At the same time, market participants are using new products to smooth the impact of volatility in NZ Unit (NZU) prices.

In its latest carbon market report, Jarden reported increasing use of “simple average index pricing structures” by participants who were “captured” by the emissions trading scheme (ETS), “in response to ongoing NZU price volatility”.

The NZU price collapsed from early November – hitting a three-year low in mid-January – after the government announced that it was decoupling the ETS from NZ’s Paris Accord commitments.

The move was defended as a technical adjustment but its coincidence with a swathe of other policy decisions weakening NZ’s climate change commitments made it the second time in three years that a NZ government has fundamentally undermined confidence in the ETS.

The Labour-led government caused a similar price collapse in 2023 after it announced in late 2022 that it would reject Climate Change Commission (CCC) advice to tighten the ETS.

Carbon prices plunged on Nov 5, trading as low as $33 by January 15, before a late February high point at close to $48. The NZU price has softened since, settling at $43.67 yesterday in the Carbon News index, which averages three available benchmark prices in a market that is both lightly regulated and has yet to establish an industry standard benchmark.

In a market update, issued this week, carbon trader Marex said that a combination of low NZU prices and improved farm balance sheets appeared to be constraining supply at a time when many forest owners tend to monetise their NZU claims.

January to April traditionally traded “flat to softer” because it has “historically been the time forestry supply is most evident”, with the carbon NZ carbon price averaging a 6% fall annually over that period since 2010.

“Supply has been materially lower than seasonal norms, tightening visible liquidity”.

Marex, whose NZ managing director is Carbon News shareholder Nigel Brunel, anticipated “near-term headwinds” caused by “auction dynamics and psychological resistance near $50”.

NZUs last traded above $50 on November 4 last year, having pushed close to $60 in the second half of last year before the policy announcements on Nov 5 started NZUs plunging to trade as low as $33 by January 15.

The underlying shift in forestry credits coming to market reflected “improved rural economics and a meaningful change in underlying balance sheet conditions” while sellers withdrew from the market when prices plumbed the low $30 range, Marex said.

“The [recent] rally has been driven more by the absence of supply than by aggressive new demand.”

On emerging trends in carbon traders’ behaviour, Jarden said that “ETS-captured entities are increasingly aligning their procurement strategies with the Commtrade platform benchmark”.

“This approach enables compliance entities to pass through NZU costs in line with prevailing market levels, ensuring pricing consistency with peers across both retail and wholesale channels while mitigating exposure to short-term price fluctuations.”

Jarden reported “active trading on increased liquidity and large voice-brokered traded volumes”, with the firm facilitating trade in 1,095,000 spot NZUs last week and 5,475,220 spot NZUs for the month of February.

The carbon price remains well below the $71 floor imposed in this year’s government carbon auctions, the most recent of which again failed to clear this week, with an expectation that new supply via auctions is unlikely this year.

Last month, the Government published a request by Energy and Climate Change Minister Simon Watts that the Climate Change Commission consider policy options for underpinning the carbon price.