Forestry and the Emissions Trading Scheme

The 2015 ETS review was concluded in mid 2017 with clear calls to strengthen the scheme and improve its stability and predictability. Further consultation is now underway on an improved framework for the ETS and a better ETS for forestry.

A number of stakeholder meetings on the proposed ETS changes have been hosted recently by the Ministry for the Environment and Te Uru Rakau. The proposed changes to the ETS being discussed in these sessions have been split into two sets of proposals:

  1. Improvements to the New Zealand ETS (MfE)

  2. A Better ETS for Forestry (Te Uru Rakau)

Improvements to the New Zealand ETS

The changes proposed by MfE are primarily aimed at ensuring the ETS is fit-for-purpose, and appropriately aligned with the government’s broader climate change policy and objectives, and New Zealand’s commitment to the Paris Agreement on climate change.

The proposed changes include:

  • A proposal to introduce an annual process for setting and announcing ETS unit supply volumes over a five-year rolling period.

  • Proposals related to setting up an auctioning system to assist in managing unit supply.

  • A proposal to replace the current $25 fixed price option (FPO) with a different price ceiling called a cost containment reserve (CCR). The CCR would form part of the auctioning process and would allow more units to be made available (the “reserve”) if the price ceiling was reached.

  • The FPO option will remain in place until at least 2020. The government is aware that there may be a requirement to change the FPO from $25 to another price in the interim, to keep prices in line with international markets and maintain some predictability during the transition phase.

  • Proposals around how the government might limit the use of international units in the ETS, if it were reopened to international carbon markets. The aim is that any international linking would maintain integrity and stability of the ETS.

  • Proposals on how to phase-down industrial allocations to Emissions Intensive, Trade Exposed (EITE) emitters.

  • Other proposals look at improving market governance and information availability, and refining compliance and penalty structures.

  • The full consultation document can be found here.

A Better ETS for Forestry

A suite of changes specific to forestry have been proposed to simplify the way the ETS works for forestry participants, increase afforestation and enable more flexibility in the rules to support the right trees being planted in the right place, for the right purpose.

Significant proposals include:

  • A proposed change of accounting approach for production forests, called “averaging” accounting. Under this approach, participants would earn credits for carbon growth up to the long-term average storage of their forest. They would not earn credit for carbon growth above the average, and would not be required to surrender for emissions related to harvest. The benefits of such a proposal are:

    • Reduced complexity and simplified accounting due to no need to calculate harvest emissions.

    • Potentially more units available to sell without liability.

    • Aligns better with the international accounting approach New Zealand will adopt under Paris.

Te Uru Rakau is seeking feedback on several considerations as to how averaging may be implemented, for example:

    • Which forests might be able (or required) to use the averaging approach.

    • How a transition to averaging might work.

    • How the average would be calculated, and how to account for different and changing rotation lengths.

    • Ongoing reporting requirements under the averaging approach.

  • A proposal to consider how New Zealand should recognise storage of carbon in harvested wood products. New Zealand’s accounting approach under Paris (from 2021) will recognise the carbon stored in wood products, and so an opportunity is available to align our domestic scheme to recognise the same. The government seeks feedback on whether ETS participants should receive additional credits for HWP, or alternatively whether an “industry good” fund could be established to support the forestry sector to develop longer-lived wood products.

  • Proposals to create a new “Permanent Forests” category in the ETS. The aim of this category would be to replace the Permanent Forest Sink Initiative (PFSI) which currently sits outside the ETS. Te Uru Rakau suggest that having Permanent Forests in the ETS would simplify administration and encourage more permanent forestry by enabling ETS participants to transfer to the permanent forest category with relative ease. Feedback is sought on:

    • How permanent and rotational activities interact in the ETS.

    • How to define “permanence” and what restrictions should apply to permanent forests.

    • What process and conditions should be applied for participants wanting to exit the permanent category early or move to/from the permanent category.

  • A number of proposals have been presented for operational improvements to the ETS. Some suggested improvements include:

    • Providing more certainty on land classification by developing definitive eligibility maps.

    • Improved Pre-1990 offsetting rules to provide more flexibility for applications.

    • Improved access to Tree Weed Exemptions.

    • Deforestation offsetting for Post-1989 land (beneficial if averaging were to be adopted).

    • Process that allows reconfiguration of CAA boundaries.

    • Allowing landowners to retain ETS participation when a Forestry Right is granted. 

  • The full consultation document can be found here 


Making a submission

The Government welcomes feedback from all parties that may be affected by proposed changes to the ETS. Submissions must be received no later than 5pm on Friday 21 September 2018. Instructions on how to make a submission, and a link to an online submission form, can be found at the MfE website (http://www.mfe.govt.nz/consultation/ets). PF Olsen will be making a submission but encourage all our clients to read the consultation documents and submit feedback directly to MfE on the changes that matter most to you.

Price Update

The month of August saw history made, as the NZU price moved from $22.70 at the start of the month, to close August at $25.05. Yes, the market price is currently over the $25.00 price cap! How might this be possible you ask? Well emitters can’t yet use the $25 fixed price option, as they first need to complete an emissions return. These returns can’t be submitted until early next year, and emitters believe that by then the price cap may have increased. We expect that prices will remain at these levels for now, but that liquidity will reduce as both buyers and sellers wait for a decision to be made on a change to the cap.

European carbon prices continue their march upward, with carbon prices increasing by 30% in the last month. Current prices are at the equivalent of $NZ 41.00 per EUA… will this start to influence the NZ Government's decision on timing a change of price cap?

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