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Forestry and the Emissions Trading Scheme - June 2014

Industrial EmissionsForestry in the New Zealand ETS has had a tumultuous month.

On the 16th May the government tabled a surprise amendment to the The Climate Change Response Act: The Climate Change Response (Unit Restriction) Amendment Bill, which was part of the Budget Measures (Miscellaneous Fiscal Matters) Bill. The bill stops post-1989 forest land participants from meeting ETS deregistration liabilities by surrendering ERUs, and once adopted under urgency became effective immediately for any new de-registrations after the 16th May. Any de-registrations that had been submitted prior to midnight on Thursday 15th May can still meet liabilities using ERUs. Liabilities for harvesting of post-1989 forest land, or pre-1990 deforestation can still be met using ERUs until 31 May 2015. Deregistration from the ETS can still be completed, but the surrender liability will need to be met using NZUs.

The bill was tabled to remove the 'unintended consequences' of the ETS that have the 'potential to expose the Crown to significant fiscal risk'. In a statement released by the Ministry for Primary Industries (MPI), it defines this fiscal risk as 're-registration arbitrage', where post-1989 forest participants profit by registering and deregistering the same piece of land in the ETS multiple times, each time receiving NZUs from January 2013 while registered but surrendering cheaper international Kyoto (ERU) units when they deregister. MPI claims there has been little of this arbitrage activity to date, but that the potential impact is significant, in terms of fiscal cost and reputational risk.

The bill was tabled without consultation to the forestry sector and was contrary to Associate Minister for Climate Change Simon Bridges clarification in December 2013 that ERUs would continue to be able to be used by ETS participants until May 2015. The next government review of the ETS is not due until 2015.

This sudden regulatory change without consultation does nothing to help post-1989 forest land owner's faith in the functioning of the ETS. Of PF Olsen clients who had de-registered to date, only 41 percent have opted to re-register immediately. This percentage is in line with the percentage of re-registrations stated at 40 percent in the government Regulatory Impact Statement document. Some participants have de-registered from the scheme with no intention of re-registration. Others are choosing to wait and see how the market unfolds over the next few years. Post-1989 forest land owners have until the end of the current commitment period, December 2017, to decide whether to join or re-join. Participants with more than 100 ha of post-1989 forest land will need to decide early in 2017 to allow field measurements to be completed by the end of that year.

Brian Fallow of the New Zealand Herald discussed the new legislation and ETS in his article of the 29th May: Anti-rort law hits forest good guys.

Price Update

The adoption of the Climate Change Response (Unit Restriction) Amendment Bill had an immediate effect on the NZU market, with prices steadily climbing in the week that followed, peaking at around $5.40 at the start of June. Post-1989 arbitragers had been the primary source of NZU supply in the market over recent months and with the arbitrage opportunity essentially quashed, liquidity in the market of NZUs contracted. The market has declined again since this date and NZUs currently trade at around $4.00-4.20 per NZU.

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

For emitters the May surrender has now been completed. ERUs are valid for another year (excepting post-89 de-registrations), so NZU trading will continue on a procurement as opposed to necessity basis.

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