Establishing market for emission trading

Posted on December 10, 2010 by

As India looks at keeping the doors of climate negotiation open for itself after the pressure tactics from developed countries, understanding aspects of emission trading and mechanisms for establishing a sound domestic market would be appropriate to observe the mistakes made by some of the countries that have established similar systems and try to replicate best practices.

NZ ETS – Information Disclosure

The market for emissions units heavily depends on existence of reliable information to operate efficiently. Buyers and sellers have a need of clear identification of each other and a reasonable understanding about the level of supply and demand in the market to establish prices.
In the context of the EU ETS, the sudden fall in the price of EUAs in the April 2006 showsed that poor quality information about the level of supply of and demand for units. Such situations can create price shocks that have a potential to negatively affect the operation of the market. In the case of New Zealand’s ETS, the issue of information disclosure was kept in mind when originally designing the NZ ETS, particularly disclosure of emissions  information that be an indicator of the level of demand

Listed below are some information disclosure requirements that tend to provide information of interest to the market.

Section 68: This section mandates that as soon as practicable after the Minister directs the Registrar to issue New Zealand units (NZUs) into a Crown holding account, a copy of the direction is published in the New Zealand Gazette and accessible via the internet.

Section 89: This section requires that the scheme administrator to publish certain information each year, including the total quantity of emissions and removals reported by NZ ETS participants. This information must be published by 30 June each year. This information provides some indication of overall supply and demand, and therefore may be of some interest to the market, the information is aggregated and generally published too late to inform market behaviour.

Section 8A: This section requires the Ministerial directions relating to Crown trading activities to be published. These directions can be of interest to market participants since they show the identity of participants in the Permanent Forest Sink Initiative and parties with a Project to Reduce Emissions or a Negotiated Greenhouse Agreement, and how many units the Crown has transferred to those parties (AAUs, ERUs, or NZUs).
Section 77(8)(b): This section requires the publication of final determinations regarding the free allocation of NZUs to fishing quota owners and pre-1990 forest land owners. These determinations are published in the Gazette and made accessible via the internet “as soon as practicable” after the Minister makes a final determination.

Section 86B(5): This section requires the scheme regulator to publish the amount of free allocation to emissions-intensive, trade-exposed (EITE) firms and entities who receive a free allocation in the agriculture sector. Publication must occur in the Gazette and on the internet and occur as soon as practicable after the scheme regulator determines the amount of final allocation to each entity.

Put together, information disclosure provisions under various sections mentioned above implies that some information is provided to the market about the level of supply in the market and the identity of unit sellers. It also identifies likely buyers and seller. Even though these information disclosures requirements are primarily directed at regulatory transparency rather than efficient market operation. The system still has gaps if it is seen from efficient market operation as objective.

It remains to be seen whether government will be called upon to improve information disclosure in order to assist market operation, or whether market participants themselves will start to provide this information in a more deliberate and coordinated way.

Posted in: Carbon Markets