Forestry and the Emissions Trading Scheme - August 2013

Price Update

Prices for NZUs have been on the rise. Price at the time of last WoodMatters mid-July was around the $2.00 mark and is currently at around $2.50 per NZU.

The cheaper imported ERUs, which can be used for surrender purposes until 2015, have also increased from $0.28 up to $0.70 and are currently trading at around $0.58 per ERU. A limited supply of ERUs in the market remains the cause of the ERU price increase whilst demand remains high from both emitters and forestry owners exiting the ETS.

Whilst an ERU price of $0.70 may seem high compared to the ERU price in previous months, the price relative to the NZU means that if required to surrender credits, using ERUs for this purpose is still a no-brainer. Also for those post-1989 forest owners considering the arbitrage opportunity, the spread between NZU and ERU price is currently more favourable than when NZU price was $1.80 and ERU price was $0.15.

Pre-1990 Forest Owners

We have had a number of enquiries from pre-1990 forest owners who have heard of the arbitrage opportunity and are wondering whether they can use these ERUs to surrender their liability prior to having any harvesting plans in place.

Unfortunately the arbitrage opportunity only applies to post-1989 forest owners who can bring forward their liability by de-registering from the ETS. A pre-1990 forest owner only generates a liability by deforesting, which is a change of land use or not replanting within four years of harvesting. Remember harvesting in the normal cycle of forestry operations followed by replanting or natural regeneration is not deforestation. If a pre-1990 forest owner deforests now, then they can use ERUs to surrender this liability. ERUs can currently be used for surrender but will not be a valid unit in the ETS from around 2015, therefore we do not recommend buying ERUs in advance of deforesting.

If pre-1990 forest owners have plans to deforest in the future (beyond 2015), buying up NZUs at the current relatively low prices and holding them in their owner's registry account ready for surrender in the future is also an option.

ETS Update: The Last Year in Review

The annual report for the period 1 July 2012 to 30 June 2013, under section 89 and section 178A of the Climate Change Response Act 2002 has recently been released by the Environmental Protection Authority (EPA).

Reported emissions over all sectors are up from 31.8 million units last year to 108.8 million over this reporting period. This was the first year that agriculture had to report emissions (but were not required to surrender). Increases in emissions from coal and gas were also reported.

On the surrender side, surrender has more than doubled from 16.3 million units to 34.4 million units. Surrender associated with deforestation of pre-1990 forests was 8.2 millions tonnes, whilst surrender from post-1989 forests was 9.2 million tonnes. Therefore units surrendered from the forestry sector constituted 51% of the total amount surrendered last year.

It is highly likely that the majority of this post-1989 surrender requirement is due to post-1989 forest owners taking advantage of the cheap ERU situation and de-registering from the ETS, rather than surrender requirements generated by harvesting as the age of the oldest post-1989 forests is currently no more than 23 years. A total of 187 post-1989 participants exited the ETS in this reporting period. Some are re-registering, or considering re-registration before the end of 2017, to resume claiming credits from 2013 onwards. Many may choose to remain de-registered.

When a surrender notice is generated, then under section 22C of the Climate Change Response Act a participant is entitled to meet this surrender liability by paying $25 per unit. It is no great surprise that given the recent pricing history of both NZUs and ERUs, that a grand total of zero emitters chose to use this mechanism for their surrender requirements in the 2012/13 year!

While the ETS and price of carbon stimulated new forest planting ("carbon forestry") in the last few years, this year new planting has all but dried up. Nevertheless, the ETS has the potential to encourage new planting in the future if NZU prices lift. This could well happen when ERUs get removed from the picture and the government removes the 2 for 1 deal for emitters. This will increase the demand for NZUs. Linking the New Zealand ETS with an Australian ETS and possibly other countries would widen the market for NZUs and could provide renewed confidence to carbon forestry enterprises in New Zealand.

If you would like any advice relating to the status of your forest in relation to the ETS, then please contact erin.leahy@pfolsen.com.