Clarky's Comment - July 2012, ETS Review Announcements

ETS Review Announcements

Significant announcements over the last few weeks will have material impacts on the role of forestry in our Emissions Trading Scheme. There was good news and bad for the forestry sector. Emitters and farmers were smiling from ear to ear.

Full allocation of the 2nd tranche of the pre-1990 landowner compensation NZUs was most welcome. This restores the confidence of a large set of the forest owning community that has suffered significant balance sheet losses on land value arising from the removal of the former property right to change land use subject only to RMA provisions.

The decision not to limit imports of foreign carbon credits for use in the NZ ETS was justified on the basis of maintaining the linkage to international prices – a logic difficult to reconcile with placing a cap on the upper price limit! Australia and the EU recognise the importance of restricting supply of international carbon units and have struck a balance between what mitigation they will allow to be done offshore and what they expect to be done on-shore.

For as long as the cost of compliance remains low due to a slowing of the global economy and oversupply of units in Europe we can expect little incentive for New Zealand businesses and consumers to change behaviour that will be needed if New Zealand is to have hope of meeting its stated goal of reducing our net greenhouse gas emissions by 50% from 1990 levels by 2050. One has to question whether that goal is still part of our climate change thinking?

The other core principle that appears to have been abandoned is that the cost of the ETS will be minimized for NZ Inc. under the "All Sectors, All Gases" design element. The further delay in entry of agriculture was justified on the grounds that other nations have not included agriculture and that agriculture has no means of mitigating emissions.

It has always been known that with agriculture accounting for around 50% of New Zealand's greenhouse gas emissions and a much smaller portion within our trading partners that we would need to include agriculture even though others may not. Nor have I yet had any credible response from anyone arguing that planting trees is not an effective and relatively low-cost means of mitigation for farmers.

We will have a reasonable new land planting figure for 2012, but that was all arranged when carbon was close to $20. With carbon now at $6 - $7 and these latest ETS policy revisions, interest in new planting is now dead and we are expecting very little new planting to take place in 2013.

Yet it is widely acknowledged within Government and by academic and economic commentators that forests planted in the mid-1990s are the main reason we will meet our 2008 – 2012 Kyoto net emissions commitment, and that planting more forests now is important to buy time to allow the New Zealand economy to adjust to less reliance on fossil fuel, and research solutions to agricultural emissions.

The Afforestation Grant Scheme was certainly well subscribed and effective at getting more trees established. Perhaps it is time to resurrect that? In addition some changes to the tax treatment of sales of immature forests could help improve the liquidity of forests, making investment more attractive. There may be other policy instruments that could help encourage investment in new planting. I think the time is right to start that discussion with the Ministry for Primary Industries and its Minister if we are serious about reducing New Zealand's net greenhouse gas emissions.