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Forestry and the Emissions Trading Scheme - February 2013

Since the beginning of the year NZUs have traded in the $2.30 to $2.50 range but in the last week have shown signs of weakening and are looking like they will break below $2. The market is awash with NZUs from the pre-1990 allocation, post-1989 forest owners selling up and deregistering from the ETS and emitters swapping out of NZUs for cheap UN offsets for their May 2013 surrender deadline. So where is the limited demand coming from? It is coming from emitters who are taking a forward position beyond 2014 when it is likely that the NZU will be the only eligible unit. Given the over supply of NZUs, emitters can afford to act like vultures and patiently circle above to pick off cheap NZUs from the ETS carcass.

Deforestation

We are receiving a number of enquiries from pre-1990 forest land owners wanting to take advantage of the cheap ERUs (currently about $0.20 per unit) and deforest. For a mature radiata forest this means a deforestation liability of only $150 to $200 per hectare. Not that long ago deforestation would have cost $15,000 per hectare! What many don't realise is that to surrender units for the deforestation liability in 2013, the harvesting needs to have taken place in 2012. You can of course purchase forward but be cautious as ERUs and other UN offsets may not be eligible in the ETS beyond 2014, see last edition of Wood Matters.

Forest owners are also thinking about switching their pre-1990 forest land to post-1989 forest land by taking advantage of the cheap ERUs and paying the deforestation liability after harvest. There is nothing stopping them from surrendering the units, but the act of harvesting and surrendering units alone does not mean that deforestation has taken place and the land is now eligible post-1989 forest land. Deforestation is change to another use other than forest land. Only then is it eligible as post-1989 forest land. Harvest cutover is still forest land but classified as temporarily unstocked.

Post-1989 Deregistration

We are seeing a few post-1989 participants pull up stumps and withdrawal from the ETS. This of course means surrendering the units they have claimed to date. For those that have sold their NZUs, they can buy ERUs as replacements at ridiculously low prices compared to what they sold the NZUs for and book a profit. Alternatively for those that are still holding NZUs, they can swap the NZUs for ERUs and take the profit margin.

Pre-1990 Allocation

The New Zealand Emissions Unit Register has begun transferring the second and final tranche of the forestry allocation to pre-1990 forest landowners. The transfers of NZUs, which represent approximately 62% of the total allocation, are expected to be completed by April 2013. No application needs to be made as they are issued automatically and the primary representatives to the holding account will receive an email when the transfer is completed.

If you require any advice on the ETS or want to sell or purchase credits, feel free to contact Colin Hercus at colin.hercus@pfolsen.com.