Clarky's Comment - October 2011: Changes to the Emissions Trading Scheme

The Government announcement on Friday 30th September of a proposal to ban certain industrial gas Certified Emission Reduction (CER) units from the NZ ETS is positive in a number of respects (see Consultation Document).

  1. CERs derived from HFC-23 and N2O reductions have low environmental integrity. Their inclusion in emission trading schemes does nothing to reduce atmospheric greenhouse gas concentrations. They are to be banned in the European Union Emissions Trading Scheme (EU ETS) from 2013 and the impending Australian scheme.
  2. The recent ETS Review recommended urgent action by the Government to ban HFC CERs (see ETS Review 2011 - Review Report). The proposal announced on 30th September picks up on this recommendation and extends it to include N2O units. Our view is that the ban should include ANY CER deemed not eligible in the EU ETS.
  3. A ban on units that are non-compliant in the EU ETS will prevent New Zealand from becoming a dumping ground for large volumes of these units that have no other home and will be cheap for emitters to purchase for compliance purposes. Good for them, but not so good for the forest owners who may have invested considerable capital in establishing a forest specifically because of the improved projected financial returns available from selling carbon credits.

We understand that while these low cost, low integrity units comprise a significant portion of the international supply of CERs, they are not the only reason that the international price of carbon units has fallen. Depressed economic activity and cracks in the financial foundations of the European Union have also been a factor.

Australia is likely to pass its Clean Energy Future Bill in November that sets a floor price of A$23 from 1st July 2012. In contrast NZ emitters have recently been able to meet their surplus emissions with imported CERs at 50% of around $14 or NZ$7/unit. The question needs to be asked at what price does our NZ ETS become ineffective at its primary objective of changing behaviour to move New Zealand towards its target of a 50 per cent reduction in New Zealand greenhouse gas emissions from 1990 levels by 2050? Perhaps we also need either a floor price or maximum percentage of imported units that can be used to satisfy surplus emissions, to stimulate domestic responses.

Forestry in the ETS Review

The ETS Review Panel gave the forest growing sector, led by New Zealand Forest Owners Association Chief Executive David Rhodes, a very fair hearing and has largely endorsed our key proposals for further consideration by Government after the election. In addition to the HFC / N2O CER ban, the most important issues for forest owners picked up by the Review Panel are:

  • Offsetting should be reconsidered i.e. "relocation" of pre-1990 forests without penalty.
  • Introduce a "claw-back" provision of the second tranche of pre-1990 compensation units in respect of pre-1990 forest land "relocated" under the offsetting provisions.
  • Consider an extension to application dates for exemptions and allocations that apply for pre-1990 forests.
  • Agriculture should remain in the ETS and the timetable should not be changed.
  • Include recognition of harvested wood products in the NZ ETS if this is permitted internationally.
  • Make provision for "averaging" i.e. ability to earn up to 50% of the total accumulated carbon in a forest block, without harvest liabilities arising, provided that the forest is replanted after harvest.
  • The panel rejected the notion that the government should provide cover for catastrophic loss of forest crop through fire, pest or other uncontrollable event noting that private insurance is available for some, but not all, of such risk.
  • Support for a self-insurance pool of units for post-1989 forests, along the lines of that proposed in Australia (5 per cent retention). Such a scheme would have no recourse to the Government and should not result in any further liabilities to the Government.
  • Consider increasing the 100 ha minimum threshold for compulsory field measurement, and make it optional for those under the threshold to undertake actual measurement or use look-up tables.

The proposed ban on certain industrial gas CERs is an excellent and welcome first step. Combined with action on the other matters recommended by the Review Panel we should see a boost in the confidence of land owners and investors to plant forests for a mix of timber, soil and water protection and carbon benefits.