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Carbon Update

Carbon Price

NZUs continue their dramatic fall trading mid $15 Monday last week and slipping to below $14 on Friday. NZUs were trading around $16.50 this time last month. At these prices it is not surprising to see that forestry NZUs are not appearing on the market in any significant volume, instead replaced by the imported CER which are the reason for the price fall. CERs can be used by NZ emitters for compliance and have taken a dive in price due to increased supply and the economic situation in the European Union.

Not surprisingly, emitters will be making the most of depressed prices and buying up CERs in bulk. Point Carbon reported last week that one broker had estimated that several million CERs came into New Zealand in one week. One CER is equivalent to one NZU for compliance and the demand in 2010 for surrender on the 31 May 2011 was 8.3 million units, albeit for the last six months of 2010. So we could very well see future demand out to 31 May 2013 being met in the short term given current pricing levels. But, if CER prices were to lift above the price expectation of the forestry NZU owner in significant enough quantities, emitters will be presented with an arbitrage opportunity – selling their CERs at a profit into the European market and replacing them with NZUs. It was this scenario that saw NZUs reach $21 earlier this year after the Fukushima nuclear power crisis and Germany's announcement that they were not going to extend the life of their aging nuclear power plants.

It is worth pointing out that the New Zealand ETS currently has no limits on the importation of CERs, unlike the European ETS which limits the use of CERs to around 10%. The recently announced Australian Carbon Pricing Scheme will only allow 50% of obligations from mid 2015 onwards to be filled with overseas generated offsets such as CERs.

Australian Carbon Price Scheme

The Australian Government announced the details of its carbon pricing scheme on the 10 July. The question many were asking in NZ, especially given the current state of the carbon market, was what, if any, impact would it have on the NZ ETS? The short answer is very little in the short term. It is proposed that in the fixed price period from July 2012 to mid 2015, Australia will not allow the linking with any other international schemes. There is the potential for the Australian and NZ schemes to be linked beyond mid 2015 when the price in Australia will be floated, but there will be differences to be overcome in how the two schemes are run.

ETS Review

The much awaited NZ ETS review has had its release delayed until the end of August as Nick Smith has asked the review committee to consider the implications from the recently announced Australian Carbon Price Scheme on the NZ ETS. Key issues the carbon market is looking to be addressed are the future of;

  • The $25 cap.
  • The two for one obligation for emitters.
  • Agriculture in the ETS.
  • CERs in the ETS post 2013, especially industrial gas CERs.

Deadlines Loom

30 September 2011 is the deadline to apply for the one off opportunity for a less than 50 hectare exemption on pre-1990 forest land. This exemption will enable the deforestation (change of land use) of pre-1990 forest land without incurring any deforestation liability.

30 November 2011 is the deadline to apply for the one off allocation of NZUs for pre-1990 forest land. This allocation of NZUs is partial compensation for the potential impact the ETS deforestation rules have had on pre-1990 forest land value. Pre-1990 forest land owners are not incurring any liability by applying for the allocation and are tax free when sold.