 0.0014
  • 0.0048
  • 0.0106

0.0753 0.0013 0.0009 0.2253 (-1.64) (-1.94) (4.89)*** (0.77) (-0.78) (-0.67) (-2.28)* (-2.90)** (3.82)*** (0.47) (0.09) (3.39)*** Notes: z-statistics show in parentheses. *** denotes significance at 𝑞 ≤ 0.001, ** denotes significance at 𝑞 ≤ 0.01 and * denotes significance at 𝑞 ≤ 0.05.

VAR Results

slide-22
SLIDE 22

Full Period (01 Jul 2010 to 31 Dec 2013) First Period (01 Jul 2010 to 17 Jun 2011) Second Period (20 Jun 2011 to 18 Feb 2013) Third Period (19 Feb 2013 to 31 Dec 2013) Specification (A) (B) (C) (A) (B) (C) (A) (B) (C) (A) (B) (C) 𝑺𝑵𝑻𝑭 0.0349 0.0876 0.5306 0.0138 0.0150 0.0313 0.0393 0.0688 0.3703 0.0398 0.1468 0.9275 𝑺𝟑 0.0417 0.0715 0.0404 0.0679 0.2185 0.0681 0.0891 0.0488 0.0226 0.0755 0.1233 0.0768 𝒀𝟑 39.6740*** 70.2361*** 38.4423*** 18.2173 69.8801*** 18.2776 42.6487*** 22.3704* 10.0759 18.4465 31.7784*** 18.8106 𝒔𝒖 𝒔𝑫𝑭𝑺𝒖 𝑶𝒇𝒖𝑱𝒏𝒒𝒑𝒔𝒖𝒖 𝒔𝒖 𝒔𝑫𝑭𝑺𝒖 𝑶𝒇𝒖𝑱𝒏𝒒𝒑𝒔𝒖𝒖 𝒔𝒖 𝒔𝑫𝑭𝑺𝒖 𝑶𝒇𝒖𝑱𝒏𝒒𝒑𝒔𝒖𝒖 𝒔𝒖 𝒔𝑫𝑭𝑺𝒖 𝑶𝒇𝒖𝑱𝒏𝒒𝒑𝒔𝒖𝒖 𝒔𝒖−𝟐 0.0894

  • 0.1530
  • 0.1583
  • 0.1744

0.0305 0.0123 0.0127

  • 0.2048
  • 0.0083

0.1858

  • 0.2291
  • 0.3005

(2.72)** (-1.86) (-0.32) (-2.74)** (0.44) (0.09) (0.27) (-2.47)* (-0.02) (2.81)** (-0.94) (-0.20) 𝒔𝒖−𝟑 0.0203

  • 0.0394
  • 0.1077
  • 0.1008
  • 0.0943

0.0312

  • 0.0336
  • 0.0700

0.0145 0.0832 0.1494

  • 0.1996

(0.62) (-0.48) (-0.22) (-1.61) (-1.39) (0.22) (-0.68) (-0.81) (0.03) (1.31) (0.64) (-0.14) 𝒔𝑫𝑭𝑺𝒖−𝟐 0.0520

  • 0.1920
  • 0.1871
  • 0.0459
  • 0.0005
  • 0.1166

0.1265

  • 0.0157

0.0291 0.0191

  • 0.2774
  • 0.1413

(3.97)*** (-5.84)*** (-0.94) (-0.87) (-0.01) (-0.98) (4.61)*** (-0.33) (0.11) (1.06) (-4.17)*** (-0.34) 𝒔𝑫𝑭𝑺𝒖−𝟑 0.0274 0.0772 1.0800 0.0483 0.0705

  • 0.1026

0.0654 0.0150 0.1865 0.0015 0.0836 1.3569 (2.08)* (2.33)* (5.39)*** (0.92) (1.24) (-0.87) (2.35)* (0.31) (0.71) (0.08) (1.25) (3.21)*** 𝑶𝒇𝒖𝑱𝒏𝒒𝒑𝒔𝒖𝒖−𝟐 0.0060 0.0063 0.0513 0.0455

  • 0.0246

0.1657 0.0086

  • 0.0018

0.0338 0.0044 0.0083 0.0408 (2.79)** (1.16) (1.57) (1.62) (-0.81) (2.62)*** (1.69) (-0.20) (0.71) (1.55) (0.80) (0.62) 𝑶𝒇𝒖𝑱𝒏𝒒𝒑𝒔𝒖𝒖−𝟑

  • 0.0026

0.0137 0.0193

  • 0.0177
  • 0.0452

0.0122

  • 0.0024

0.0061 0.0506

  • 0.0037

0.0159

  • 0.0179

(-1.22) (2.52)* (0.59) (-0.63) (-1.49) (0.19) (-0.46) (0.68) (1.05) (-1.32) (1.53) (-0.27) 𝑷𝒋𝒎𝒖 0.1166

  • 0.0586

0.8950 0.0304 0.0094 0.0545 0.2167

  • 0.0924
  • 1.0526
  • 0.0052
  • 0.7690

7.3769 (1.35) (-0.27) (0.68) (0.59) (0.17) (0.47) (1.45) (-0.35) (-0.75) (-0.02) (-0.83) (1.25) 𝑯𝒃𝒕𝒖 0.0499

  • 0.1872

0.0948

  • 0.0095
  • 0.0128
  • 0.0701

0.0493

  • 0.1802

0.9810 0.0850

  • 0.6235
  • 3.9479

(1.11) (-1.66) (0.14) (-0.29) (-0.36) (-0.94) (0.75) (-1.57) (1.59) (0.58) (-1.15) (-1.15) 𝑫𝒑𝒃𝒎𝒖

  • 0.0061

1.0554

  • 2.0866
  • 0.0515

0.6030 0.1687 0.1863 0.9627

  • 2.3764
  • 0.1093

2.6766

  • 3.0638

(-0.05) (3.34)*** (-1.09) (-0.62) (6.74)*** (0.90) (0.89) (2.62)** (-1.20) (-0.32) (2.11)* (-0.38) 𝑭𝒎𝒇𝒅𝒖

  • 0.0043

0.0007 0.0390 0.0016

  • 0.0023

0.0008

  • 0.0204
  • 0.0082

0.0006

  • 0.0059

0.0079 0.1787 (-1.45) (0.10) (0.86) (1.05) (-1.37) (0.23) (-2.83)** (-0.65) (0.01) (-0.78) (0.28) (1.02) 𝑼𝒇𝒏𝒒𝒖 0.0015 0.0208 0.1056 0.0103 0.0124 0.0081

  • 0.0151
  • 0.0007
  • 0.0691

0.0075 0.0571 0.4329 (0.15) (0.82) (0.69) (1.32) (1.46) (0.46) (-0.92) (-0.02) (-0.45) (0.33) (0.67) (0.81) 𝑫𝒑𝒎𝒆𝒖 0.0011 0.0068

  • 0.0141
  • 0.0001

0.0029

  • 0.0002
  • 0.0004

0.0054

  • 0.0703

0.0077 0.0164 0.0638 (0.19) (0.45) (-0.15) (-0.02) (0.55) (-0.02) (-0.04) (0.33) (-0.81) (0.54) (0.31) (0.19) 𝑰𝒑𝒖𝒖 0.0056

  • 0.0177

0.0137

  • 0.0032
  • 0.0002

0.0163 0.0104

  • 0.0396

0.1625 0.0412 0.0517

  • 0.0393

(1.00) (-1.26) (0.16) (-1.02) (-0.05) (2.28)* (1.05) (-2.27)* (1.73) (1.73) (0.59) (-0.07) 𝜷𝒋 (𝒋𝒐𝒖𝒇𝒔𝒅𝒇𝒒𝒖)

  • 0.0020
  • 0.0061

0.0925 0.0007

  • 0.0008
  • 0.0014
  • 0.0048
  • 0.0106

0.0753 0.0013 0.0009 0.2253 (-1.64) (-1.94) (4.89)*** (0.77) (-0.78) (-0.67) (-2.28)* (-2.90)** (3.82)*** (0.47) (0.09) (3.39)*** Notes: z-statistics show in parentheses. *** denotes significance at 𝑞 ≤ 0.001, ** denotes significance at 𝑞 ≤ 0.01 and * denotes significance at 𝑞 ≤ 0.05.

VAR Results

slide-23
SLIDE 23
  • 4. RESULTS - VAR
  • Full period (01 July 2010 to 31 December 2013).
  • NZUs returns affected by lagged NZUs, CERs and Net Imports. Fundamentals

insignificant.

  • First period (01 July 2010 to 17 June 2011).
  • NZU returns affected by lagged NZUs and extreme hot weather (coincides with first

surrender date).

  • NZUs independent of CERs and Net Imports.
  • Second period (20 June 2011 to 18 February 2013).
  • NZU returns affected by lagged CERs, and NZ electricity. Some NZU-CER feedback.
  • NZUs lose independence, follow CERs.
  • Third period (19 February to 31 December)
  • NZU returns affected by lagged NZUs.
  • NZU regain independence, CERs decoupled.
  • CERs affected by coal.
  • Net imports affected by lagged CERS (import incentive).

23

slide-24
SLIDE 24

GRANGER-CAUSALITY

Null Hypotheses Full period First Period Second Period Third Period CERs do not Granger-cause NZUs (17.3660)*** (1.5787) (26.0900)*** (1.1721) Net Imports do not Granger-cause NZUs (9.0041)* (2.7599) (3.0063) (4.1148) All variables do not Granger-cause NZUs (24.0350)*** (4.0541) (28.4580)*** (4.7959) NZUs do not Granger-cause CERs (3.8807) (2.4450) (6.8708)* (1.1010) Net Imports do not Granger-cause CERs (7.9583)* (3.4325) (0.4972) (3.0091) All variables do not Granger-cause CERs (11.3840)* (5.7102) (7.1492) (3.9141) NZUs do not Granger-cause Net Imports (0.1619) (0.0509) (0.0013) (0.0691) CERs do not Granger-cause Net Imports (33.5210)*** (1.7344) (0.5171) (12.0520)** All variables do not Granger-cause Net Imports (33.6520)*** (1.7434) (0.5497) (12.3760)* Notes: 𝑌2 shown in parentheses. *** denotes significance at 𝑞 ≤ 0.001, ** denotes significance at 𝑞 ≤ 0.01 and * denotes significance at 𝑞 ≤ 0.05.

slide-25
SLIDE 25
  • 4. RESULTS: GRANGER-CAUSALITY
  • Both CERs and Net Imports Granger-cause NZU prices across the

entire time period.

  • CERs had a greater impact than Net Imports, especially in the second period.
  • CERs Granger-cause Net Imports across entire time series.
  • Data showed large increase in ERUs and are consistent with professional

comments.

  • VAR and Granger-Causality show support for H2: an inter-

dependent relationship between NZUs and CERs.

  • CER returns being the major determinant of NZU returns during the second

period.

  • No support for H3: Negative relationship between Net imports

and NZU returns.

  • Some evidence of Net Imports positively impacting NZUs and CERs (full

period).

  • NZ participants continuing to import CER units in third period.
  • Consistent with NZ ETS participants banking NZU and buying cheap units

(Mundaca and Richter, 2013)

NZ ETS 25

slide-26
SLIDE 26

Carbon Pricing in NZ’s ETS 26

50 100 2008 2009 2010 2011 2012 2013 International Incoming Transactions (milions) AAU RMU CER ERU from AAU 10 20 30 2008 2009 2010 2011 2012 2013 International Outgoing Transactions (milions) AAU RMU CER ERU from AAU

  • 20

20 40 60 80 2008 2009 2010 2011 2012 2013 Net Position (million units) AAU RMU CER ERU from AAU

slide-27
SLIDE 27

5. . CONCLUSIONS & POLIC

LICY IM IMPLICATIONS

  • Fundamentals have minimal impact on pricing (danger of linking)
  • unlike EU ETS where there are limits on importation
  • Three distinct periods in NZU pricing
  • CER prices above NZUs (01 July 2010 to 17 June 2011).
  • Not much evidence of exportation contrary to expectations of the scheme

generating a surplus

  • Appears to be autarkic
  • CER prices drop below NZUs (20 June 2011 to 18 Feb 2013).
  • CERs drag NZUs prices down
  • System becomes linked
  • Dubious CERs banned (19 February 2013 to 31 December 2013)
  • System regains some impendence
  • But importation continues of other types of units

NZ ETS 27