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Forestry and the Emissions Trading Scheme - July 2014

During May and June this year we have seen a flurry of trading activity in the New Zealand ETS on the back of NZU price rises following the tabling of the The Climate Change Response (Unit Restriction) Amendment Bill (as reported in last months edition of Wood Matters). However the market has since settled with very little trading occurring.

With nothing of note to report on the New Zealand ETS, here is an update of what is happening globally on the carbon front in the 'big three': China, USA and Europe, and our nearest neighbour Australia.

China, USA and Europe are the biggest emitters of greenhouse gases according to the Netherlands Environmental Agency Report of 2012, accounting for 29%, 16% and 11% of global emissions, or 56% collectively.

United States

President Obama recently announced targets to cut emissions from gas and coal fired power plants by 30% from 2005 levels. As emissions from these power plants have already fallen since 2005, the targeted reductions equate to a further 17% from current levels. The Environmental Protection Agency will set emissions standards for each state and the state will choose how to reduce emissions to meet target levels. Obama is facing expected pushback from industry groups who claim these targets are a threat to jobs as lower energy costs are an American advantage to industry over foreign competitors. Obama's plan falls short of setting emissions targets for the entire US economy.

Europe

The European Union ETS (EU-ETS) was launched in 2005. European Unit Allowances (EUAs – each equivalent to one tonne of CO2 emissions) currently trade at the equivalent of around $NZ14 per EUA.

Eastern Europe (outside the EU) has been New Zealand's source of the cheaper Emissions Reduction Units (ERUs). The ERU has been the preferred unit for surrender purposes in the New Zealand ETS over the past 18 months and New Zealand has been the dominant buyer of ERUs for surrender purposes. Countries that have not signed up to a second commitment period under the Kyoto Protocol cannot use ERUs from the 31st May 2015 onwards. The EU-ETS has also banned some ERUs from being used before this date. These limitations resulted in an oversupply of ERUs and a subsequent reduction in the price of ERUs.

China

China is now operating 7 regional emissions trading schemes with a planned nationwide ETS operational by 2018. This is an extension on the previous target operation year of 2015. China has signed a three year cooperation deal with the EU, with the EU contributing EU$5million to the China ETS pilot schemes, as well as providing expertise and experience.

Australia

Australian Prime Minister Tony Abbott of the Liberal party electioneered on the repeal of Australia's carbon tax but has since been under immense political pressure to take steps to mitigate Australia's contribution to climate change.

Clive Palmer of the Palmer United Party effectively controls the Australian senate. The Abbott government needs the Palmer United party support to pass a number of measures including the repeal of the carbon tax (due this week). The Palmer United Party recently announced it would support the repeal of the carbon tax if the government bought in an ETS with a zero price, which would increase once Australia's main trading partners had implemented appropriate climate mitigation policies. The planned ETS takes the existing ETS developed (but not implemented) under the previous Labour-led government and adds a provision that the ETS won't apply until the "US, Japan, South Korea, the EU and China" have taken sufficient action to trigger a move into an ETS in Australia.

The response from the Liberal party was that an ETS was not part of the government's policy. The ETS is likely to fail in the House of Representatives even if it passes the Senate. We watch this space for developments in the carbon politics of our nearest neighbour…

Price Update

After an exciting but short duration rally in prices in May/ June, prices have receded back to form a new informal floor price at around the $4.00 per NZU mark. NZUs are currently trading in the range $3.95-$4.00. June is historically a quiet month following the 31 May surrender deadline. Emitters with future requirements for NZUs are sitting back to watch the market and trading has been light. ERUs are valid for surrender purposes for another year (excepting surrender obligations incurred by post-1989 de-registrations). NZU trading will continue on a "procurement" as opposed to "necessity" basis.

ERUs continue to trade in the range $0.17 -0.18 per ERU. For forestry ERUs can now only be used for surrender purposes in relation to pre-1990 forest land deforestation or post-1989 forest land declines in carbon stocks following harvesting.

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