Salt Carbon Fund - short term pain, potential long term gain

The Government’s adoption of the Climate Change Commission’s recommendations on the emissions trading scheme is a step forward but forestry carbon still needs to be sorted out, says Salt Funds portfolio manager Paul Harrison.

Thursday, July 27th 2023, 12:20PM

by Andrea Malcolm

Climate Change Minister James Shaw has announced that from December the government will raise the reserve price for carbon units (NZUs) auctioned under the ETS from $33 to $60. It will also raise trigger prices for the cost containment reserve in the ETS from $82 to $173, and lower the cap on the number of units that can be auctioned over the next five years.

This will result in 17.6 million fewer units to be auctioned over the next five years making NZU holders use up their stockpiles over time.

The market for carbon units weakened at the end of last year when the government ignored the CCC’s December advice to raise prices to a level which would discourage carbon emissions. A lack of buying by emitters and additional supply from forest owners further depressed the price.

However following a successful legal challenge by Lawyers for Climate Action NZ two weeks ago, the High Court ordered the government to reconsider its position, resulting in yesterday’s announcement.

Harrison who manages the Salt Carbon Fund says the market had already priced in the news when the High Court made its order, This saw the price of NZUs trading back up above $60 this week after falling below $40 earlier in the year.

The NZX-listed Salt Carbon Fund which is available on Sharesies is one of the few offering retail investors exposure to the price of carbon credits offshore and locally. With assets of around $90 million it is 90.5% invested in NZUs, 4.59% carbon credits from the Australian ETS, and 4.91% cash.

Since inception in 2018 it has returned 13.52% but the last three years have been a rollicking ride for investors with three year returns of 22.31%, two year returns of 15.25% and a loss of 20.53% in the 12 months to March 2023.

Harrison says despite the short term pain there is still the potential for long term gains.

“This is a step in the right direction but there’s still uncertainty on how forestry will be treated.” This refers to the fact that the ETS has two types of units - those released by the government and those generated by forestry.

“One of the issues is there’s too much forestry that can potentially come into the ETS which would mean an oversupply of carbon credits on the market which isn’t going to discourage emissions.”

The government is reviewing the situation with a call for submissions closing in August but there will be no outcome before the election. Harrison says in mitigation Salt has shed all forestry NZUs from the Carbon Fund.

In the meantime another auction will take place in September, before the government’s new settings kick in. Harrison says he is committed to the New Zealand trading scheme. He says it is the second oldest in the world (started in 2009) and there it is improving.

Tags: Climate Change