Forestry and the Emissions Trading Scheme

A review of the New Zealand Emissions Trading Scheme commenced at the end of 2015. The priority issues of the ETS review are to consider whether transitional measures should be removed or phased out. Transitional measures include the 2 for 1 subsidy and the $25 fixed price option, which effectively caps the cost of emissions at $12.50 per tonne. The transitional 2 for 1 has not affected all sectors equally, with the forestry sector required to surrender 1 for 1 for any emissions. Not to mention agriculture which continues to be excluded from the ETS altogether, effectively a subsidy.

A recent report by the New Zealand Institute of Economic Research assesses the economic impacts of removing these transitional measures. The modelled impact of removing the 2 for 1 subsidy, at a carbon price of $25/tonne, is a reduction of only 0.1% of GDP. Even at a carbon price of $50/tonne the impact to the NZ economy is negligible at a reduction of only 0.2% of GDP!

The removal of the transitional measures will have the effect of increasing the demand for NZUs and therefore raising the price. As part of the review Professor Bruce Manley has modelled the predicted impact of an increased carbon price on afforestation. He finds limited afforestation at a carbon price below $15, increasing to 50,000 hectares per years at the as yet fairy tale carbon price of $50/tonne. Afforestation is just one positive outcome of a higher price on carbon. The Ministry for the Environments recent ETS evaluation document states that due to the low carbon price over most of CP1 the ETS had not significantly influenced domestic emissions or business. A higher price on carbon will ensure businesses consider their emissions due to the costs imposed on their business, which will be the driver to the uptake of emissions reduction technologies

The removal of the transitional measures is the first step in strengthening an ETS that has been largely ineffective to date, with considerable more work to be done.

Price Update

The NZU market had traded between around $9.25 and $9.60 over the past month, currently trading at around $9.25 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)