Wood Matters

Forestry and the Emissions Trading Scheme

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Staffing update

There have been a few changes in the ETS team here at PF Olsen recently, so we thought it would be timely to give an update.
 

Erin Jeffrey has left PF Olsen to pursue other opportunities in the industry. With over 10 years’ experience in ETS operations, she leaves big boots to fill, but has also helped to build robust systems and processes that we will continue to benefit from in her absence. We wish Erin the best of luck in her new role!
 

Dawoon Park has picked up the FMA measurement programme from Erin, and this will keep her busy over the coming months. Felix Brandt has joined the PF Olsen team and is quickly coming up to speed with our systems and client base. Felix brings experience in managing ETS matters from his previous role based in Blenheim.
 

I am (gradually) transitioning to a new role as Investment Manager for PF Olsen but will continue to assist with ETS operations while we recruit and train additional staff to bolster our capacity going forward.
 

If possible, please make Felix (felix.brandt@pfolsen.com) your first point of contact for general ETS queries. This will allow him to get to know our client base, and I can assist where needed.

 

ETS announcements

The government recently announced changes to decade-old industrial allocation settings, which will see many larger emitters receive less free allocation. The Government will adjust baselines using updated data and will also reassess eligibility of “emissions intensive” operations, given the risk of emissions leakage posed by recent increases to carbon pricing. These changes will be implemented in 2024 (at the earliest). More information can be found here.
 

The Climate Change Commission (CCC) also released its latest advice on updating unit limits and price control settings. This Government will use this advice to inform updates to auction quantities, CCR size and trigger pricing. The key recommendations made by the CCC are:
 

- Reducing the limit on the number of units available for auction

- Raising the trigger prices for the cost containment reserve and auction reserve price  

- Changing to a two-tier cost containment reserve from 2023 

 

The recommended two-tier CCR trigger is proposed at a whooping $171 / $214 for 2023. You can read more about how the market has reacted to this below.

 

ETS regulations exposure draft
Te Uru Rākau recently released an exposure draft of the new Climate Change (Forestry Sector) Regulations 2022. These regulations are required to operationalise many of the new ETS changes that go live on 1 January 2023, including Averaging and Temporary Adverse Events.
 

There is a lot of detail in the regulations linked above. Helpfully Te Uru Rākau also published an explanatory note on the changes, which is a little easier to read and understand. Some of the key changes and new concepts to note include:
 

 - Two new age bands have been introduced for short rotation forests. If you clear your trees before age 5, you will be assigned an average age of zero. Forests cleared between age 5 and the default age will be credited to age 5. This change is important to note if, for example, you were planning to change species early in the rotation. The “replacement species” will be considered second rotation and will therefore not be able to earn any credits. In summary, clearing trees at a young age could now reduce or even eliminate your ability to earn units under averaging.

 - If post-1989 forest land is deforested after 31 December 2020, it must remain deforested for at least 15 years before any replanting would be considered first rotation forest that could utilise averaging.

 - Cleared forest species can be ignored for the purposes of determining first-rotation status, if the trees had regenerated (i.e. were not planted) and had not reached their nominated average age prior to clearing. Participants with such trees would have to account for the residual decay of this clearing, meaning that the unit earning potential of the new trees under averaging would be reduced. This reduces complications for areas of farmland that contain scattered young wilding pines or regenerating scrub.

 - Applications for Temporary Adverse Event (TAE) coverage must be approved before any Final Emissions Return (FER, previously known as MER or Mandatory Emissions Return) is submitted. So, if you suffer a TAE near the end of a reporting period, and you submit a FER before the TAE application has been approved, your TAE application will be cancelled.

 - Sub-area rules are being simplified so that discreet areas <1ha in a CAA of a different forest type, YOE or clearance status can be ignored and instead be treated as per the surrounding forest. This means that participants won’t be required to report clearance in a CAA until that clearance reaches at least 1ha in size.

 

The draft regulations are open for consultation, with a tight deadline of 5 pm on 5 August 2022. More information, including how to make a submission can be found here.

 

ETS Auction
The second NZ ETS carbon auction for 2022 was completed on 15 June. All the 4.825 million auction units were sold, as well as the remaining 1.307 million Cost Containment Reserve (CCR). The auction cleared at $76.00, which was slightly below the secondary market price at the time.

Now that the CCR has been exhausted, there are 9.65 million units left available for the remainder of the year, with auctions scheduled for 7 September and 7 December. More information on the results of the June auction can be found here.

 

Price Update
NZUs dropped from historic highs in mid-February to as low as $70 in early March. We then saw a prolonged period of relative price stability where spot pricing was range-bound between $75 and $77 through to early this month.

Recently we have seen prices drop down to around $72-73, driven by increased selling at a historically quiet time for buyers who have just settled their liabilities for last year.

Then today, spot prices rallied as high as $82.00 off the back of the CCC’s recommendation to increase the CCR trigger price for next year’s auctions to at least $170 per unit. Current trading is around $80.75 (as at 28 July).

ETS Graph