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The ETS here and overseas

Stuart Orme, New Zealand Tree Grower August 2013.

Forget fairness, logic and justice. The ETS is all about managing risk and seizing opportunity. As I write this article I am just back from my third trip to China in as many years. I marvel equally at how patient and accepting Chinese drivers are as much as I am at the change in temperature and my aging inability to enjoy plummeting back into a New Zealand winter.

If you cast your mind back you might remember receiving multiple communications from government agencies about the ETS, its impingements, opportunities and implementation. There has been an amazing silence since Nick Smith handed the role of climate change to another Minister.

Labour MP Moana Mackey in mid-July suggested an amendment to the Climate Change Act. If accepted this would see a requirement for 50 per cent of New Zealand emission surrenders to be made up of NZ Units. It signals that a change of government will look to re-establish some robustness into the current ETS which will reflect in a change to carbon credit pricing.

The 50 per cent surrender requirement would have been a laudable solution a year ago to stop plummeting carbon prices which led to landowners abandoning new planting and long term forest reversion practices. If introduced today it could be a major inconvenience to many forest owners. These are the ones who are yet to effectively freehold their 2008 to 2012 allocation of NZ Units by surrendering units bought overseas. Some overseas units were bought about 10 per cent, and in some cases one per cent, of what they sold NZ Units for some time ago. If you are potentially affected by this and have not considered the information relevant to you, we would encourage you to do so.

It is not about fairness, logic or justice. It is about how the ETS affects you and what are your opportunities or exposures. Given the government’s role in policy implementation, what the government is doing, not doing or likely to do in the future may affect you.

What is the rest of the world doing?

China

Pollution is a problem that China is well aware of. A driver guide we hired for a day explained that in the last year 2.5 million cases of lung cancer and other lung ailments have been attributed to poor air quality. No doubt smoking is in the mix as well but the number he referred to was, if I recall correctly, about the spike increase being seen. China does have an active emission reduction programme with laudable targets and ability by the government to make it happen.

While I was still there a few days later I found myself in the office of the architects of how China will measure their forest for carbon sequestration. This is no small feat given the geographical and species differences available. But they are committed to it, with impressive government backing and a budget to make it happen in the next few years.

The United States

Late June saw President Obama give a rousing speech to announce a new, comprehensive plan to combat emissions. Climate change it seems has emerged as a top item on the President’s second term bucket list.

‘2012 was our warmest year in history ... the planet is warming and human activity is contributing to it .... As a President, as a father and as an American, I am here to say, we need to act. I refuse to condemn your generation and future generations to a planet that is beyond fixing.’

Obama has ordered the Environment Protection Agency to enact new federal pollution standards for new and existing power plants. While some have called his approach draconian, the timing works. The US is at the forefront of a shale gas boom which looks likely to be a global game changer. You do not need to crash too many trains carrying oil from shale to highlight potential emission dangers. The US appears to be well on its way to expanding its regional emission reduction programmes and taxes.

Europe

In early July the European Parliament voted in favour of implementing back-loading on a one-off basis. Back-loading is a method of removing credits from the market place to put upward pressure on the carbon price and more incentive not to emit. Of the various texts that were proposed, this was probably the strongest one in terms of effect on supply.

On the basis of this move forward, the European carbon prices rose in minutes from €3.25 to €4.71 as the European Parliament rejected watered down plans to temporarily withhold emissions units from the market. They voted instead for the original tougher proposal. Just to clarify, this refers to the European Unit Allowance not an ERU.

Australia

Who knows? By the time you read the story in Australia it may be clearer. Some have speculated that the new Prime Minister Kevin Rudd would accelerate an ETS up-take and publicly support an early transition to a market based scheme. The current pricing model sees Australian emitters paying a carbon tax of a fixed $23 a unit rising to $25.40 in next July.

Others have said that with Rudd’s re-introduction to the leadership, it is unlikely the opposition leader Abbott will have control of both houses. Therefore it would be too hard for Abbott to repeal what has been enacted in the Australian ETS as suggested he might want to do.

New Zealand

New Zealand could probably serve us better by having a more open dialogue about the future of our own scheme.

Forestry has enabled New Zealand to be in a carbon surplus position. However, this will drastically change in the future as we move to harvest maturing forests planted after 1989 and there is a vacuum created by no new forests being planted or allowed to revert.

In the last article we discussed the current situation where anyone who has received post-1989 NZ Units can effectively freehold them by surrendering ERUs. In that time, the price of an ERU has risen from just below 13 cents to as high as 30 cents. Equally the NZ Unit price has firmed, so the difference in price between the two remains about the same. That said, many of our clients are choosing to pay cash for their ERUs as they feel there could be some value on the price of an NZ Unit.

The main difference is that I had thought there was a manageable risk until the end of 2014 and early 2015 to exit and re-enter the ETS to freehold previous forest carbon obligations. Now I am becoming more in favour of doing this sooner rather than later. The government may need cross-party support for something soon and re-visiting the ETS may once again become a popular focus for them.

Stuart Orme of Woodnet is a Registered Forestry Consultant based in Masterton.

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