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Forestry and the Emissions Trading Scheme - December 2013

Government Confirmation on Timing of ERU Validity

On Friday 6st December the government released its decision regarding when it will restrict the use of some types of emission units within New Zealand's Emissions Trading Scheme. It has long been known that ERUs would become invalid for use some time in 2015, as New Zealand has not signed up to the next commitment period of the Kyoto Protocol. However the government decision on the timing of this action brings a level of certainty to activities captured under the NZ ETS, such as deforestation.

The government decided that Kyoto emissions units (ERUs, CERs and RMUs) will be invalid for surrender obligations after 31st May 2015. After this date any surrender requirements will need to be met using NZUs.

If you are interested in reading the full media release, follow this link: Decisions on Kyoto Protocol emission units

Deforestation

The government announcement means that if deforestation is completed in the 2014 calendar year then the surrender liability can be met using ERUs. The surrender of these ERUs would be due by 31st May 2015. Any deforestation that takes place after 31st December 2014 will require NZUs for surrender purposes.

At current prices, using ERUs for surrender of a deforestation liability equates to a per hectare cost of $90 to $180 per hectare depending on forest location and the age of the trees harvested. Using today's NZU prices this deforestation liability would equate to a per hectare cost of $1,500 to $3,000 if using NZUs for surrender. Using ERUs while they are still available for use is the least cost option for meeting the deforestation surrender liability.

Therefore if you have an intention to deforest it is important you get harvesting underway as soon as possible to make sure this harvesting has been completed by the 31st December 2014. Furthermore, as at that date, the change of land use must have commenced. This means that some activity must have taken place on this land to prepare this land for its alternative use. Harvest cutover land is still forest land but classified as temporarily unstocked.

Please note that any deforestation that has taken place up to 31st December 2013 needs to have an emissions return completed and provided to MPI by the 31st March 2014.

If you want to change the use of some of your forest land and minimise your liabilities under the NZ ETS, then contact PF Olsen to prepare a proposal for managing your obligations and minimising your costs. For any further information and a proposal to manage your NZ ETS deforestation obligations please contact erin.leahy@pfolsen.com.

Price Update

NZUs have traded in the range $3.15 -$4.15 per NZU in the last month, currently trading at around $3.30- $3.50 per NZU.

The prices of ERUs have steadily moved down to $0.14 per ERU and are currently trading at around $0.18- $0.19 per ERU.

This decrease in ERU price from the highs we saw in August is being driven by new certainty around eligibility of some ERUs in the European ETS. This eligibility issue does not concern the NZ ETS, as our scheme does not differentiate between ineligible and eligible units, however we can take advantage of this issue in the European market by purchasing the ineligible units at a lower price.


Figure 1: Recent Carbon Prices - NZ$/t CO2e – Real (CPI adjusted)