Currently, NZUs that do not sell at auctions accumulate into later auctions within the same calendar year. This can mean progressively larger auction volumes across a calendar year. Although this preserves the availability of auction volume throughout the year for NZ ETS participants, it increases the number of bids at or above the CRP9 needed for the auction to clear.
The problem: Bidding behaviour can affect auction results. In particular, bids below the CRP can cause auctions to decline. This can prevent NZ ETS participants from purchasing units, even when they are bidding above the CRP. The accumulation of unsold NZUs across the calendar year increases the implications of this risk. This is inconsistent with the policy objective of the auction mechanism.
Figure 1 illustrates how the accumulation of unsold NZUs within a calendar year can affect auction outcomes. Both scenarios have identical bidding behaviour. However, the latter, which includes previous unsold NZUs, fails to clear due to bids below the CRP.
9 The confidential reserve price functions to prevent the sale of units below prevailing secondary market prices. The confidential reserve price can be different at each auction and is not revealed to the public.
Figure 1: Example of impact of current auction rollover provisions for units within the same calendar year
Note: CRP = confidential reserve price.
Proposal: Amend regulations to change the way that rollover NZUs are treated at subsequent NZ ETS auctions in the calendar year. Options are outlined in table 7. The proposed changes would not affect the number of NZUs available, nor other aspects of the auction mechanism such as how the CRP functions.
Table 7: Options for managing rollover auction volumes
| Option |
Description |
Assumed impact |
|
No change
|
Unsold units continue to roll over to the next auction.
|
This can contribute to progressively larger auction volumes throughout the year, and bids below the CRP causing auctions to decline, as shown in figure 1.
|
|
Option 1: Sell unsold units if there is enough demand
|
Unsold units roll over, but are only sold if the current auction first clears its newly offered volume.
Bidders can still access the unsold units if there is enough demand. However, these additional units will not affect participant’s ability to first access the newly offered units.
Remaining unsold volume will not roll over into next the calendar year, the same as current provisions.
|
This approach maintains market stability by preventing a buildup of unsold units that could distort the outcomes of later auctions, while also ensuring the volume remains available to participants if there is demand.
Cost to the Crown to implement this change. However, enabling participants to better access units when there is sufficient demand would result in revenue from clearing those auction units to the Crown.
Participants may find accessing units in larger quantities via auction more convenient than the secondary market.
|
|
Option 2: Spread out unsold volumes across the year
|
Instead of rolling over all unsold units to the next single auction, this option spreads them evenly across the remaining auctions in that year.
|
May enable better access to NZUs throughout the year. Will not resolve the issue for the final auction of the year if no auctions clear during the year, because all units accumulate into the final auction.
|
Figure 2 is an example of how option 1 would work, using the same scenario as in figure 1. In it, 5 million units are sold.
a) The auction operator first checks whether there are enough bids above auction clearing price to clear the ‘new’ auction volume of 5 million units. There is, so these units are sold, with the five millionth bid determining the sale price. This is the same outcome as the scenario in which there are no ‘rollover units’.
b) The operator then calculates if the remaining bids are enough to clear the rollover volume. In the example, there are 1 million bids above the CRP and 2 million bids below it, so the rollover units fail to sell.
c) In all, 5 million ‘new’ units sell and re-offered 5 million do not. These unsold units are rolled over to the next auction or are cancelled if it is the last auction for the calendar year.
Figure 2: Example of auction result under option 1
Note: CRP = confidential reserve price.
Other options include holding two additional auctions per year, at regular intervals, so NZ ETS participants can access NZUs that were not sold in previous auctions, or cancelling any unsold NZUs after an auction has failed to clear. However, we are not considering these options further because we do not consider they are viable. Holding two additional auctions would be administratively complex, and cancelling rollover NZUs would remove the ability of NZ ETS participants to access these NZUs.
