Government announces changes to the ETS – July 2012

Posted on 17 July 2012 in Carbon | Comments Off on Government announces changes to the ETS – July 2012

SPECIAL BULLETIN

Government has announced a number of changes to the NZ Emissions Trading Scheme (ETS), to be implemented via legislation to be passed later this year.

THE GOOD NEWS – Second tranche of Pre 1990 compensation to stay!

THE NOT-SO-GOOD NEWS – NZ carbon market looks a bit grim in the short term.  Forestry appears to be expected to subsidise the New Zealand ETS in the short term by continuing to generate credits that the Crown can benefit from in ‘Kyoto returns’ but which forest owners are unable to sell at a realistic price.

THE KEY CHANGES ARE:
  1. Pre 1990 landowners will continue to receive their allocation of emissions units in full, unless they take up offsetting. In recognition of the benefits offered by offsetting, Pre 1990 forest landowners who take up offsetting will need to return the second tranche of this allocation.
  2. The introduction of offsetting as an option for Pre 1990 forests, giving forest landowners the flexibility to convert their land to a better use, but avoid ETS deforestation costs by planting a carbon equivalent area of forest elsewhere.
  3. The start date for surrender obligations for biological emissions from agriculture has been deferred, pending a review in 2015.
  4. The transitional measures designed to reduce the initial cost impacts of the scheme beyond 2012 have been extended. In particular, these will extend the ability of many of those with ETS obligations to surrender one emissions unit for every two tonnes of emissions (the ‘one for two’). In addition, participants will also have the choice to meet their obligations by paying the Government $25 per tonne of emissions (the fixed price option).
  5. Government will have the power to increase the supply of New Zealand Units (NZU’s – the primary emissions unit used within the ETS) through an auction, within an overall cap on the number of NZU’s auctioned and allocated. This will help to ensure that ETS participants do not need to fund more emissions reductions in other countries than New Zealand needs to in order to meet its international obligations or domestic targets.
  6. Quantitative restrictions on the number of international emissions units that can be surrendered by those with ETS obligations will not be introduced. This will ensure that the carbon prices faced by ETS participants continue to reflect international prices.

The Government also intends to make some operational amendments for forestry under the ETS.  One of these changes will be to extend the time for submitting Post 1989 emission returns from three months to six months (currently emissions returns must be submitted between January and March of each year). The Government’s reasoning for the changes is “to maintain the costs that the ETS places on the economy at current levels. This will ensure businesses and households do not face additional costs during the continued economic recovery, and that New Zealand continues to do its fair share on climate change.”

SO WHAT DOES IT ALL MEAN?

While some ETS commentators have reacted as saying the carbon market has been “buried in a six-foot hole” and others are saying it’s merely in “suspended animation”, for many the confirmation that the second tranche of credits will be allocated is welcome news – landowners will continue to receive their second tranche allocation of New Zealand Units (NZU’s) in full. Where landowners have approval to take up offsetting they would be required to pay back any second tranche NZU’s they have received.

Offsetting opens up the way for better land use and should be understood by anyone able to benefit from it.  Offsetting means that Pre 1990 forest landowners will be able to convert forest land without deforestation liabilities provided a new forest is established elsewhere. Offsetting will be an option for Pre 1990 forest landowners from 2013.  Pre 1990 forests harvested before 2013 will also be eligible provided these areas are not already considered to be deforested (ie, already converted to other land use or fallow for over four years).

Major emitters were expecting to have to progressively increase the number of units they had to surrender (and therefore purchase) from next year.  As the Government has now chosen to retain the ‘one for two’ policy, it’s expected that the potential increase in demand for forest credits will take longer to appear.

Despite calls to follow Australia’s lead and introduce a mandatory proportion of carbon offset purchases to be sourced from within NZ, Government has continued to allow emitters to source units from overseas (in the form of Certified Emission Reduction units, CER’s) to meet their surrender obligations.  This effectively benchmarks the price of NZU’s against the international market and does little to affect an internal balance in NZ emissions reduction programmes.

Point ‘5’ regarding the introduction of auctioning appears to allow the Government to provide NZU’s to the market to generate cash returns for the Crown.  Potentially commendable as it will help to keep the money in NZ, but concerning in that these credits may sell at less or equal to international rates and effectively be in competition with forest produced credits – watch this space and be prepared to lobby when it comes up for consultation.

The good news is that the EU Carbon programme participants are unhappy with low carbon prices and are looking to effect policy that will put upward pressure on price but we all know they have some major economic factors to consider at the same time along with working out how Italy lost 4:0 to Spain in July!

Although we think that the Government could have been more proactive in:

  • tying NZ produced credits to the NZ market,
  • ensuring that the price paid to emitters by consumers is aligned with their costs of compliance, and
  • positioning agriculture better so that an election change does not inflict a sudden change on the NZ ETS for farmers …

… the reality is that the ETS appears to be HERE TO STAY and if you have land that is better in exotic forest or indigenous reversion, then the ETS is still a worthwhile consideration.

Credit prices like any other product can be expected to react to changing market conditions and credits are easy to store in your NZEUR account.