Clarky's Comment - May 2012, ETS Update Proposals

ETS Update Proposals

It is PF Olsen's view that the proposals put forward by the government in response to last year's Caygill Review will do nothing to encourage investment in the forestry sector. Investment in new planting is critical to managing New Zealand's green-house gas emissions growth expected over the next 20 years. All major political parties have repeatedly said our economy needs to adopt a low carbon future and that forestry is a vital part of that future, as well as a means of getting there.

Particular concerns that PF Olsen has submitted to the Ministry for Environment on are:

Pre-1990 Forest Compensation

Compensation offered in respect of placing an effective permanent restriction on land use for pre-1990 forest owners was only ever partial compensation. To now limit that compensation on the basis such limitation was signaled as a possibility at an earlier date does not make it right. One would expect that in a modern democracy that the removal of a property right for a common national good would result in fair compensation for the affected party.

The government is to be congratulated for achieving offsetting during the Durban negotiations. That is the best outcome for New Zealand and is environmentally neutral. However there are considerable costs to pre-1990 forest owners associated with offsetting including:

  1. Immediate write-down of the value of the offset land as it transfers from post-1989 to pre-1990 land.
  2. Costs associated with re-establishment of roading and forest landing infrastructure on the offset land.
  3. Transaction costs for those having to purchase or lease offset land.

Given that the initial compensation package was only "partial" it is unreasonable to argue that a cost-mitigating change (even if less than the loss if offsetting had not been allowed) should result in a lower level of compensation than originally set out.

Auctioning and Restriction on International Units

In essence, both of these measures appear targeted at maintaining the price of carbon within a price band.

PF Olsen supports measures that will move the price paid for NZUs to a level that:

  1. Frees up units for sale to NZ emitters, by restricting the import of international units; and
  2. Will encourage new afforestation that is so badly needed to offset emissions that will arise when the mid-1990 forest plantings mature and are harvested from 2018.

Last year a price just below $20/NZU stimulated interest in new planting. With the price currently $6-7/NZU such interest has evaporated as forecast returns for the project only stack up with the assumption that the NZU price moves back up to the $20 soon enough to significantly improve project revenues. We therefore conclude that a price target of $20/NZU is the minimum needed to achieve a new planting target in the order of 20,000 ha/annum.

Given that auctioning and restrictions on international units are in fact tools that will enable the government to manage carbon price, it seems reasonable that the government would also declare its preferred price range each year or over a 3-year average. Such knowledge would be helpful to potential forest investors planning forest establishment investments that have a 30+ year life, and would also provide some certainty to emitters planning whether or not to invest in greenhouse gas mitigation measures.

Agriculture Transition Measures

It is PF Olsen's view that the proposal to review the timing for entry of the agriculture sector is unnecessary and simply serves to reinforce the widely held view amongst farmers that they will never be held accountable for on-farm emissions. As long as this view prevails, efforts to mitigate around 50% of NZ greenhouse gas emissions will be subdued.

The delay is unnecessary because the rationale for it, being the widely promulgated position by farming sector leaders and lobbyists that there is no means to reduce or mitigate farm emission is wrong. While nitrogen inhibitors will not be a viable measure in all situations, tree planting is a mitigation tool available to all farmers. It is low-tech and highly effective. Whilst not a sustainable long-term solution, it does "buy time", about 30 years, giving time for other mitigation solutions to be developed.

The Carbon Farming Group recently presented figures in its ETS Review Consultation submission showing that at a price of $20/NZU, the full impact of the ETS (which would not come into effect until 2050) would be to add $0.20/kg and $0.15/kg to the cost of lamb and beef production respectively. This represents approximately 3.0% and 3.7% of lamb and beef 2011 prices (respectively). The impact on dairy is substantially less. With an NZU price of $6-7, the cost of the obligation is substantially less (see www.carbonfarming.org.nz/wp-content/uploads ). A well-targeted tree planting programme on many properties has the potential to significantly reduce the cost of any ETS obligation (and hedge against NZU price risk), with minimal impact on farm carrying capacity.

Any delay in the entry of the agriculture sector, and in particular the provision for another review sends a message that politicians have no appetite to include agriculture in the ETS. This message simply flows directly through to increased land values. High land values are a major impediment to new afforestation. Policy makers need to be cognisant of the distortionary impacts on land use created by the differential treatment of the forestry sector and the agricultural sector.

The question that now needs to be asked is whether government has abandoned one of the original fundamental design features of the ETS so that it will have least cost to the economy, being "All Sectors, All Gasses"?