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Emissions Trading Scheme: A recovery for New Zealand Units

Lizzie Chambers, New Zealand Tree Grower August 2016.

The New Zealand carbon market finds itself in an interesting place once again. Late last year saw the announcement of another Emissions Trading Scheme review, the successful international negotiation of the Paris Agreement and the appointment of a new Minister for Climate Change.

Since early December the price of New Zealand Units (NZUs) has more than doubled − from $8.50 to $18 by mid-July. In response to these greatly improved prices there is renewed interest from foresters and emitters.

Investment in carbon forestry once again becomes a credible prospect. Let us have a look at the main influences and risk factors to bear in mind when trying to decide your best course of action.

The days of cheap Kyoto units are over

As a country which undertook a commitment under the first period of the Kyoto Protocol from 2008 to 2012,

New Zealand had access to international carbon credits which were generated from the Kyoto agreement. Other emission trading schemes, such as the European Union’s, placed strict limits on the use of these cheaper credits, but New Zealand’s Emissions Trading Scheme gave unfettered access to emitters and foresters.

The fall in European industrial output following the global financial crisis, combined with over-supply, saw Kyoto units fall in value to as low as 10 to 15 cents. As the price of Kyoto units eligible in the New Zealand scheme fell, the NZU price followed, and at its lowest hit $1.55. Foresters subsequently found their use restricted in a government attempt to curtail trading.

However, emitters and those with a deforestation obligation continued to be able to surrender certain Kyoto units in the New Zealand scheme until the end of May 2015. Then the Emissions Trading Scheme became a domestic only scheme. This isolation, and the constraint it places on emitters, is perhaps the main reason for the price increases seen to date.

Legacy of cheap units

The legacy of cheap Kyoto units remains. Until May 2015 foresters and emitters tended to bank their NZUs. Instead they bought and surrendered eligible cheaper Kyoto units. So widespread was this that in the three-year period covering 2012 to 2014, of the 112 million units surrendered to the government, only 1.4 million were NZUs.

The result was that NZUs have been stockpiled in private accounts. The government’s estimate of this is 140 million, which is roughly seven times the annual compliance demand from traditional fossil fuel emitters under the current two-for-one deal enjoyed by emitters. Noting that excessive units banked forward beyond 2020 have the potential to undermine achievement of the 2030 target under the Paris Agreement, the government has recently announced that this two-for-one deal for emitters will gradually go.

The roll-off begins in 2017, with obligations on the energy industry, liquid fossil fuels and waste increasing by a third for 2017 and a further third for 2018. The year 2019 will be the first year for which an emitter will have to surrender a whole carbon credit for every physical tonne of carbon dioxide emitted.

The result will be a fresh 60 million tonnes of compliance demand over the period 2017 to 2020 which did not exist before the announcement. This should amount to a much tighter market, and the recent increase in value of the NZU price probably reflects that.

Policy makers hold the cards

A word of caution. In deciding how quickly to roll off the two-for-one deal the government took a carefully considered view that about 51 million units to be banked into the 2020s would represent an appropriate level of comfort for non-forestry market participants − to ensure secure operation of the market. They make the very valid point that the level of banked NZUs carried into the 2021 to 2030 period is only problematic if the amount of banked NZUs carried past the end of 2030 is significantly smaller.

What then might encourage the number of NZUs banked at 2030 down to lower levels? In our view, the main reason behind that risk that we could reasonably imagine would be readily available substitutes − an emitter need not hold as many NZUs in a world where multiple other credits would do the same job. Therefore, a lot hinges on the way in which policy-makers intend us to be involved with international carbon markets and the relative carbon prices of those markets.

The Emissions Trading Scheme Review

Stage one of the Emissions Trading Scheme Review has been completed and led to the government retaining the $25 fixed price option − effectively this is a cap on the NZU price. Meanwhile, a second stage of the review continues. There is uncertainty about the future shape and structure of the Emissions Trading Scheme after 2020. As an example, take the recent regulatory impact statement which accompanied the two-for-one announcement. It shows that the government considered imposing expiry dates for NZUs already in existence, but decided against it.

It also shows that the government remains interested in maintaining its ability to ‘maximise the fiscal benefits of the ETS by selling NZUs by auction’. The new settings will create room for the government to do just that, at a time of its choosing. The provision that would enable the government to offer further supply to the market via auctioning already exists in legislation. While this might not necessarily be implemented before 2020, on the face of it any new units issued and auctioned to emitters would provide further competition to holders of existing NZUs. Meanwhile fresh NZU supply grows every year due to carbon sequestered by growing trees, and by the significant free allocations to industry. As obligations on industry eventually double, so too will the free allocations made to industry. Therefore, while the stockpile will reduce, it will be by a slower rate than the increased demand announced above. Add to that New Zealand’s very clear intent to develop clubs of countries from whom we could buy international units, NZU holders face considerable risks after 2020.

International linkages

The race is on to work out how the Emissions Trading Scheme will link with other international markets for carbon credits after 2020. Linking to other markets is important as it offers additional options and liquidity to those with obligations under the Emissions Trading Scheme.

Such links have the potential to lower costs to emitters to the extent that −

  • There are cheaper abatement options in the countries we are linking to
  • We can agree and enforce common standards to ensure transparency and environmental integrity
  • We manage to persuade them to open up for business.

The New Zealand government is likely to face pressure to ensure that costs faced by New Zealand business are not out of step with those faced by other countries. As one point of reference, current levels of NZU prices are more than double those faced by European emitters.

Done properly, linking can only be a good thing. It could provide a source of demand and supply for those holding NZUs. But we need to keep a reality check. This is not a free market, but one of a regulatory construction. So far there is no global price on carbon. Instead, there is a patchwork of regional and national schemes at various stages of development, and with different levels of stringency. While as a country it is important to demonstrate good faith and to keep working towards a global price on carbon, to open up the door without limits and safeguards is not sensible.

The Paris Agreement not yet in force

It is almost impossible to disentangle the relative effects on price of all the changes we witnessed late last year. But there can be no doubting the significance of the Paris Agreement, hailed as ‘a new era of global cooperation on one of the most complex issues ever to confront humanity.’

It is significant because for the first time, every country in the world has pledged to curb emissions. The Paris Agreement lifts ambition by aiming to keep average global temperature rise this century below 2°C but also wants to limit the temperature increase even further to no more than 1.5°C above pre-industrial levels.

The agreement requires participants to peak their global emissions as soon as possible, and effectively sets a goal of nett zero emissions by 2100. Afforestation will have to play a lead role in meeting this challenge. But the agreement has yet to come into force as it requires at least 55 countries, responsible for at least 55 per cent of total greenhouse gas emissions, to have ratified it. New Zealand, like most other countries, has yet to ratify the agreement and so far only 19 countries had done so.


The main point of highlighting all of the above uncertainties − the stockpile, the potential for auctioning, uncertainty about international linkages and just general political interference − is that recent price rises do not necessarily equate to a permanent recovery. There might well be further optimism for NZU holders. Certainly, in the long term, there is much about which we can be positive. The Paris Agreement would see all countries committed to having to scale up ambition and this can only lead to a rise in carbon prices.

Domestically, while we can see the playing field of the Emissions Trading Scheme between now and 2020 with some clarity, it all looks a lot more hazy after that date. In a world of uncertainties a ‘best endeavours but no-regrets’ sales strategy might be more appropriate than simply holding on. Doing nothing is still a decision and those sitting on NZUs must acknowledge that their chips are still on the table.

Can you live with that? If you want to see live competitive and transparent prices go to the website

Lizzie Chambers runs Carbon Match.


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