Forestry and the Emissions Trading Scheme

In February NZUs broke through $2, and got as low as $1.50 and are currently trading around $1.70. This sudden drop from $2.40 in a matter of days appears to be due to a large volume being dumped on the market.

So given the record low price of an NZU and the ridiculously low price of an ERU ($0.20), what opportunities does this present for forest owners?

  1. If you have sold post-1989 NZUs now is the time to consider repurchasing NZUs to cover your carbon liability at harvest. Many sold NZUs in the $18 to $20 range and repurchasing them at $1.70 is a very attractive option. Some are asking if they can purchase the cheaper ERUs instead? If they are required beyond 2015 then NZUs are the only risk-free option as ERUs probably won't be eligible when you require them for surrender.
  2. If you are considering deregistering your post-1989 forest from the ETS now, there are two reasons why the low carbon price is to your advantage. First, any NZUs you have sold can be replaced with cheaper ERUs and surrendered. Secondly, if you still hold NZUs, don't surrender them. Instead sell them and purchase the cheaper ERU. Selling one NZU and purchasing an ERU replacement will book a $1.50 profit per NZU.
  3. If you are a pre-1990 forest land owner that has or is going to deforest in 2013 (surrender of units in 2014), now is the time to consider purchasing the cheaper ERUs to cover your future deforestation liability. At current ERU prices the deforestation liability for a 28 year old Radiata pine stand will be less than $160/ha. Remember though that deforestation is not harvesting, it is change of land use. Normal harvesting and replanting is not considered to be deforestation.

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