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Forestry and the Emissions Trading Scheme

In August the New Zealand Productivity Commission released the final report on the ‘Low-emissions economy’. The key findings of interest to the forestry sector relate to land use change and agricultural emissions.

To transition to a low-emission economy land use will need to change significantly. Modelling undertaken by the commission indicates planted forests will need to increase by between 1.3 million and 2.8 million hectares over three decades. This is reported as 44,000 to 90,000 hectares per year over the period to 2050, which is a significant undertaking. For context the average level of planting from 1990-2015 has been only 18,000 hectares per year and the 2017 provisional estimate for new planting in 2017 is only 4,000 hectares. Most conversion opportunities will come from marginally profitable beef and sheep farms.

Reducing agricultural emissions is an important part of the equation. The report states that factoring an emissions price of agriculture will “incentivise the search for, and adoption of low-emissions practises and technologies”. The commission has supported the distinction between short-lived and long-lived emissions and suggests that all long-lived gases should be included in the NZ ETS. Whereas short-lived gases (such as methane) from agriculture and waste should be considered in a separate pricing mechanism, either a parallel ETS or a quota system. The commission believes this “two baskets” approach aligns mitigation policy more closely with the underlying science of warming. The commission recommends a mix of farm-level and processor-level point of obligation for surrender in the ETS - incentives to reduce emissions will be stronger if point of obligation is at the farm level.

The Interim Climate Change Committee is due to report to the government the recommended policy for inclusion of agriculture into the ETS by April 2019. In addition to this, the outcomes of the consultation on the “Zero Carbon Act”, “Improvements to the NZ ETS” and “A Better ETS for Forestry” are also due in 2019. Policy certainty will decrease the risks of a long-term forestry investment; however, land availability is likely to remain a key limiting factor to afforestation rates at the level modelled by the Productivity Commission.

The NZU market seems to be suffering from a lack of liquidity at present, with both buyers and sellers retreating somewhat. With the $25 Fixed Option price (FPO) in mind, there seems little stimulus to drive prices any higher at present. Through the second half of September and into October, spot pricing for NZUs have hovered very closely to the $25.00 mark. Sellers with small volumes have seen some discounting from this level.

Record volatility has been seen in Europe during September, with EUA prices dropping by 30% in a week. It seems that recent record highs have triggered profit-taking and a little panic selling. Prices came back reasonably quickly but not fully to the record high levels seen earlier.

Poland seems to be feeling the effect of high prices, as it generates as much as 90% of its power from coal. The Polish energy minister has recently been calling for the European Union to intervene in the market.

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