Recent Large Sale of AAUs

What does it mean for Post-1989 Forest Owners?

A European buyer has purchased approximately 520,000 forestry generated AAUs from Ernslaw One, a large NZ forestry company. (AAUs are assigned amount units - these are the units allocated to governments as part of the Kyoto Protocol) The process involved obtaining NZUs (NZ units) under the NZ Emissions Trading Scheme for carbon sequestration in post-1989 forests during 2008. The NZUs were then converted to AAUs and sold. Whilst the price has not been disclosed, it is understood to be around 10 Euros per unit.

This is by far the most substantial trade of forestry units so far, but the lack of disclosure makes interpretation difficult. On the positive side it does indicate an international market for NZ forestry units but the depth and liquidity of the market is still unclear.

Based on this announcement we have received the following question from a number of clients:

Have I missed out on an opportunity?

Firstly, 2008 NZUs can still be claimed. The next opportunity is during the period 1 January to 31 March 2010. You will have until 31 March 2013 to claim 2008 NZUs.

The sale was possible for Ernslaw One as they are a large forest owner with multiple age-classes, allowing them to mitigate the carbon price risk associated with harvesting (one, or few, age-class forest owners are highly exposed to a high carbon price at harvest time when they have to buy back the carbon credits). They also offered a large parcel which is much more sought after for an international sale. Finally, they invested heavily in development work (including mapping and carbon assessment) with an uncertain outcome. Few other forest owners would have wanted to take on this level of risk.

The above situation does not match that of most NZ forest owners.

Whilst it is unlikely this sale would suit, or could have been emulated, by most NZ forest owners, such a sale also potentially forgoes other opportunities. With the ETS under review, there could be significant changes announced later this year. Some attractive possible new options may include:

  • The government may bring in a scheme whereby a forest owner can claim a lesser amount of NZUs but doesn't have a carbon liability if they replant. This could suit single/few age class forests very well.
  • New schemes (such as carbon pools) and financial instruments may become available that allow forest owners to hedge carbon price risk.
  • Inclusion of emitters into the ETS should encourage the development of a domestic market for NZUs. Currently the domestic NZU market is virtually non-existent as emitters await outcomes from the ETS review.

Concern has been expressed about the cap on conversion of forestry NZUs to AAUs. Under the Kyoto Protocol New Zealand must retain a minimum of 90% of its allocated AAUs in its registry in CP1 (2008 to 2012) - called the Commitment Period Reserve. This cap will allow approximately 39 million NZUs to be converted to AAUs (less the 520,000 already converted by Ernslaw One and some minor transactions). This is more than all of 2008 and 2009 carbon credits for all the post-1989 forests across all of New Zealand! So you don't have to feel as though you are going to miss out on this count; depending on how many opt into the ETS, the cap may never be reached at all in CP1.

It is possible, however, that the government could otherwise put restrictions on how many carbon credits go offshore to try to increase domestic supply for emitters. This would, however, be foolish policy as it would effectively result in the forest owners subsidising the emitters. If there is to be any subsidy, it should be from the tax payers generally, rather than one disadvantaged sector (see also Clarky's Comment).