Clarky's Comment - December 2012, Carbon Markets and Price

Carbon Markets and Price

Is the current low (and falling) price of CERs (UN-certified carbon credits) that may be used as NZU (NZ carbon credits) substitutes in the NZ Emissions Trading Scheme (ETS) a problem for NZ Inc? Some would argue that a low cost of units is consistent with keeping NZ industry competitive internationally, especially against offshore firms in developing countries that are facing no greenhouse gas emissions costs.

There are however a couple of basic reasons why it is not in New Zealand's best interest to have ETS compliance costs staying so low for extended periods:

  1. In March 2011, the Government announced the decision to gazette a long-term target of a 50 per cent reduction in net greenhouse gases from 1990 levels by 2050. The ETS was adopted as the most efficient means of preparing New Zealand business and the economy for a carbon-constrained future. If the price of emissions units is so low that it does not change behavior, or the relative cost of fossil fuels versus cleaner alternatives, then the ETS will fail in one of its primary objectives.
  2. Aggressive new forestry planting during the 1990s has been recognised as the primary reason New Zealand has been able to meet its CP1 (2008 – 2012) binding Kyoto commitment to reduce net greenhouse gas emissions to 1990 levels, despite strong growth in emissions from most sectors of our economy. But looking forward these forests will be harvested from about 2018 onwards, generating massive emissions. The lowest-cost way to manage this potential national liability is to plant more trees now that will absorb atmospheric CO2 at the same time as the harvest is taking place. Such planting is highly capital intensive. The taxpayer is not in a good position to fund these plantings, especially after the cash needed to recover from the Christchurch earthquakes. Private investment in planting will only take place if there is confidence that NZUs can be sold at around $20 or more.

To its credit the government has recently announced a proposal to ban the use of certain industrial gas CERs in the NZ ETS. This is a welcome development. But there are plenty of CERs available that would still qualify as eligible in our ETS and until the European economies improve these are likely to remain at a low price.

In addition to the ban on HFC and NO2 CERs, a cap on the proportion of imported carbon credits that an emitter may use in the NZ ETS will help ensure that the price of NZUs is supported at a level that encourages significant new planting. 2018 is not that far away.