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Clarky's Comment - December, ETS Review

A Discussion Document and Call for Submissions on the Emissions Trading Scheme was issued on 24th November. See: ETS Review Discussion Document

The biggest surprise for me was the continued exclusion of agriculture. The stated reason is that mitigation measures are not technically available. This is wrong.

All famers can plant trees, either on land they own or land they buy or lease. Farmers that choose not to plant trees can purchase NZUs in the same way that any other emitter has to.

Trees are a relatively low cost means of balancing greenhouse gas emissions from farms. We are aware that at least one major corporate farming firm has an objective of becoming carbon neutral, primarily by planting trees.

Furthermore:

  1. Many farmers are in a position to use trees to offset emissions with relatively little impact on farm productivity, by planting the lower producing land and riparian strips while intensifying on their best topography and soils.
  2. The single biggest cost input to growing trees is land. The cost of land converted to forest for farmers is equivalent to the value of the lost annual profit under current pastoral use. This is typically low on the poorer parts of farms. It is always lower than the average per hectare value shown on the rateable value assessment, or the market value that must be ascribed by forestry investors that are not farmers.
  3. Planting trees on farms has positive environmental and diversification benefits for both the farmer and wider society.

Excluding agriculture has the effect of raising pastoral land values, making it harder for others to buy or lease land to plant trees. This seems counterproductive given the acknowledged role of trees in enabling New Zealand to meet its greenhouse gas reduction targets.

But the Review Discussion Document does contain some positives. The removal of the 2 for 1 subsidy for emitters will have the effect of doubling demand for NZUs, and raising the price. Provided we have bipartisan support for higher prices at a level that will make forestry planting competitive with pastoral land use we could see interest in tree planting.

The NZ government has the ability to increase the supply of NZUs that would have the effect of depressing prices. However with about 140 million NZUs banked in holding accounts there is already plenty of supply that can and will be released to the market if the price rises sufficiently.

Our submission is that:

  1. The government should provide business with some price certainty by saying at what price it will intervene by auctioning to increase the supply of NZUs. If this is anywhere below about $17/NZU there is unlikely to be interest in tree planting.
  2. The government should not take much notice of the inevitable bleating from emitters facing prices in excess of $17, and nor should it lower the current $25 price cap. Our economy is in much better shape to cope with prices up to the $25 level than it was immediately following the GFC. At that time NZUs were priced at about $20 and emitters faced an effective price of $10 under the 2 for 1 subsidy. Many were able to pass these costs through to customers and the NZ economy did not collapse. Most emitters have taken advantage of low cost imported ERUs over the past few years, while banking their free allocation of NZUs, so they already have an effective buffer in place.