Forestry and the Emissions Trading Scheme - February 2014

Deforestation Emissions Return

For deforestation completed in the 2013 calendar year, the deforestation emissions return is due by the 31st March 2014, with surrender of units due by the 31st May 2014. The surrender liability in 2014 can be met using ERUs, currently the cheapest unit available for least-cost surrender. It is important to note that deforestation is a change in land use OR not replanting within four years following harvesting. Harvesting and replanting as part of a regular forest cycle is not deforestation.

2014 Voluntary Emissions Return – Post-1989 forest land participants

Commitment Period 2 (CP2) of the Emissions Trading Scheme commenced on 1st January 2013. Under the Climate Change Response Act 2002, the only compulsory requirement for emissions returns is to submit a Mandatory Emissions Return (MER) at the end of each five year commitment period. Post-1989 forest land participants have an option to complete a voluntary emissions returns (VER) annually by the 30 June and if completed, participants will receive the New Zealand Units (NZUs) they are entitled to for the carbon stock change for 2013. If a VER is not filed, then all units they are entitled to will be received either following the next completed VER or after the MER in 2018.

If you are a Field Measurement Approach (FMA) participant, your participant-specific look up table will now be used for all emission returns. For those who are not FMA participants the default look up tables will be used.

The advantage of submitting a VER is that you will receive the NZUs for the preceding year earlier than if you wait for the MER in March 2018. This may be of value if it allows these units to be sold at higher prices and/or yields revenue sooner. Earlier receipt of NZUs also provides an arbitrage opportunity which involves deregistering from the ETS, selling the NZUs and purchasing ERUs to satisfy the liability. A profit can be made from the difference between the NZU and ERU prices.

In order to submit a VER, applications to register (or re-register) forest land must be approved before 30 June 2014. All forest land being re-registered in the ETS is assessed as a new application, using all available aerial imagery and resources held by MPI. As MPI continually acquires additional aerial imagery, the new eligible post-1989 forest area may differ from the original registered area. Due to the high volume of ETS registration applications lodged recently, MPI have advised that GIS processing times have increased.

Price Update

NZUs have traded in the low $3's since the New Year, currently trading at around $3.20- $3.30 per NZU.

ERU price continues to be volatile with the price being driven by the liquidity of supply of ERUs, that are ineligible 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. ERUs moved down to $0.14 per ERU for a short period prior to Christmas, but have since increased to currently trade at around $0.34 per ERU.

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

CO2 Price Trend

For further information on managing your NZ ETS deforestation obligations and minimising your costs, or completing a voluntary emissions return for 2013 please contact erin.leahy@pfolsen.com.