Forestry and the Emissions Trading Scheme - November

In October, New Zealand’s first state of the environment report in eight years was released by the Ministry for the Environment. 'Environment Aotearoa 2015' provides an overall picture of the New Zealand environment across the air, atmosphere and climate, fresh water, land, and marine environments.

In terms of the atmosphere and climate, New Zealand was responsible for about 0.1 percent of global emissions between 1990 and 2011, so internationally we do not contribute a large volume of emissions. However global net emissions of greenhouse gases rose 33 percent in this period, whilst New Zealand's emissions increased by 42 percent. Emissions from agriculture are the largest contributor to New Zealand’s emissions profile at 48 percent (mainly methane emissions from cattle and sheep), followed by emissions from energy production, at 39 percent. Currently agriculture is required to report its emissions in the ETS but is not required to surrender credits for its emissions.

Whilst the extent of agricultural land has not changed substantially since 1996, the intensity of agricultural production has increased in a number of regions. The intensification of farming has resulted in increased emissions and other detrimental environmental effects noted in Environment Aotearoa such as declining water quality, nitrogen leaching and soil compaction.

The ETS is currently New Zealand’s primary tool for reducing emissions. Unfortunately the ETS in its current format is not having the desired effect of changing emission behaviours. The government ETS review is expected to commence in 2015. The outcomes of the IPCC Paris conference are likely to be an integral part of this review. It is clear that the ETS needs to be strengthened to reverse the increase in New Zealand’s emissions. The inclusion of agriculture in the ETS is unlikely to be an outcome of this review. However if included in the ETS this would have the effect of making the largest emitting sector in New Zealand (48%) accountable for their emissions. It would put an economic price on the decision to intensify farming operations, and have the additional benefit of potentially staving off the other detrimental environmental affects featured in Environment Aotearoa attributable to agricultural intensification such as water quality and soil compaction.

Large areas of New Zealand hill country used for pastoral farming are susceptible to erosion or situated along rivers and lakes and are having negative impacts on water quality. Converting these areas to forestry would benefit the environment in various ways, while continuing to provide economic benefits to the country.

Price Update

The NZU market strengthened from trading around $6.70-6.80 last month and is currently trading at around $7.40-7.45 per NZU.

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)

Carbon Prices - November 2015