‘ETS reforms could scare off investors’

Richard Rennie MARKETS Carbon

WHILE the latest Emissions Trading Scheme reforms may be well intentioned, forestry and carbon experts are concerned the methods proposed to force emission reductions may complicate and cloud the carbon market.

The reforms have been proposed to meet government concerns that New Zealand is not reducing emissions fast enough, with carbon offsetting being chosen over actual reductions by emitters, prompting an overemphasis on forestry offsetting.

The prospect of falling short on Paris Accord carbon reductions costing $23 billion has also spooked officials into revisiting how the Emissions Trading Scheme (ETS) scheme operates, and could better incentivise reductions in gross emissions.

The reform proposals come amid record levels of ETS forest registrations.

A spike in land submitted for ETS forestry peaked last year at 200,000ha, with the Ministry for Primary Industries estimating that, by January 1 this year, 500,000ha of land had been entered under the ETS.

It had taken 10 years to reach 300,000ha by January 2022.

But Lizzie Chambers, director of Beyond Carbon traders, said the government risks muddling control over land use with the ETS’s overall role, overcomplicating the market, and scaring potential investors away.

“A lot of the increase came from people realising they needed to get in and make a claim for NZUs, to put their hand up for five years of carbon credits.

“That sudden rush on forests already there may have contributed to the Climate Change Commission’s [CCC] concern over pine tree planting. There was also 60,000ha of new forest included in the 200,000ha, but back then money was cheap and carbon prices were higher too.”

One the four proposals put forward to get closer parity between offsetting with ETS credits and actual emissions reduction is to restrict the type of NZUs emitters can use.

The government could restrict how many forestry-generated NZUs emitters can pay for their carbon emissions with. Another proposal is to create two ETS markets, one for emission reduction and one for removal.

Big emitters could not use forestry NZUs to offset, and NZUs would be sold to the government, or on a separate market.

Price matters. And yes, at the higher price more people may have moved into forestry. But you could deal with that by putting in constraints on land use through councils and consent processes, as has just been proposed.

Lizzie Chambers Beyond Carbon director

But Chambers said the complications of such proposals include creating an “A” and a “B” status in units, with forestry units likely to take a tumble in value if they can’t be bought by big emitters, further disincentivising tree planting, the only tool at hand so far for much of NZ’s total reduction efforts.

Instead, she favours a version of the other two proposals, which include tightening up the supply of NZUs to push the price up, something government was told to do by the CCC last year, and dropped.

The other option is to allow the government and overseas buyers to buy NZUs from removal activities such as carbonabsorbing trees, raising the price to incentivise reductions and removals.

The government would also have to determine whether money was better spent to buy the NZUs, or provide direct funding to emitters, as in the NZ Steel case.

“If they [the government] is so concerned on price they could step back from auctioning so much into the market.” She said last year, when carbon prices were touching $88 a unit, signals were already flowing to emitters who were looking at even higher prices in a year’s time, and considering their gross reduction alternatives.

“Price matters. And yes, at the higher price more people may have moved into forestry.

“But you could deal to that by putting in constraints on land use through councils and consent processes, as has just been proposed. This is the place to deal to that issue, not the ETS scheme itself.”

Forest Owners Association president Grant Dodson said the CCC is taking a zealot’s view on emissions, focusing on gross emission reductions at a time when NZ is desperately short of technology capable of achieving genuine gross reductions.

“Much of the technology is at least 10 years away. CCC has said ‘We are worried about too much forestry.’ Forestry is the only thing that is working, and it is already being chopped.”

He said the uncertainty on ETS direction is prompting potential investors to pull back once this year’s plantings are complete.

“And we will have about $25bn of carbon liabilities that will be owed [under the Paris Accord] that won’t be able to be found elsewhere.”

He agreed with Chambers that having two differing units would only complicate the market.

“And just as a dollar is a dollar, a unit should be a unit. The climate is indifferent where it has come from.”

Euan Mason, professor of forestry at the University of Canterbury, said he could understand the government wanting to reduce gross emissions.

“But when more than half the emissions [from agriculture] are not covered, what can they expect?”

Having different units for different uses reflects woolly headed thinking and risks throwing the baby out with the bathwater by cutting off forestry, he said.