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Forestry and the Emissions Trading Scheme - December

Two weeks of negotiations at the United Nations Framework Convention on Climate Change (UNFCCC) international climate conference (COP21) in Paris have concluded with a new international agreement. The agreement, which will come into effect in 2020, is the first international agreement to require all countries to cut greenhouse gas emissions in a bid to limit global temperature rises to two degrees Celsius this century. The agreement includes an additional aspirational goal of limiting temperature rises to 1.5C, following lobbying from Pacific countries most likely to be affected by climate change. It is the first international agreement reached in regard to global emissions in 18 years, since the Kyoto Protocol in 1997. Unlike Kyoto, the Paris agreement will not be a fully legally binding treaty, however all countries are expected to ratify this new agreement.

The Intended Nationally Determined Contributions (INDCs) submitted to date have been analysed in aggregate and are expected to result in an estimated temperature rise of around 2.7-3C. Therefore it has been agreed in Paris for progress towards the 2C limit to be reviewed every five years, starting formally from 2023, but with a request for countries to revisit their emission reduction targets in 2018. Governments have agreed to set up a framework for monitoring, measuring and verifying emissions reductions. This will promote transparency on who is doing what to reach the global target.

Importantly for New Zealand, the final draft also included provisions for carbon trading with detailed rules to be established at a later date. However carbon offsets can only be used for compliance once, and any unit traded by a country will not be able to be counted against their own emissions reduction targets.

The New Zealand ETS review is underway, as already discussed in Clarky’s comment. A strengthening of the New Zealand ETS is clearly required, and changes need to be implemented over a relatively short timeframe. Under the Paris agreement, the first voluntary scorecard on emissions reductions is required to be presented on the global stage in 2018, with the first formal review of contributions in 2023.

Price Update

The NZU market was trading at around $7.10-7.15 last month. The market price increased steadily over the month as information was released in regards to the New Zealand ETS review, and in anticipation of countries reaching agreement in Paris. The market was trading at around $8.60-$8.70 before the Paris agreement announcement, and sharply climbed to trade at $9.30 per NZU on Monday 14th December.  The market was trading at around $9.00-$9.15 per NZU at the time of writing.

The figure below shows the recent carbon credit prices for EUAs, CERs, NZUs and ERUs. Note that from 1st June 2015 only NZUs or New Zealand AAUs are valid units in the NZ ETS. EUAs are valid units for trading within the European Union.

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

PF Olsen - recent carbon prices