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Emissions Trading Scheme - August 2012

NZUs continue their downward trend trading in the $4.70 to $5.70 range, currently at around $4.70. The much talked about temporary set-aside of carbon to curb oversupply in Europe is facing internal opposition and this caused the carbon price to collapse due to the uncertainty it created in the market.

With the unrestricted importation of overseas units by NZ emitters, it is little surprise that NZU price has collapsed when you look at the NZ ETS 2011 facts and figures recently published by the Ministry for the Environment. The graph below shows the types of units surrendered by emitters for 2011 emissions with 71% coming from offshore, NZ has effectively become a dumping ground for unwanted offshore units. In the previous year units from NZ made up 98% of the surrender, this year it was only 29% with emitters favouring the cheaper overseas units.

Types of units surrender in the NZ ETS for 2011 emissions

Where do all these units originate?

Forestry NZUs – NZUs given to forest owners under the ETS.

Other NZUs – NZUs allocated to emissions intensive and trade exposed industries for their loss of competitiveness on international markets as a result of the NZ ETS i.e. manufacturing.

NZ AAUs – Forestry NZUs that have been converted to NZ AAUs or have been granted to those who have Projects to Reduce Emissions (PRE) of Permanent Forest Sink Initiative (PFSI).

CERs – Certified Emission Reductions that are generated by Clean Development Mechanism (CDM) projects in developing countries such a India and China.

ERUs – Emission Reduction Units that are generated by Joint Implementation projects offshore. This is where a developed country funds an emission reduction project in another developed country.

RMUs – Removal Units are Kyoto units generated through storing carbon in trees from countries such as Hungary or Russia.

One can't escape the irony that nearly 20% of the units surrendered came from forestry projects overseas, whilst only 13% came from NZ forestry. So far the government has achieved the following from the ETS:

  • net outflow of foreign exchange to purchase units off-shore (what happened to "buy NZ-made"?)
  • support for off-shore forestry projects (of dubious integrity) in lieu of NZ forestry
  • removal of incentive for new forest planting
  • removal of the disincentive to deforest
  • removal of incentive to develop low-carbon energy sources
  • removal of behavioural change from emitters

Doesn't seem to match the original objectives very well.

It would be an interesting academic exercise to do a life-cycle analysis of the ETS development process. Over the last five years or more, there has been an enormous amount of time and energy expended by the government and industry with little apparent impact on reducing NZ's carbon footprint. All that has really been achieved is increased costs of compliance and probably wasted effort and investment by early adopters and entrepreneurs.

We also question some of rhetoric being promoted about the ETS by the government:

  1. That it is trying to protect NZ from unnecessary costs in a period of economic hard times. Not so. NZ industry and consumers are paying prices for electricity and liquid fuel based on $25 carbon – remember the price rises in July 2010? Where is the reduction in prices as a consequence of these businesses meeting their emission commitments with off-shore units at a fraction of the budgeted cost? Perhaps this is part of a plan to improve the profitability of electricity generators prior to selling 49% off to the public?
  2. That NZ emitters are paying the "international price" for carbon. Not so. European emitters operating in the biggest compliance market in the world have to satisfy most of their emissions with EUAs – the main unit of compliance in the European Union ETS. CERs trade for about half the price of EUAs. RMUs trade for a lower price than CERs. Therefore, NZ emitters are enjoying a carbon price significantly lower than what most other emitters operating under an ETS have to pay.