18 September 2013

The kindest view you could have of the Emissions Trading Scheme, what's left of it, is that it is a brutally pruned seedling barely surviving in frozen ground, says business columnist Brian Fallow in the NZ Herald.

Just how much damage the Government's refusal to limit New Zealand emitters' ability to meet their obligations with ultra-cheap imported carbon has done to the scheme is apparent in the 2012 numbers released by the Ministry for the Environment on Tuesday.

Last year, 26.9 million units were surrendered to the Government by participants in the ETS, a whopping 64 per cent increase on 2011's tally of 16.4 million.

Actual emissions of greenhouse gases did not jump 64 per cent, of course. The big increase, however, was in the forestry sector, which accounted for 82 per cent of the increase in units surrendered.

Some of that was deforestation, because the collapse in carbon prices meant that the deforestation liability no longer provided much of a barrier to exit from forestry. Or to put it another way, the incentive to replant that carbon pricing was supposed to provide has pretty much disappeared.

The other driver of the increase in units surrendered by the forest sector represents "Kyoto" forest owners - those whose forests were planted since 1989 on land not previously forested - opting out of the ETS. Untrammelled access to international Kyoto markets has allowed some forest owners to sell their NZUs when the price was $20, subsequently replace them with cheap ERUs, use the latter to square accounts with the Government and pocket the profit.

Others may have decided to hold on to their NZUs but filled their boots with enough cheap imported carbon to meet their obligations so that any future recovery in the price of NZUs, which do not have a use-by date, is all upside.

Of the 26.9 million units surrendered last year 9.2 million were from the forestry sector.

The Government has yet to decide on the rules for carrying over Kyoto units for use beyond the end of 2012. But the upper limit will be 15 million tonnes. In addition, by refusing to undertake commitments under the Kyoto Protocol for the 2013 to 2020 period, the Government has shut New Zealand out of the Kyoto markets from 2015 on.

So demand for NZUs, which have been largely crowded out of the domestic carbon market, ought to increase. Just as well, because there are millions of them out there as the ETS has been running for more than three years. The big uncertainty is how many will ever be available for sale.

Officials of the Ministry for the Environment are working on an auctioning system to provide an additional supply of NZUs to the market. In light of all this uncertainty that is an unenviable task.

Meanwhile, deforestation continues, at a rate of around 5000 ha a year, a figure that may understate the rate of deforestation.

Land owners have four years after harvest to replant and avoid a deforestation liability. In the meantime they get the benefit of the doubt, unless it is obvious that a land use change is under way.

The ministry's report has afforestation exceeding deforestation in 2010, 2011 and most of all in 2012. But its estimate for this year has a net contraction in the size of the plantation forest estate - exactly the opposite of what we need.

Source: NZ Herald. To read the full article click here. 

To read the NZ Government report 'ETS 2012 -- Facts and figures' click here.