When the price of carbon affects New Zealand’s budget

Last December, New Zealand decided to lower carbon prices to reduce consumer price inflation. Added to a failed auction in March, revenue generated by the government for selling carbon emission quotas is now NZ$1.2 billion below expectations for this year’s budget.

New Zealand Parliament buildings
New Zealand Parliament Buildings in Wellington that include the government, the Parliament House and the Parliamentary Library. | © Koon Chakhatrakan, 2022

Despite lowering the price of carbon, New Zealand failed to sell carbon emission credits in March, contributing to a shortfall of 1.2 billion New Zealand dollars (US$741 million) in the government budget compared to the forecast so far.

The Treasury of New Zealand on May 9 published the international financial statements of the government, whose budget year ends on June 30.

It shows the government’s operating balance before gains and losses, which represents underlying income and expenses, reached a deficit of NZ$3.4 billion (US$2.1 billion) in the nine months to the end of March.

The deficit proves to be much higher than the NZ$913 million the Treasury forecast in December, despite the government’s efforts to reduce spending by NZ$723 million more than expected.

In a country that was used to having a budget surplus before the COVID-19 pandemic, two factors primarily explain the challenging results: Lower tax revenue due to the economic slowdown and low carbon price.

New Zealand’s revenue for the nine months to March 31 was NZ$91.7 billion, or NZ$2.9 billion lower than forecast (-2.4%). Corporate and individual tax revenue generated NZ$2.3 billion less than anticipated.

Furthermore, the Emissions Trading Scheme, New Zealand’s carbon marketplace, was short of NZ$1.2 billion compared to the forecast based on a carbon price of NZ$85 ($US52).

No successful bid for carbon credits in March

Since March 2021, New Zealand has auctioned carbon credits to polluters every quarter. It is part of New Zealand’s policy to meet its emission reduction targets by encouraging behavioral change.

High carbon prices make emitting greenhouse gases more expensive, which can force industries to adapt their production but also end up with more expensive fuel at gas stations for consumers.

For example, the energy and waste industries are required to buy and surrender to the government one New Zealand Unit (NZU) for every metric ton of carbon dioxide equivalent they emit.

The government controls upper and lower prices and limits the number of NZUs, so businesses are limited in the greenhouse gas they can release, although they can buy and sell units from each other.

Moreover, the government estimated it would raise NZ$4.5 billion (US$2.8 billion) between 2021 and 2025 by selling carbon units with the scheme to support the Climate Emergency Response Fund and carbon-cutting efforts such as cheaper public transport.

The government raised NZ$2 billion last year as carbon credits were a hot commodity. In 2021 and 2022, all auctions on carbon credits sold out, including all the extra units held in reserve.

But to the surprise of many, there were no successful bids in last March’s auction for the 4.5 million carbon units available for sale.

In December, under Jacinda Ardern’s leadership – the former prime minister resigned from her position in January – the government decided to take the inflationary pressure into account and agreed to set significantly lower carbon price settings despite the recommendations of the Climate Change Commission.

The energy sector welcomed the decision, citing the potential impact on electricity and fuel prices.

In March 2023, the NZU price reached an 18-month low at NZ$54.50, according to the government, compared to December’s forecast price of NZ$85.

But bids during March’s auction were all lower than the confidential reserve price set by the ministry of Climate Change, the first time since the implementation of the auctions. Instead of expecting to earn more than NZ$250 million in the auction, which would have already lacked NZ$800 million (US$500 million) compared to the forecast, it ended up with no revenue at all.

Climate Minister James Shaw defended it was “a reasonably regular feature” in the European ETS.

Deficit offset during the next auction in June?

Fewer carbon credits sold means fewer polluting rights, which can benefit the environment.

But the lack of demand in the auction was also seen as a lack of confidence in the carbon market because of an insufficient climate policy.

Investors are willing to buy NZUs if they anticipate a financial gain, which can occur if the country remains ambitious regarding its climate goals and emission reduction targets, making the supply of NZUs more essential for businesses and thus increasing the price.

While carbon market mechanisms may be confusing and hard to comprehend fully, New Zealand’s news website Stuff argues there is speculation that the Emissions Trading Scheme could result in a NZ$1.3 billion budget loss this year if market confidence and carbon credit prices are not boosted. This revenue was dedicated to finance emission reduction actions.

For now, the combination of a low carbon price and the auction’s failure to raise revenue is reflected in the NZ$1.2 billion missing from the Treasury financial statement.

As Minister of Finance Grant Robertson will soon release the budget for the last quarter, where some cuts are expected, the government will have the opportunity to partially offset the hole in June as all units can be again available during the next auction.

However, the government budget is also affected by the economic slowdown, which in the end, can affect demand for carbon credits if production decelerates.

It’s inevitable that the government’s books will be affected as the economy cools. We are doing our bit to restrain spending and responsibly manage our finances. The upcoming budget has required tough choices as we respond to the deteriorating economic conditions,” stated Mr. Robertson. The country also needs to repair country’s infrastructure severely damaged by floods and Cyclone Gabrielle.

With a net debt of 19.1 percent of growth domestic product, better than the forecast of 20.4 percent of GDP thanks to higher interest rate revenue on financial markets, New Zealand’s debt remains one of the lowest of the OECD, Mr. Robertson recalled.

He added the budget deficit is significantly smaller than it was at the same time a year ago.

Related Articles

Back to top button