New Zealand holds first auction

On 17 March 2021, the New Zealand ETS (NZ ETS) held its first allowance auction. In this first round of auctions, all 4.75 million allowances on offer were sold at a clearing price of NZD 36.00 (USD 25.90). There were 40 participants that bid for a total of 11.6 million units, with 30 participants successfully procuring units.  
 

Auctions will be held quarterly, with the total amount of allowances split evenly across auctions. They will be operated by the New Zealand Exchange (NZX), together with the European Exchange (EEX), which runs auctions for the European Union Emissions Trading System (EU ETS). The auctions are key element of the recent NZ ETS regulatory reforms now being implemented. The government has yet to decide how the proceeds of the auctions will be invested.

The auctioned New Zealand Units (NZUs) may still be used for the 2020 compliance period, which concludes at the end of March. For the 2020 compliance period, participants also still have the option of buying allowances from the government at a fixed price of NZD 35 (USD 22.70). Once 2020 compliance has been completed, the fixed price option will be replaced by a Cost Containment Reserve (CCR), designed to release extra allowances for auction when secondary market prices rise above NZD 50 (USD 32). The trigger price of the CCR will increase by 2% each year to counter inflation effects.

A week before the auction, the New Zealand parliament passed a bill introducing a confidential auction reserve price for this and all following auctions. Through a confidential formula, the new reserve price is based on the secondary market price (currently around NZD 37, USD 27) and is not made public even after the auction has passed. It is set in addition to the auction price floor, which is currently set at NZD 20 (USD 13) and increases by 2% per year to account for inflation. In the sealed-bid, single-round auctions, the clearing price is set at the lowest successful bidding price, with the lowest eligible bid being the floor price. However, if the clearance price falls below the confidential reserve price, the auction is effectively cancelled and none of the units sold. Any unsold allowances are rolled forward to the next auction within the same calendar year or cancelled if it is the last auction of that year.

The confidential reserve price aims to counter potential market manipulation. It prevents auction participants from placing a coordinated bid at the auction price floor, which could artificially lower the clearing price far below that of the secondary market, enabling buyers to immediately profit from reselling the allowances.