MAF Updates PF Olsen on the Emissions Trading Scheme

Last week MAF held a one-day workshop for PF Olsen staff to update us on the recent changes to the Emissions Trading Scheme (EMS) and to provide guidance on how to set up accounts in the New Zealand Emission Unit Register (NZEUR) and join the ETS. This was a highly informative session and PF Olsen thanks MAF for the effort it went to. A lot of material was covered, but highlights that may be of particular interest to readers are bulleted below:

  • If you have deforested, you are required to notify MAF by 31 January 2010, submit a return by 31 March 2010 and surrender units in April of 2011.
  • The Allocation Plan, outlining the process for applying for partial compensation credits for pre-1990 forest land, will come out sometime in 2010 (we expect early 2010).
  • Currently 149 entities have joined the ETS (with post-1989 forest land). Currently all applications are being audited (100% audit).
  • There is evidence of a lack of understanding of the ETS in applications (both forest owners themselves and by third-party/consultants applying on behalf of forest owners).
  • There is a general expectation that a measurement-based approach will be introduced in the future (as opposed to table-based approach which is the only approach available now).
  • You must open a NZEUR account prior to joining the ETS.
  • There is a $550 (inclusive of GST) set charge for applying to join the ETS - additional charges will be made if the application takes longer than a set time.
  • The onus of proof of eligibility (of post-1989) is on the applicant.
  • Records must be held for 20 years.
  • All liability lies with the applicant and penalties for offences may result in fines up to $50,000 or imprisonment.

A lot of time was spent discussing mapping (post-1989). PF Olsen is working with MAF to ensure that its application process is efficient and minimises the amount of time both parties have to spend on each application (to avoid additional costs being charged). MAF emphasised that carbon accounting areas (the unit of land over which you account for carbon stock changes, CAAs) are permanent and to make sure you get it right first time. For post-1989 forests planted prior to 2006 about 1996[1], the choice of CAA will materially affect how you earn and surrender credits. An example was given how one configuration of CAAs resulted in 150 credits earned in CP1 and another configuration of CAAs resulted in nil credits earned, also in CP1 (same forests, same total net stocked area). There are also important implications for treatment of stand boundaries, stocking gaps and the "15m rule".

Will there be a market for my carbon credits?

One of the important issues facing would-be forestry Emission Trading Scheme (EMS) participants is "Will there be a ready market for my carbon credits and what price will I get for them?"

To answer the first part of the question, PF Olsen has projected the likely supply and demand balance of carbon credits in New Zealand for commitment period one (CP1, 2008 to 2012) and two additional five year periods. Some important points to note are:

  • The partial compensation/free allocation of units to pre-1990 forest owners will potentially supply a lot of credits to the market for CP1 and the next commitment period.
  • Demand is muted in CP1 by the gradual phase-in period for the energy and transport sectors into the ETS (Agriculture will not be exposed until after 2015, if at all).
  • There is a limit to how many domestic credits (NZUs) can be converted to the international AAUs, and therefore exported in CP1. This limit is expected to be effectively 24 million units for conversion of forestry NZUs to AAUs.

Below shows three scenarios, all with the assumption that 50% of the eligible post-1989 forest owners join the ETS and make their carbon credits available as potential supply. The three scenarios presented are:

  1. Low new forest planting (5,000 hectares per year).
  2. Medium new forest planting (20,000 hectares per year).
  3. High new forest planting (40,000 hectares per year).

If 50% of post-1989 forest owners join the ETS and want to sell their carbon credits, there is likely to be more supply than demand in CP1 but a supply deficit thereafter.

On this basis, there will be a surplus of units (i.e. a surplus above the domestic demand and ability to export units) in CP1 but a deficit in subsequent years. It is unclear how big the uptake will be by post-1989 forest owners. We expect that large multi age-class forests owners will be most keen to join the ETS as they have a natural hedge for carbon price risk. Small, single/few age-class forest owners, however, may be more cautious about joining, as it is more difficult to address the carbon price risk.

The situation is more positive for new forest owners. They will earn more carbon credits than they have to account for at harvest (as opposed to post-1989 forest owners with existing forests who will mostly have to account for all the earned carbon credits at harvest), by the time their new forests are sequestering meaningful carbon, there is expected to be more demand than supply, even under the High new forest planting scenario.

PF Olsen progresses with developing carbon forestry opportunities

PF Olsen has had a busy month seeking out the best commercial angles in carbon forestry for clients, and how existing forest owners and would-be forest owners can get the most out of the ETS. Highlights include:

  • Very high response rate to our last Wood Matters from those wishing to register their interest with PF Olsen and/or seeking additional information. If you intended to respond, but didn't, please use this link to go back to the last issue of Wood Matters, and you can click on the appropriate responses available throughout the various articles.
  • Advanced discussions with third-parties to offer services associated with a carbon fund/pooling carbon. One such benefit of this initiative is expected to be the ability to sell carbon credits and lay off the carbon price risk.
  • Service packages related to establishing holding accounts in the NZEUR, joining the ETS, cost-benefit analysis of specific forest owner situations and development of specific client carbon forest strategies and projects.

We will be doing our best to keep those that have registered informed of our progress.

[1] This has been corrected since this article was published and distributed.