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Forestry and the Emissions Trading Scheme - November 2014

A government review of the ETS is expected to take place in 2015. There is no indication yet that the National-led government will make changes to strengthen the ETS.

This is despite the latest report released by the UN's Intergovernmental Panel on Climate Change. Climate change critics claim that over the history of planet earth natural cycles of warming and cooling have occurred (fact) and that earth is currently experiencing a natural cycle of warming. Science has now proven to 95% certainty that increased green house gas emissions as a result of human activities are the cause of this warming, not natural cycles.

The quantum of the required change to worldwide emissions to reverse this catastrophic warming, as estimated by the UN panel, is daunting: a 40-70% reduction in green house gas emissions by 2050.

The mantra of Climate Change Minister Tim Groser is that New Zealand will continue to do 'it's fair share'. The official target is a reduction in our emissions by 50% of 1990 levels by 2050, with an interim reduction target of 5% by 2020. This interim target is now only 6 years away, and coincides with a period of forecast increased forest harvesting. This increased harvesting is due to the extensive planting of farmland in the 1990's. This will switch forestry from a carbon sink to a source of carbon emissions in terms of the ETS. It is possible that some owners of these forests will elect not to replant, thus further reducing the size of the national forest estate and reducing the size of the forest carbon reservoir (the amount of carbon contained in New Zealand's forests). It is very difficult to understand where the 5% reduction in emissions can possibly come from under current government policy, let alone how the much larger reduction can be achieved between 2020 and 2050. Policies that recognised the environmental benefits of forests and wood could stimulate new planting.

Price Update

With the 2014 emissions surrender not due for some months (May 2015), and ERUs being a valid unit for this surrender there is no impetus to buoy the NZU market. The market has maintained similar price levels to last month.

There are still very few buyers and sellers in the market. NZU prices are trading in the range of $4.30 to $4.40 per NZU. ERUs continue to trade in the range $0.16 to 0.17 per ERU.

The figure below shows the recent carbon credit prices, for both NZUs and ERUs.

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

Deforestation

ERUs can be used for surrender purposes for pre-1990 forest land deforestation completed in 2014 or the preceding four years (with surrender due by May 2015). If you are a PF Olsen client who has completed harvesting of pre-1990 forest land in the last four years and are not replanting, or currently unsure whether you are replanting, please contact Erin Leahy at erin.leahy@pfolsen.com to discuss your obligations under the ETS.