NZETS – Is there an arbitrage opportunity for Post 1989 forest owners?

This risk or so it was perceived ultimately has limited post 1989 forest owners entering the NZETS – on the basis the Government offered to guarantee to cover the carbon liability to those who did not opt in. Carbon Monitor has commented on this in past issues suggesting forest owners should opt in and retain the credits. This of course has been muddied somewhat by the Field Measurement requirements for forests over a certain area. This activity would introduce cost where in the event the foresters were simply retaining credits in ‘their bottom drawer’ there was no income.

Since the inception of the NZETS forest credits peaked around $23NZD for an NZU in early 2011. Arbitrage was created from fluctuations in NZD terms for CER credits. Emitters were reportedly swapping in and out of CER back to NZU picking up a tidy profit.

Recently we reported our ‘silly fool’ arbitraging his position and buying back NZU (or the CER equivalent) at some $13NZD and pocketing a nice sum whilst covering his harvest and other potential liabilities.

Now with the price of an NZU around $7 it seems there is a strong argument to do the same and purchase CER around $6 NZD for those post 1989 forest owners who have sold their credits previously.

Commentators have raised this as an issue to consider and no doubt stimulate some activity in the market. Taking a clear profit and covering absolutely a liability appears to make sense. However the type of CER one might purchase is now critical – see the Government exclusion on industrial process CER announced December 2011.

People have commented – but how do we make sure the CER are acceptable and will work to cover the liability? One option may be to exit the NZETS entirely and surrender the CER?

NZETS Carbon Credit Leasing offer

Recently TBK capital sent out a document entitled Carbon Credit Leasing Offer. The essential elements of the offer were summarised in their email as follows:

Summary

• Our client is seeking a limited area of established forests for long term lease.
• Rental of $200-$250 per hectare per annum (plus GST) paid annually in advance.*
• To qualify, forests must be first rotation radiata planted after 1989.
• Our client takes a registered lease of the owner’s forest and takes on all carbon credit liability.
• The owner retains ownership and possession of land, tree crop, and cutting rights.

Our Client

• Our client is a New Zealand owned and operated company that is in the business of Carbon Farming. They own, lease and plant forests for carbon credits.
• They supply bulk carbon credits direct to large energy companies and oil companies who need carbon credits to meet their legal obligations.
• They currently have 10,000 hectares of forestry under management.
• They have recently completed the largest sale of carbon credits in New Zealand history.
• Their team includes experts in carbon credits, forestry, finance and insurance.

In essence their client appears to want to take a registered forestry right that specifies the NZU issued from the forest growth accrues to them for an annual fee per ha.

EITG was asked to look at this and we made the following observations:

1. The price of NZU on Carbon Match late January was around $7
2. At a lease price of $200 per ha (they claim the GST as an input) that is around $10 per credit on 20 credits per ha or $6.66 on 30 credits per ha
3. The international market, where there is no practical restriction on credits entering the NZETS is around Euro 3.81 or $6.14 (@0.62 exchange rate)
4. Whilst the international market prices remain at this level NZU according to commentators are expected to remain at low levels
5. Non binding advice on the issue of who is liable for surrendering the credits from MFe in a telephone conversation around July last year was
   1. Whilst Mfe say the liability would be chased through the lessee and the Directors of the Lessee in the event that company failed

i.      The liability could still ultimately attach to the land

1. There is no legal precedent that Mfe were aware of in this area

Questions that leap to mind are

1. Who is behind this offer?
2. What is their financial status?
3. What does the insurance provide, and is the Lessor an interested party in the policy?
4. What obligations does the Lessor have in the event of loss during the no harvest period?
5. What legal advice do they have that the Lessor is not ultimately liable?
6. Is any legal advice addressed to the Lessor?
7. What is the actual situation with liability if the lessee fails? Or cannot honour its obligation to surrender sufficient credits?
8. What about the obligation for field measurement in 2012?

It’s a simple scheme on the face of it. In a falling market probably not that profitable. At $20 per NZU it was of course highly profitable provided they had resolved the issue of the cost of credits at harvest and their attendant liability. At $7 per NZU we wonder if the same applies?

Does the EU need to take action to Save the Carbon Market?

Barclays and other analysts are praising the market saying it is working and suggesting the price drop is a function of oversupply. They argue an oversupplied market will see the price dropping.

That may be true, but what about the intent that created the market in the first place?

Phase I of the EUETS saw the price collapse from 30 Euro to cents towards the end of 2007. Analysts believe that the collapse was from misallocation of units in Phase I.

It seems that the same thing is happening towards the end of Phase II or the Kyoto Commitment period which ends this year.

What are the possible factors:

1. The EU in recession meaning that growth in emissions are less than expected as they follow economic growth generally
2. The NER 300 where a large scale auction of EUA was passed to the EIB to raise money for CCS projects
3. Unclear policy statements such as the renewable energy targets announced in April 2011, that needed urgent clarification that these were not a substitute for market instruments
4. Regulatory changes as to the EUETS access for CDM projects
   1. Industrial process CER
   2. Coal efficiency projects
   3. Large Scale Hydro (>20mw)

Since the ban on industrial gas CER was announced the race to issue CER in these projects has seen them increase from 64% of the CER issued to over 80%. Volumes have skyrocketed and are expected to continue to increase.

However there is a limit to the volumes of CER able to be surrendered in the EUETS, compare this to the AUETS in 2015 allowing 50%, and the NZETS with no limits.

The EU parliament has responded to the collapse in EUA prices by first voting to set aside 1.4bn EUA from auction, which on a second vote was re worded to ‘large volumes’

The set aside can only be temporary whilst the EU works on implementing a more stringent limit for 2020, down from the 20% of 1990 levels to 30%. Something they say could take 18 months.

Even the addition of Airlines into the ETS see twitter @eitg is being dealt with largely by grand parented allowances.

So what may happen next? After the market moved substantially from long on carbon with the announcement of the NER300 it is reportedly heavily short.

Options have remained pretty static indicating traders are not sure where the market will end up.

Common sense says that the market is intended to place a price on emitting. Everyone would agree the current price is not one that provides a clear message to emitters to change behaviour and certainly not one that would encourage them to make long term investments in reducing emissions. Its too easy to wait, stock up on cheap credits and ride out the market.

Time for the regulators to remind everyone why we have carbon trading. But when will they act?

Will the domestic Australian Carbon price tank at the commencement of full trading in July 2015?

Spot CERs are currently quoted at EUR 3.81 in January 2012.

The Australian carbon tax will commence at AUD $23 (approx EUR 15.00) in July 2012, rising at a marginal fixed percentage for the next three years, until 2015 when full trade commences. Upto 50% of Australian liabilities can be covered through CERs and other international offsets. So given the prevailing spot CER price will the Australian spot price crash severely to match the CER price?

It wont as the price floor will prevent that. Companies will still be able to meet 50% of their obligations with international instruments such as CER, However they will be liable to pay the Australian Government the difference between the purchase price and the floor price. There is a discussion paper out at present on exactly how this may be implemented.

The other issue is what will the international price for carbon in 2015? From reading reports from Barclays capital it appears the price today is a consequence of oversupply emerging from two elements, the rush to issue industrial gas CER prior to the post 2012 EU ban and the NER 300 auctions of EUA by the EIB that resulted in the market going from long to short. The CDM pipeline from UN RISO suggests much less in the line of CER from post 2012 and the supply demand situation in 2015 is far from clear.

The Price of Carbon and the EUETS – how will it affect CER prices?

In a move designed to shore up sagging carbon markets, with both EUA and CER at their Phase II lows, the EU announced that it would withhold permits from the market adding that the expected EUA price would be around 30 Euro.

On the 20^th December 2011 European MEP added weight to this voting by a narrow margin to withhold some 1.4bn EUA from the auction markets. Point carbon tweeted @pointcarbonnews that a further vote may dilute the wording to ‘substantial volumes’ rather than an absolute target.

Since early 2011 EUA and CER prices have fallen from around 15 Euro to 5-6 Euro. On top this is Deutsche Bank was reported as stating with the current economic downturn the existing EU target of 20% by 2020 would be met without the need to purchase CER units.

Point Carbon also tweeted that there is a solid prospect of a vote on a 30% target.

Both these factors will have an interesting effect on the forward pricing of CER in particular. Many brokerage houses have been caught ‘long’ in carbon with some attributing recent losses to their positions in the carbon market. Part of the dramatic collapse can be attributed to those with long positions being automatically sold out of the market by stop loss orders.

Pricescarbon @pricescarbon indicated an increase in EUA to Euro 8.81 or around 20% in response to the announcements

Carbon Monitor Volume 16 Issue 11 – December 2011

Will the Durban talks Rescue the Carbon Market?

 

Much has been placed on the outcome of the Durban talks on climate change. Before discussing the potential outcomes the broad facts need to be looked at.

 

1. The EU is committed to its own ETS to 2020 at least, and will allow non industrial gas CER post 2012 and new CDM from LDC registered post 2012. There are no caps or floor on price but limits to how many CER can be used
2. The Australians have a carbon charge to 2015 and an ETS thereafter with 50% of compliance to be met by non industrial gas CER
3. The NZETS is likely to continue with a delayed introduction of agriculture (50% of GHG emissions) and a price cap. Long term the need to surrender permits for every tonne of GHG may move up from the current one for two to full matching of emissions will likely come into play. Post 2020 the ‘wall of wood’ resulting from the concentration of the age of NZ plantation forests maturing  should create upwards of 40mt of emissions per annum
4. Japan is looking for an alternate to the CDM to allow project based credits
5. California and a number of other states have ETS or intend to create them, although Eastern states have recently moved away from an ETS, making the US ETS landscape diverse.
6. China is starting to implement its own regional based emissions trading schemes

 

Post 2012 the on going function of Kyoto in a new form appears dependent on India and China becoming part of the scheme in that they accept an emissions cap. These two countries in the past have been the source of the vast majority of the CER created under the CDM albeit most of these were industrial gas CER.

 

The global financial climate has certainly dampened emissions but also more importantly diminished the cash and the will to limit GHG whilst trading partners are seen to take jobs and create potential political problems in developed countries.

 

Notwithstanding that CM expects the EU to negotiate and trade off some of its position for a larger club of nations with a successor to Kyoto. The Chinese managed to delay agreement two years ago, and with their appearing unwillingness to bail out Europe financially will they see merit in bailing out Kyoto?

 

We can only wait and see.

 

Reader Questions NZETS Forestry Rules and the Carbon Markets

 

A Carbon Monitor reader provided us some feedback on their view of forestry in the NZETS and emissions trading. Their points and CM reply are below:

 

Reader: Averaging would have been the best system from the start and should be applied now but I guess the resulting job losses at MAF etc will block it.

 

The air carbon problem & forestry are both very long term. Plantations which are reforestation, are rewarded for their one-off storage of carbon and so it is only the average amount stored in the long term that counts. Measuring them constantly as they grow and giving the owners credits all the way up to harvest is expensive in bureaucracy and management time and we have the silly concept that harvest is as sudden emission. It is not, and it is only the long term average carbon stored on a forest site that matters, so only that should be given to us. And of course only once. That average amount across the country will rise if more reforestation occurs, so that should be the priority in all policy affecting forestry. Averaging would certainly encourage planting, as you would have certainty:

 

Credits would be given for the first half (in carbon) of the first rotation, which would be sold to pay for it and the only rule needed would be the forest has to be replanted at harvest. Only one measurement would be required, to determine a reliable average.

 

CM Response: Forest averaging was looked at in the international negotiations. However the Kyoto Protocol dictates how the process must be applied and that is net carbon stock change over the commitment period, that is five yearly. VCS REDD however does use averaging and has a 20% insurance ‘reserve’ to cover losses across the portfolio of REDD projects such as fire.

 

VCS requires carbon stocks are measured regularly minimum every 5 years – even the NZETS is five yearly minimum. Only the increase in carbon stocks are granted credits – simply giving a forest owner half the expected credits for their forest is not credible and will not contribute to a functioning market

 

Reader:  Under current rules many plantation owners are afraid to sell carbon at $13 in case they have to buy it back at $130 in 10-15 years time.

 

Unless we move to averaging, forest growers will get disillusioned with the ETS & reject it before long.

 

CM Response: Forest owners were afraid to sell at $20 as most did not understand the risks, and now with the publicity most do. I know a few who sold at $20 and have purchased credits back at $13.

 

We don’t see the cost of credits reaching $130 in the future – there are too many technology solutions to avoid emissions at around $45 USD. If the SO2 story is anything to go by once that level is reached the technology will intervene and prices drop significantly. This is the climate change end game, not reforestation or forest credits (as they exist to develop liquidity). Also bear in mind forest owners who don’t register are giving their credits to the government to use for NZ compliance free of charge, with a promise (a politicians promise) to provide the owners credits at harvest free of charge. With the wall of wood post 2020 the forest industry will arguably be the largest single sector for GHG emissions.

 

Averaging can be achieved by better methods than you suggest whilst still complying with the UN rules. Pooling is one idea publicly mooted.

 

Reader:  At the same time it looks like the ETS & all carbon trading is doomed anyway, now the greens of the world (and it will be the mainstream left next) have moved to oppose trading carbon. Plus Europe is entering a long period of economic trouble, and they will have a surplus of credits to dump on the market, thereby ruining it. Markets and their merits will be a political victim of crisis.

 

So trading carbon will die out as a ‘good idea’ quite soon and carbon taxes may then be sold as the replacement, by a new younger generation of politicians. China & the US will not trade carbon, but they may tax fossil fuels instead, selling the idea by saying they will recycle that money directly to the people, as well as spent some on research to replace fossil fuel & adapt to climate change.

 

CM Response: The EUETS does operate the same way as the NZETS. It revolves around a cap on companies in specific sectors. Permits are then auctioned for those emitting over their cap, or alternately credits such as CER can be purchased for compliance (within specified limits).

 

It is correct to say the NZETS market may be flooded with credits but in another way. The EU has banned post 2012 CER from industrial processes or some 65% of all CER issued. Unless the NZ Government also bans these they will be sold in NZ and the NZETS price will drop significantly. This is a risk whether the EUETS collapses or otherwise unless policy intervenes.

 

Seven regions in China and ten states in the USA already have cap and trade systems operating or in planning. California the worlds 8th largest economy has a cap and trade system and will include forestry. The Australian system is a fixed price ETS to 2015 when the price can float between a floor and a cap. It is an ETS in that participants can avoid a carbon charge by abatement or purchasing ACCU credits from its commencement in 2012.

 

In summary comments on forest averaging are technically correct, but in the context of the UN rules are not able to be applied. Moreover the opportunity for fraud without regular compliance and monitoring is incompatible with a trading scheme. Finally forest carbon credits in essence inject liquidity into the New Zealand ETS so a flow of credits is essential.  Unfortunately applying a forest only perspective to the scheme results in an incomplete analysis.

 

As to the conclusion that trading markets are at an end and Europe will flood the market with cheap credits, again the facts suggest the contrary. We agree if the EU collapses it would be a whole new game for carbon trading, but such a collapse would be unprecedented. Industrial gas CER are the biggest threat to non EU trading schemes and are being either excluded or intended to be excluded. Emissions trading is globally accepted as the only means to reduce emissions, the other policies have long been abandoned after many years of debate.

Is the Future of the EU Critical to Carbon Markets?

Carbon Match www.carbonmatch.co.nz recently provided this interesting update on the European situation

What Would Breakup of the Single Currency Zone Mean for Carbon?

Such a scenario appears to pose a small, but potentially catastrophic risk to the carbon market, which the EU ETS dominates to the tune of more than 85%.

To add to the woes of a market unnerved by the eurozone crisis and in any event already depressed by fundamental oversupply, the European Investment Bank has announced that it will push on regardless with the sale of the NER300 (New Entrant Reserve).

Many had expected that the EIB might defer the sale of these 300 million allowances onto the market, given how European allowances have fallen recently.

On a more positive note, there have been some louder voices joining the call for the EU to shift up a gear and adopt a 30% by 2020 target, given that they have almost reached the 20% by 2020 target with another 8 years still to run.

The hope is that the step-up could be championed afresh by environmentally ambitious Denmark, who take EU presidency in the first half of 2012.

Unfortunately it’s hard to imagine this idea gaining much momentum when European Leaders have other much more urgent issues to contend with.

New Leaders Hurry to Implement Reforms While Germany Holds Back from Agreeing to Further Assistance

Recent weeks have seen Greece’s Papandreou replaced with Papademos, Italy’s Berlusconi supplanted by Mario Monti and now a new centre-right government for Spain, to be led by Mariano Rajoy.

The question now is whether these three can hold onto the reigns of their distressed horses and guide them into more stable terrain.

Greece is a mere trifle compared to what Italian or Spanish defaults could mean for the much larger France, which is hugely exposed to both countries and whose credit rating is already at risk of being downgraded.

Italy alone is estimated to need up to a trillion euros of backstop financing and it’s unclear where this might come from.

Something Has to Give

Currently the European Central Bank is a central bank without legs. Some have suggested that what’s required is for the ECB to be allowed to be lender of last resort by being empowered to issue bonds in its own right and use the proceeds to secure potentially solvent but seriously ailing governments (Italy).

But as it stands, the ECB isn’t empowered to do this. To change this, core Europe, especially Germany, would have to agree.  Propping up peripheral Europe to avoid the collapse of the Euro is a tough sell.

The more palatable option would be for the ECB to print money and continue with bond buying in an effort to keep interest rates manageable.  But the risk of inflation is one that won’t appeal to the German public either.

Yet the alternative could be just as damaging. Were there to be a break up of the single currency, the harder currencies of the North would rapidly appreciate, making exports and manufacturing sectors less competitive, and running the risk of triggering contractionary cycles in those countries.  A deeper recession or even a depression could result.

Germany, in particular has been, and continues to be, the biggest beneficiary of the common currency.  It does seem that it’s in their interest to allow some kind of quantitative easing before another stalwart of the Euro zone, France, begins to come under attack as seriously as Italy has.

We can only wait to see what happens.  While still very unlikely, a break up of the single currency could spell catastrophe for the EU ETS, and the wider carbon market

 

Apology to Readers of Carbon Monitor

 

We are sorry that the delivery of the carbon monitor via email has been interrupted over the last couple of months. This is due to circumstances beyond our control. Our provider “email now” ceased service without warning leaving us without our data bases and a service provider.

 

We have managed to recover an older version of our databases so apologies if you have already opted out. The opt out facility is on the new mail system we have selected Mail Chimp please click on the label in the email.

 

We hope to have the email template tidied up and fully operational in the New Year.

 

To all the readers who have given us feedback and to those who have criticised the CM we thank you for giving us the feedback and look forward to improving the quality and delivery of the CM in 2012. Meantime we wish you all happy holidays and a safe and prosperous 2012

 

Keep up to date on what is happening between issues of the CM by following EITG on twitter.

 

Australian Carbon Farming Initiative – will it Link to Other Markets?

 

The Australian CFI is a way of receiving carbon credits or ACCU (Australian carbon credit units) for certain activities.

 

There are two classes of credits, those that fit the Kyoto requirements and voluntary credits. Burning land fill gas is accepted and creates Kyoto ACCU, whilst soil carbon creates voluntary ACCU.

 

There is a commitment and budget for the purchase of voluntary ACCU by the regulator.

 

Additionality is applied to all projects. This ensures a project would not have happened without the CFI that is it is not business as usual (BAU)

 

There is a white list and black list of project types. Each project must be implemented using an ‘approved methodology’ There are a few of these in progress the most unique is the reported culling of feral camels.

 

Using the concepts of additionality, approved methodologies and other processes the CFI appears to be modelled from the United Nations clean development mechanism (CDM) and joint implementation (JI) – refer to our glossary the approved processes for generating credits from projects in countries outside the host country.

 

ACCU are defined as personal property to allow registration of interest against them and therefore the potential to raise finance.

 

ACCU and Kyoto units are defined under the Corporations Act and ASIC Act as financial products triggering the provisions relating to financial services and markets and product disclosure under the Corporations Act. The ASIC act will extend to cover dealings with ACCU and international carbon units.

 

ACCU are suggested to be fungible in the international carbon markets. It is suggested that with the provision of linkage with the EUETS and NZETS the ACCU will be tradeable in these markets. Such linkage is likely to be limited in EITG view.

 

The international carbon markets the ACCU may link to immediately is the AAU market or the Kyoto market, as AAU are used for country level compliance. The Australian Government proposes to swap an ACCU for an Australian AAU. The experience in the NZETS is forest based AAU have once been sold in volume for reasonable prices (1mt and $20NZD) However recently the weakening euro and large volumes of AAU on the market suggest prices of around 5 Euro or less for an ACCU converted to an AAU.

 

There may be a valid argument that an ACCU has high environmental integrity and is therefore more valuable than a so called ‘hot air’ AAU.

 

However in the absence of transparent market data (there is very little of this in the AAU market) it is very difficult to accurately suggest a price for an ACCU converted into an AAU.

 

Australian Clean Energy Act Now Law

 

Australia took another major step towards a clean energy future on November 8 after the Senate passed legislation which will pave the way for one of the most important environmental and economic reforms in the nation’s history.

 

The passage of the Clean Energy Future legislative package will allow Australia to begin reducing emissions, developing and fostering new technologies in renewable energy, encouraging energy efficiency and creating opportunities in the land sector to cut pollution.

 

It will drive investment in clean energy and it will ensure that Australia plays its part internationally as a global citizen.

 

A fixed carbon price of $23 a tonne will apply from 1 July, 2012, moving to a flexible price after three years.

The carbon price is a tax on pollution and will only be paid by Australia’s largest polluters.

 

For most people, the Government’s comprehensive Household Assistance Package will cover, and in many cases exceed, any price rises.

 

In fact, nine out of 10 households will receive compensation from a combination of tax cuts and increases to family benefits.

http://www.cleanenergyfuture.gov.au/

 

Australian Business Clean Energy Law Checklist

 

Recent publications on the new Clean Energy Legislation suggest Australian business use the following check list when identifying if they are subject to the Legislation   Are emissions from my business covered?

Do facilities operated by my business emit direct emissions that exceed the 25,000 t CO2-e threshold?

Do I have operational control of the facilities or is there another operator on-site which could have operational control?

Does my business involve a joint venture arrangement which might limit my liability for emissions?

If my businesses’ direct emissions are not above the threshold, do facilities my business operates nevertheless use large amounts of electricity, natural gas or other fuels?   As a supplier of goods and services can I pass the increased costs of compliance on in the cost of the goods I produce under my supply contracts?

If I am purchasing goods or services, can the supplier pass through its carbon costs under the supply contract?

Is the supplier entitled to free carbon units which would reduce its direct costs?

Can I take steps to reduce emissions at my facilities or reduce energy costs?

If I am a liable entity and have an obligation to purchase permits how do I purchase permits? Is there an opportunity to purchase from the Government at auction; can I purchase from third parties, other liable entities, brokers or project developers under the CFI? Will I be able to get a lower permit price that reduces my compliance costs?

 

Full details of the compliance obligations and various checklists can be found on our web site under the menu Australian Scheme.

 

Carbon Monitor Volume 16 Issue 10 – November 2011

Is Australia the Next Market for CER’s?

 

Point Carbon has identified the Australian Emissions Trading Market as a major consumer of project based Certified Emissions Reductions or CER units.

 

In the fixed price period of the carbon scheme, running for three years from July 1, 2012, Australian emitters will not have access to international credits such as CER. From mid-2015, when the ETS comes into force Certified Emissions Reductions (CERs) can be used to meet 50 percent of their surrender obligations.

 

Analysts at Thomson Reuters Point Carbon estimate that Australian firms will buy 350-400 million international off­sets between 2015 and 2020. These credits will come from existing projects that are registered to produce CER units and projects registered post 2012. Currently projects creating CER registered post 2012 and not from least developed countries are not admitted to the EUETS. The Australian ETS will provide demand for credits from this class of projects.

 

At an expected market price of A$17.80, Australian demand for carbon credits in dollar terms could exceed A$7.12 bil­lion over the five years. Bloomberg New Energy Finance has plotted demand for CERs in 2020 at 90 million, slightly below expectations at the Australian Treasury.

 

Source: Point Carbon Australia New Zealand Carbon Market October 2011.

 

Australian Opposition Undermines Carbon Tax

 

The Australian opposition leader Mr Abbot has come out warning companies not to take forward positions under the new carbon legislation. The legislation passed in the lower house earlier this month and is expected to pass the Senate before the end of the year.

 

Mr Abbot is reported to have cautioned companies that they would not be compensated for expenses incurred if in the event he came to power he intended to axe the carbon tax.

 

Commentators see this move as a cynical attack at the carbon tax to try and undermine it. Given the oppositions support for some sort of ETS this is in the view of many people hypocritical. Australian television is saturated by sound bites from the rival political personalities and the attacks at the Governments policy are relentless and sometimes meaningless. As on commentator put it, when have you ever heard of an incoming party abolishing a tax?

 

The reality is however a proper market cannot kick start without an ability to set a forward price. Investment will not happen without a forward price, and in our estimates most of the projected 9bn per year investment in renewable energy will be at risk in this policy environment.

 

Emitters that choose to purchase CER units, eligible in both the EU and Australian markets could mitigate the policy risk by simply selling back into the EU or New Zealand markets in the event the Australian market ceases to exist.

 

Comments on the NZETS Review

 

The report on the NZETS is by way of a review and not policy. The commentary is therefore directed at the report itself and not on what policy in our view should be.

 

The review panel has taken into account and is following the proposed Australian scheme to allow integration at some future date. Progressive increasing of the price cap and the requirements to surrender 100% of emissions are all positive but in our view being implemented to slow given the Australia plan. The sudden phase out in 2012 is arguably too radical. However there have been some perverse outcomes of the cap. The reported charging at the cap by emitters and then purchasing at a lower rate has created unintended profit opportunities from the NZETS. Whilst there is no specific evidence of this there are reports of second tier emitters becoming points of obligation to avoid paying $25. If we have an increasing cap the regulator should look carefully at what people are paying for costs that are attributed to the carbon charge.

 

I cannot see any relief from deforestation restrictions for pre 1990 forest owners as the report would recommend but notes is not possible due to the international rules.

 

One issue we are following which may change the landscape for forest owners is the classification of carbon credits as a financial product in Australia. The report considers linking to the Australian scheme and the question that is not addressed is how the New Zealand regulatory environment would need to change.

 

What flows from this is the current perception of risk by forest owners. The majority of advice has been from forest managers and this has failed to promote the awareness of risks. The panel recommends in its report this be addressed. The reality is this must in EITG view must be via proper advice from properly qualified people.

 

Choice to opt into the FMA with less than 100ha is a sensible recommendation. Increasing the threshold is not without risk and no empirical data has been supplied to argue increasing the threshold. Once data is available from 2012 measurements it may be this risk can be assessed and the threshold reviewed.

 

The pooling to create an insurance risk pool matching the Australian scheme whilst noble fails to consider the Australian scheme excludes plantation forest. Forest owners have access to and can fund private insurance. This should tie into foresters receiving proper advice.

 

Exclusion of industrial gas CER from the NZETS has been raised but no real recommendation made on the impact of this on the costs of carbon and on the ETS. An urgent recommendation for review is therefore appropriate. We note the consultation process has commenced and results are expected shortly.

 

No comment real has been made on the operation of the ETS. The timing of allocation and surrender, currently on fixed dates, are in our view counterproductive and create potential distortions in the market. I cannot see recommendations on the structure and operation of the ETS. Adding 9000 farmers of points of obligation as the report suggests would put further significant pressure on the regulator all during one time period during the year.

 

On the operation of the EUR there is some suggestion that information be released so as to preserve commercial confidentiality in relation to specific transactions. Given the purpose of the ETS is provide a readily discoverable price of emissions we question this advice. The stock market is open and subject to disclosure rules to protect parties from people miss using information. The review panel suggests that commercial confidentially is above the need for transparency in the market. To date we believe one of the flaws in the ETS has been the lack of credible and reliable information to buyers and sellers. The market is essentially bilateral trades which are unreported. Carbon Match offers a bid/ask service but this lacks depth and potential transparency.

 

The concept of averaging for post 1989 forests to deal with liabilities at harvest is raised the proposal suggests the Government use a scheme to limit credit issuance to the long term post 2008 average carbon stocks and in turn it supplies the credits to meet harvest liabilities. We don’t think this is practical as the majority of post 1989 forests will be harvested from 2020 onwards and the average carbon stock approach fails to address the fact that ALL units issued under the ETS will need to be surrendered at harvest. In our view averaging will only assist those with new plantations post 2008 of which there are few.

 

Submissions called for Removal of Industrial Gas CER from NZETS

 

The New Zealand Government proposed to ban industrial gas CERs for NZ ETS compliance – see “Consultation on Proposed Regulations Restricting the Use of HFC-23 and N₂O CERs in the NZ ETS” here.  This follows the NZ ETS review panel’s comments on industrial gas CERs in its recently released report.

 

The Government is consulting on 2 timing options, namely to ban industrial gas CERs that enter the NZEUR from 1 January 2012 (option 1) or 1 January 2013 (option 2) from use to meet NZ ETS surrender obligations.

 

Both timing options are earlier than the 1 May 2013 effective start date of the EU ETS ban on industrial gas CERs.  The ban would apply to industrial gas CERs that have already been purchased under existing forward contracts but that will not be delivered until after the regulations come into force.  However, the Government is also consulting on whether there should be an exemption for such forward contracts.  The ban would not apply to industrial gas CERs in the NZEUR at the time the regulations come into force.

 

Reported from Buddle Findlay www.buddlefindlay.com

 

Authorised Financial Adviser available to Forest Owners

 

Royden Shotter joins EITG to provide the increasingly necessary advice to forest owners under the NZETS.

Royden is an Authorised Financial Adviser (AFA) and Certified Financial Planner (CFPcm) practitioner.  As a Financial Consultant he works primarily in two roles, conducting analysis for individuals and businesses, and portfolio management of assets and investments. Depending on the mandate financial analysis typically involves data construction techniques which can be used for trouble-shooting, sensitivity analysis, problem solving or simply to reach a given result that would otherwise be too difficult to determine.  The results are then often used in strategic planning or project development.

 

Royden’s role at EITG is to provide specialised advice to clients who wish to have the benefit of financial advice before deciding what to do with their NZU units. He is separately retained by each client for this purpose. His interest in forestry was established early on, growing up in a rural environment, on his parent’s horticultural block.

 

 

Carbon Monitor Volume 16 Issue 9 – October 2011

The NZETS Review Report

 

The Panel was comprehensive in its coverage of the issues and thorough in its consultation.  Good job on collating and interpreting the myriad issues.   The Panel highlighted the need for clear long-term signals, the need to balance short-term costs and long-term benefits.  It also sought to dispel the myth that New Zealand is “ahead of the rest of the World”, stating that it is simply incorrect to say that our international competitors are not taking any action.

 

The Panel noted that uncertainty is a key theme, both at international and domestic levels. In particular it observed the availability and eligibility of Kyoto units post-2012 is unclear.

 

The Panel considered that there would be a persistent and possibly increasing premium around the environmental integrity of units, noting the high level of environmental integrity of NZUs and the need for Government to urgently clarify what restrictions, if any, might apply to the use of CERs from industrial gas projects.

 

While New Zealand should be conscious of Australian developments, it should not necessarily be bound by the features of any particular overseas scheme, although the need to preserve and improve access to international carbon markets was also noted elsewhere in the report.

 

The Panel made a number of specific recommendations for consideration by the Government:

 

Government should urgently consider whether HFC CERs pose a significant risk and whether a time limit should be imposed on their eligibility:

 

To maintain the integrity of the New Zealand scheme, it may be necessary for the Government to make certain types of HFC CERs ineligible under the scheme, with a notice period to be given so that businesses which have already bought these units in good faith have an opportunity to surrender or sell them.

 

The Panel noted that no objections were raised towards CERs originating from large Hydro projects and that it does not follow that just because certain types of emissions units are ineligible under one emission trading scheme that they should also be ineligible under the NZ ETS. However the potential risk to New Zealand’s incentives to abate, and the associated reputational risks, were noted as a concern.

 

Phase out the Transitional Measures More Slowly than Currently Legislated

Under current legislation, the two-tonne for one-emission-unit obligation and the fixed price option of $25 per NZU are due to expire from the beginning of the 2013 compliance year, effectively doubling the impact of the ETS on energy and fuel bills of households and businesses.

 

The panel has obviously struggled to reconcile the equally valid viewpoints that a) current macroeconomic uncertainty justifies some continuation of “transitional assistance” and b) we do need to call a tonne a tonne at some point.

 

The resulting recommendation is probably best described as the SUPRE approach to carbon; alter the current “2 for the price of 1” deal to a “3 for the price of 2” in 2013 and “6 for price of 5” in 2014. Then, we’ll finally see the real price of the sweater in 2015. I just hope you all like fractions.

 

Retain the cap and review in 2017

The recommendation that the cap be retained but increased slowly and reviewed again in 2017 is more straightforward and, if adopted as policy, would in fact be helpful to the development of the forward market. The Panel suggests adding $5 a tonne to the current fixed price of $25 per tonne from 2013 onwards.  This would see the fixed price rise to $50 per tonne in 2017.

 

Offer the same slowed transitional arrangements to incoming sectors

Presumably driven by a sense of fairness, the report also included a recommendation that the same 2 for 1 (from which the stationary energy, industrial process and liquid fossil fuels sectors have benefited since mid-2010) also be offered to the incoming waste and agriculture sectors.  The result would be that for some sectors the “transitional measures” would continue, and at lower price levels, than for other sectors.

While we support the intention to moderate cost, we think that the approach proposed is convoluted and confusing. If greater assistance is required for a particular sector, then this can be provided through a greater level of free allocation, but a 2 for 1 which becomes a “3 for 4” and then a “6 for 5” basis is flawed.

 

Further recommendations

 

Bring Agriculture in as planned in 2015

The Panel recommends that Agriculture remains within the ETS on the timetable that is currently legislated, with mandatory reporting beginning in 2012 and surrender obligations beginning in 2015, albeit on a moderated basis as above.  The Panel also strongly supported a farmer point of obligation, rather than a processor level of obligation, although we note that this would not preclude processors procuring carbon credits on behalf of farmers.

 

Fix the 1.3% reduction in allocation such that it is straight-lined

The problem with the current decline in levels of free allocation is that the wording of the legislation would see the size of the decrease get smaller every year.  For both highly emissions-intensive and moderately emissions-intensive industries, the decrease would become negligible and rounding rules in the Act would see free allocation to the tune of 38% continuing on an indefinite basis for emissions-intensive industries. The fix suggested is to straight-line the decrease such that it is equivalent to 1.3% of the original amount of assistance, each year.

 

Consider the potential introduction of a “Cap” in the next ETS review

Given the current intensity basis of allocation and lack of a cap, there are risks that new, potentially emissions-intensive industries could significantly expand the volume of allocation.  An absolute cap on the total allocation amount should be considered.

 

Remove the ban on NZU exports from non-forestry sectors

The Panel considers that, in principle, the ETS should allow exports from all sectors as soon as possible because an open ETS is more efficient than a closed one.  We note that, in the continued absence of an actual cap on allocations in the NZ scheme, this may diminish the attractiveness of forestry NZUs to overseas buyers in future (recognising that this market is very limited at current price levels in any case).

 

No price floor

The administrative complexity of this caused the Panel to recommend that no price floor was introduced.

Maintain existing thresholds for allocation

 

The Panel recommended that the allocation thresholds of 90 per cent allocation for highly emissions-intensive activities and 60% allocation for moderately emissions-intensive activities should be maintained.  While some submissions were for in-between threshold levels to be identified and applied the Panel considered that the benefits of this change would likely be outweighed by the cost.

 

Businesses should disclose actual carbon cost

The Panel expressed concern that the price cap should not be used as a proxy for the actual carbon price, or as an excuse to pass on excessive carbon costs to end-consumers.  The Panel noted the existence of market mechanisms that disclose trade prices for NZUs (such as Carbon Match) and supported transparency as a matter of principle.

 

Government to assess the use of new forestry “offsets” against pre-1990 deforestation liabilities

Currently the effect of the ETS is to lock pre-1990 forest land permanently into forestry use. This is driven by international rules which are currently being challenged by the Government and the panel strongly supports seeking change and noted the potential for New Zealand to get more flexibility under any future international framework.  Pre-1990 forestry offset planting should be introduced if possible.

 

Clawback of the second tranche of Pre-1990 allocations, if offsetting introduced.

The Panel recommends that the second tranche of NZUs allocated to compensate pre-1990 land-owners for loss of flexibility be clawed back if offsetting is available as an option instead.  This would amount to some 34 million units not coming to market in the post-2013 timeframe.

 

Consider averaging as a method of managing post-89 liabilities

The options available to sellers of post-89 NZUs wishing to hedge the value of potential harvest liabilities are limited. Long dated options over eligible units are not readily available and as a result post-89 forest owners selling NZUs have an unquantifiable contingent liability.  Some do not recognise this and some are deterred from selling as a result.  The Panel recommended that the Government consider averaging and retention of a proportion of NZUs as a solution. It also requested that the International Accounting Standards Board look into treatment of the post-89 actual and contingent liabilities in financial accounts.

 

A range of other forestry- and ownership-related recommendations

• Field measurement should be available as an option for owners of less than 100 Hectares, but not necessarily required.

• The pre-1990 tree weed exemption should be available beyond 2012

• Government should consider strengthening the existing afforestation schemes to encourage greater participation by Maori in post-1989 forestry.

• Government to development amendments to the Act which address the problems associated with Maori land in multiple or trustee ownership, and which ensure that the Maori Trustee can apply for the 50 Ha exemption on the basis of individual Maori trusts’ ownership rather than on the basis of total landholding.

• Government to explore whether temporary extensions to the exemption and allocation deadlines for Maori owners are necessary.

 

The Panel also made a series of recommendations on the Synthetic greenhouse gas and Waste sectors. See Chapters 7 and 8 of the report for the specific detail on these.

 

You can read the full report and the accompanying press release here

 

Supplied from Carbon Match www.carbonmatch.co.nz

South Africa a Significant Beneficiary of the Kyoto Protocol

South Africa has benefited more than any other African nation from carbon investment facilitated by the Kyoto Protocol’s Clean Development Mechanism (CDM). However, carbon market investment in South Africa has been driven primarily by the European Union’s Emission Trading Scheme (EU ETS) and as this programme enters its third phase, European policy makers are floating the possibility to restrict, from entry into the EU ETS, carbon credits from all but the least developed nations (LDCs).

In a recent interview aired on CNBC Africa, Evolution Markets’ head of African Markets, Brett Jordaan, and EcoMetrix’s African director, Lodewijk Nell, discuss the challenges facing South Africa should the European Union restrict CDM investment to LDCs.

Brett, Lodewijk, and Andrew Gilder of IMBEWU’s Climate Change and CDM legal consultancy unit also highlight the opportunities and challenges for clean energy investment using alternative market mechanisms being developed under the Kyoto Protocol in an article published today in South Africa’s Business Day.

 

New Zealand ETS review Further Comments

 

At this stage we note that it is not yet policy which limits the ability to assess how it may affect the NZETS.

 

The initial impression is that it has taken into account and is following the proposed Australian scheme to allow integration at some future date. Progressive increasing of the price cap and the requirements to surrender 100% of emissions are all positive but in our view being implemented too slowly given the Australia plan. A sudden phase out in 2012 is arguably too radical.

 

However there have been some perverse outcomes of the current cap of $25. The reported charging at the cap by emitters and then purchasing at a lower rate has created unintended profit opportunities from the NZETS. Whilst there is no specific evidence of this there are reports of second tier emitters becoming points of obligation to avoid paying $25. If we have an increasing cap the regulator should look carefully at what people are paying for costs that are attributed to the carbon charge.

 

For pre 1990 forest owners I cannot see any relief for them as the report would recommend changes but notes this is not possible due to the international rules.

 

One issue we are following which may change the landscape for forest owners is the classification of carbon credits as a financial product in Australia. The report considers linking to the Australian scheme and the question that is not addressed is how the New Zealand regulatory environment would need to change.

 

What flows from this is the current perception of risk by forest owners. The majority of advice has been from forest managers and this has failed to promote the awareness of risks. The panel recommends in its report this be addressed. The reality is this must in EITG view is via proper advice from properly qualified people.

 

The choice to opt into the FMA with less than 100ha is a sensible recommendation. Increasing the threshold however is not without risk and no empirical data has been supplied to argue increasing the threshold. Once data is available from 2012 measurements it may be this risk can be assessed and the threshold reviewed.

 

The pooling to create an insurance risk pool matching the Australian scheme whilst noble fails to consider the Australian scheme excludes plantation forest. Forest owners have access to and can fund private insurance. This should tie into foresters receiving proper advice.

 

Exclusion of industrial gas CER from the NZETS has been raised but no real recommendation made on the impact of this on the costs of carbon and on the ETS. An urgent recommendation for review is therefore appropriate.

 

No real comment has been made on the operation of the ETS. The timing of allocation and surrender, currently on fixed dates, is in our view counterproductive and creates distortions in the market. There is little in the way of recommendations on the structure and operation of the ETS. Adding 9000 farmers of points of obligation as the report suggests would put further significant pressure on the regulator all during one time period during the year.

 

On the operation of the EUR there is some suggestion that information be released so as to preserve commercial confidentiality in relation to specific transactions.

 

Given the purpose of the ETS is provide a readily discoverable price of emissions we question this advice. The stock market is open and subject to disclosure rules to protect parties from people miss using information.

 

The review panel suggests that commercial confidentially is above the need for transparency in the market. To date we believe one of the flaws in the ETS has been the lack of credible and reliable information to buyers and sellers. The market is essentially bilateral trades which are unreported. Carbon Match offers a bid/ask service but this lacks depth and potential transparency.

 

The concept of averaging for post 1989 forests to deal with liabilities at harvest is raised the proposal suggests the Government use a scheme to limit credit issuance to the long term post 2008 average carbon stocks and in turn it supplies the credits to meet harvest liabilities. We don’t think this is practical as the majority of post 1989 forests will be harvested from 2020 onwards (the so called wall of wood) and the average carbon stock approach fails to address the fact that ALL units issued under the ETS will need to be surrendered at harvest. In our view averaging will only assist those with new plantations post 2008 of which there are few.

 

NZETS – the Concept of a Participant

 

Stephen Ladányi is a subject matter expert on the operational design and implementation of the forestry sector aspects of the NZ ETS. He worked for MAF as ETS Implementation Manager from the first introduction of the ETS legislation in late 2007 until late 2010.

 

Stephen has kindly contributed an explanation of the concept of a participant as it applies to the New Zealand Emissions trading scheme.

 

The concept of “Participant” is one of the key design features of the New Zealand. Undertaking particular activities described in the ETS legislation determines who is a Participant.

 

For most sectors, these activities have been described high up the supply chain to minimise the number of Participants and thus reduce ETS administration. The forestry sector is the exception as the activity descriptions potentially result in many thousands of Participants.

 

The following table gives some examples of ETS activities:

Activity	Type of Participant
Importing coal.	Mandatory Participant
Producing iron or steel.	Mandatory Participant
Deforesting more than 2 hectares of non- exempt pre-1990 forest land in the 5 year period commencing on 1 January 2008 (or any subsequent 5 year period).	Mandatory Participant
Owning post-1989 forest land (not subject to a forest sink covenant under the Forest Act 1949).	Voluntary Participant

 

The term Participant is a singular concept even though multiple parties may be involved. In each of the following examples there is only one Participant:

 

Example A.           John Smith

 

Example B.           John Smith, Mary Smith

 

Example C.           Carbon Credits Limited, John Smith, Bernice Bloggs (a partnership)

 

Example D.           Your Company Limited, My Company Limited (a joint venture)

 

 

It is the Participant as a singular entity (and not the component parties individually) that has entitlements and obligations under the ETS. For example, it is the Participant that:

• Must have a holding account at the NZ Emission Unit Register (NZ EUR)
• Is entitled to apply for carbon credits
• Is obliged to surrender carbon credits
• Must make keep certain records
• Must make certain declarations

 

 

There are no “associated persons” rules for Participants in relation to post-1989 forest land in the ETS. Take the following example:

• John Smith, Mary Smith and Bill Bloggs together own 90 hectares of post 1989 forest land that is registered in the ETS. Collectively, they are the Participant in relation to the 90 hectares and must have an NZ EUR holding account
• Bill Bloggs also owns an additional 75 hectares of post-1989 forest land by himself. He is the Participant in relation to the 75 hectares and must have a separate NZ EUR holding account
• For the purposes of determining whether or not either of these two Participants exceeds the Field Measurement Approach 100 hectare threshold, no account is taken of the fact that Bill has an ownership interest in both of the forests. From the perspective of the ETS, these are two completely unrelated Participants neither of which exceeds the FMA 100 hectare threshold

 

Of course, there are associated persons rules in relation to pre-1990 forest land exemptions and allocations. But that’s another story.

 

Stephen can be contacted via email at

zoltan@paradise.net.nz

 

Our ‘Silly Fool’ Reacts to the NZETS Review and the Self Insurance Pool

 

This “silly fool” has been caught again by the Governments “independent review panel” announcement that 5% of carbon grown by foresters would be retained for “self-insurance pool” and/or to cover any liability at harvest that the owner may be unable to pay.
This so called “self-insurance pool” sounds like the Government Accident Compensation Scheme to me…. Very expensive.

 

Quote: “The two predominant recommendations for post-1989 forestry are around the methods of collecting deforestation liabilities

 • Averaging ……. and

 • A self-insurance pool: Under this scenario, a pre-determined percentage of post-1989 NZU allocations would be retained by the Government for future liabilities caused by natural disasters.

 

Neither of these recommendations should have market moving implications, however on balance they appear practical approaches to protecting retail forestry investors who are the predominant player (by volume of participants) in this space.”

 

On a forest, say of age 12 years, works out at $62.58 ha (based on the price I sold my NZU at in February 2011)   BUT it only covers the carbon liability! I still have to insure for re-establishment costs, plus fire fighting and possibly loss of future earnings plus there is a carbon fund coming to market where people can borrow credits to cover harvest liabilities.

 

I am already paying for FULL forest  AND carbon liability insurance, from NZ Carbon Insurance, that covers everything, all of the above plus fire, storm, clearing, replanting and especially the carbon NZU that I have liability for in the event of disaster…..the cost of this comprehensive cover is half at $31.25 Ha.

 

AND if I have “foolishly” sold all of my NZU, not taken steps to plant more offset forest or invested the carbon returns in another saleable asset and at the time for harvest, my liability is greater than the harvest returns plus the saleable asset ….. why would I harvest at all?

 

Have they allowed a way for me to opt out of this 5% retention if I desire and for the insurance industry to continue to be effective? There is a carbon fund coming to market where people can borrow credits to cover harvest liabilities.

 

The decision makers need more information and we foresters and others in the industry will do our bit to try to educate them and leave the most of the solutions to the private market.

 

The Act allows the government to go after any forest owners and directors, if they can’t meet their obligations and commitments, they are all personally liable. They cannot do a runner!

 

Why does the government place levies on every product, I, as a primary producer have been forced to pay over my thirty year farming experience on maize, wool, meat etc and never had any significant benefit from because those who manage it are salaried and never put out any personal financial risk…. I stopped growing maize in 1979 (never did get a penny of the stabilisation fund I had paid into), because the return was equal to 5 sheep per acre, on 11 sheep per acre land, stopped wool farming in 1987 the last time the price for crossbred wool was $6.80 the level it finally got back to earlier this year but it needed to be at $11.50 to be equal to inflation. Went for bull beef and stopped that in 1989 when the schedule was $3.30kg, which it finally got back to a few years ago…….. I planted trees because the forestry returns, averaged over the 60 years prior to 1990, were +3% (positive to) of inflation and no levies. All forms of animal based commodities were below inflation, dairy at just under inflation, for meat and wool farm returns (minus) -3% and had levies.

 

When I returned from my OE, in the mid ‘70’s, shearing and building a bit of capital to get started farming for myself I had found a market for NZ lamb, “great I am going to be an exporter and make some serious farming money”, went to the meat board in wellington to get started, I had a market for 2 containers a month.

 

Market 1, the front of the lamb to the end of ribs in Kenya to a big Kenyan family I had met. The Kenyans could not afford the prime end.

Market 2, for the rear half of the lambs, prime chops and back legs to a friend who owned butcher shops in Ulster, who I used to bone out NZ lamb with, for sausages!

 

The good old NZ Meat board said “give us the details and we will do it”. They didn’t even offer to pay me for the market that I had secured…….

 

So what has that got to do with the “self-insurance pool”? Everything. The point is it costs twice as much for a quasi- government levy collecting organisation to do anything, its not performance based as my business is. The cream gets licked off by this system.  None of the levies or other donations that I have been forced to pay over the years have had an impact anywhere near even keeping up with inflation or being price beneficial or market beneficial in my experience.

 

Carbon Monitor Volume 16 Issue 8 – September 2011

 

Field Measurement Regulations in the NZETS Effective 1^st September

 

In New Zealand under the NZETS if you have 100 hectares or more of forest land registered in the ETS, or the PFSI, you will be required to use the Field Measurement Approach (FMA) to determine the change in carbon stocks in your forests. It comes into force on 1 September 2011, for the mandatory emissions return covering the commitment period 2008 to 2012. From 1 September 2011 participants will be able to request their sample plot locations.

 

If you have 100 hectares or more and are thinking about registering in the ETS or PFSI, be sure you get your application in quickly. It will take time to prepare and process the application, and for you to complete the additional requirements of the FMA, in time for the mandatory emission return. If you are looking at adding or removing land, MAF recommend doing this prior to requesting your FMA sample plots.

 

www.bit.ly/maf-fma

 

Commentary

 

We have discussed the risks associated with the new FMA particularly for those forest owners that have already sold NZU on the market based on the regional look up tables.

 

There is a real risk that credits will need to be repurchased and surrendered if a participant’s forest is storing less carbon than the look up tables construed.

 

Remember also that the PSP sample plots will be provided by MAF and not those already selected and used for standing timber calculations. The customised look up tables will be interesting to compare and contrast the forest owner’s expectation of standing timber from their own sample plots using the 300 index.

 

Those that have opted into the NZETS to receive credits but not sell them and therefore preserve their right to harvest in the future (free of the Government’s guarantee to cover credits at harvest) are in our view faced with unfair cost. However the obligation to use the FMA is once every 5 years, and if suitable the PSP used by forest owners presently could be changed to the same MAF PSP to minimise the extra costs of measuring two lots of sample plots.

 

To those foresters with timber growing at seriously goods rates in excess of the norm in the region, EITG members being some of these, are up for a bonus of potentially 50% more credits issued to their accounts.

New Zealand ETS review Part Summary

Forestry allocations have been much, much lower than expected – only 25% of the 76.1 million forestry NZUs expected by the end of 2012 have been allocated to date.

Similarly, the annual allocation to Emissions Intensive and Trade Exposed industries is 25% less than was expected – at 3.5 million units per annum rather than 4.7 million.

However, in aggregate, physical emissions from the industrial, electricity and transport sectors (over the first 6 month period ending 31 Dec 2010) were also much lower than projected, at 16.3m tonnes, rather than 18.86m tonnes.  This appears to be mainly due to lower than expected emissions from the electricity sector. Emissions reported from Transport were actually higher than expected at 8.039m (cf 6.84m as previously estimated).

Of the approx 8.3 million units surrendered on 31 May 2011 to cover emissions from 1 July – 31 December 2010, only 133,150 were imported CERs.

Finally, Minister for Environment Nick Smith has requested a further update from the ETS Review Panel before publishing their Review report.  This is in order to allow them to take into consideration the announcements made more recently by Australia, including the exposure draft legislation released recently. That report from the Panel and more detail from Government on the future direction of the NZ ETS are expected any time now.

Commentary courtesy of www.carbonmatch.com

What are the Potential Risks in Land Transfer under the NZETS

 

It appears that if a party purchases land that is involved in the NZETS, something that can be established from a search of the land title, there is no independent search that can be performed to establish the position of the land in terms of the NZU units issued, surrendered or sold.

 

According to the NZEUR www.eur.govt.nz the registry where all carbon credit transfers are recorded, such information is confidential to the participant and is not publicly available.

 

The question is, if this is the case where does a purchaser’s legal advisor go to establish the adjustments or indeed a reasonable price, when settling or negotiating a land transaction? Accepting the current land owner’s representations appears not to be a reasonable approach.

 

Even before settling a piece of land the price needs to be established when entering into an initial contract for sale and purchase, and this cannot be done without full knowledge of the status of any NZU or AAU units issued. Provision could be made in the contract for a formula to adjust the price at settlement (as is the case with rates, and bodies corporate) but where can the data for the calculation be sourced from?

 

Perhaps one could write to the NZEUR on settlement date with a waiver from the current land owner to disclose the EUR transactions for that piece of land?

 

Questions on the NZETS from Forest Owners

After meetings in South Waikato a rural Bank Manager wrote to us with a few questions on the NZETS and forestry:

Q.  Owners with more than 100ha must use the field measurement approach (FMA). I’ve heard this method often calculates more carbon units/ha than the published default look-up tables? I have friends with about 95ha. Their question is how strictly do MAF(Ministry of Agriculture and Forestry) adhere to the requirement that any forest(s) totalling less than 100ha cannot use the field measurement approach?

A. The rule is quite clear – you must have more than the 100ha. MAF also decide the total area when you apply. With the FMA the associated persons rules DO NOT apply, that is if you are a beneficiary say of a trust with 10ha and own 95ha then you are not included in the FMA even though the total holding is 105ha. Similarly you can have 95ha in the PFSI and 95ha in the NZETS and are not included in the FMA.

Given this is a specialist legal test we recommend you seek independent legal advice on this and any other points. One final issue is the FMA may in some cases provide LESS credits than the old look up tables, the risks are significant to those already selling credits. We cover this in recent carbon monitors. The potential for increased NZU from the FMA is just that, and given the PSP (permanent sample plots) are MAF selected I would be cautious.

Q. For a forest owner sells some or all of their carbon units, are the sale funds taxable? If so, when they harvest their forest and have to buy units back again, is the cost of these units tax deductible?

A. Post 1989 forest owners are liable for income tax on their NZU or AAU unit sales and similarly can deduct the costs of purchasing units for surrender at harvest or to cover some other loss like fire. There is no GST. Income and expenditure are assessable in the year they occur. Again this is a specialist area and specialist advice should be sought. Units are outside of the trading stock regime, that is they are not taxable when created, but only when sold or transferred. Again the definition of ‘sold’ is wide and transfers of any kind may trigger a tax liability if not handled correctly.

Q. A farm has say 20ha of forest on it. If the farmer sells all or part of the carbon units earned, then sells the farm, how does the prospective purchaser verify if the forest is (a) part of the ETS and (b) how many units may have been sold? A purchaser needs to know this to compare farms they may be considering to purchase.

A. (a) When registering for the ETS the property title is updated noting the ETS registration. Buyers are alerted to the registration but not the status; that is whether credits have been issued or sold.

A. (b) The NZEUR is a register with all transactions logged. The name on the EUR has to be the same as the name on the title. A buyer should be able to search the NZEUR to find the transactions i.e. the credits issued, surrendered and sold thereby giving them an ability to quantify liability or for that matter assets. This facility is NOT available in the current EUR. Apparently MAF will issue a statement to the registered owner as to any outstanding liability. This of course is not sufficient to establish both the asset and liability position of a given forest block.

EITG has made enquiries as to how MAF and the EUR propose to handle the sale of land. We intend to report on their replies at a later date. The preliminary position is that the regulator would pursue the participant at the time of any issue arising before pursuing a land owner.

Given this the ultimate liability is attached to the land (albeit some parties attempting to lease carbon credits via a forestry right say they have legal advice to the contrary) Any ETS liability appears to rank ahead of any mortgage security. Buyers therefore need to be wary of what happens to their deposits on unconditional date as banks often won’t agree to removal of a mortgage without payment in full. An issue relating to carbon credits could cause withholding of proceeds of a sale to meet this liability for instance. Again this is a technical area requiring specialist legal advice.

A further complicating factor is the emergence of the FMA and the retrospective adjustment in the form of a reduction in NZU previously issued (and sold) when field measurements are used in 2012.

Q. Most forests are insured against fire. How does one get that cover extended to the loss of the carbon units that would be lost if the forest burned down. I have asked my insurance company (NZI) who have advised they will not cover carbon units?

A. There are new schemes including www.nzcarboninsurance.co.nz that provide ways to potentially address this risk. Large insurers are not currently offering carbon insurance as we understand it.

Please note: these questions and answers are indicative only and are prepared as examples and should not be relied upon as professional advice. These are complex areas untested in the Courts. You are advised to seek your own professional advice from appropriate specialists. Full terms of use of any information provided are on our web site www.eitg.co.nz

Assistance for pre 1990 Forest Owners in Southland

 

Those wishing to receive their free allocation of NZU units as compensation for loss of ability to change land use must apply before 30^th November 2011. Paul Cox of Forest Tech Services in Mataura is offering to assist forest owners. He can be contacted on 0274514 196 or 03 2033014 email fts_pmcox@ispnz.co.nz

 

Australian Carbon Farming Initiative

 

For a project to be approved under the proposed legislation it will have to pass the Additionality test.

 

This test is one of whether the project would have in fact occurred without the CFI in place, a so called business as usual test (BAU)

 

The concept of additionality has been in place for a long time as a key component of whether a project in a developing country would receive CER credits under the CDM. The CDM includes a financial additionality test. Financial additionality is not a requirement of the CFI. Rather common practice will be the key arbiter of additionality, the question being ‘is the proposed project common practice in the region in which it is proposed?’ Answer no, and the additionality hurdle can be met.

 

Approved methodologies will be issued, and parties may submit methodologies to be approved. Use of an approved methodology will be key to achieving registration. A proposed 1-5 year audit cycle allows issuance of ACCU (Australian carbon credit units) after submission of each audit that must be completed by a Registered Greenhouse & Energy Auditor.

 

A proposed positive and negative list will be published with positive list projects able to be approved and negative list either not approved or requiring much more detailed environmental, social and economic impact data to be approved.

 

Examples in consultation of positive list include capture of land fill methane, and negative list monoculture plantation forestry or changing the management of existing monoculture away from wood fibre to carbon farming.

 

Those who moved early in anticipation of the CFI will not be disadvantaged and projects post 1^st July 2010 will be eligible once the methodologies and scheme are approved.

 

Our ‘Silly Fool’ Closes his liability and Nets $65k

 

Back in March 2011 a carbon monitor reader, the self characterised ‘silly fool’, wrote suggesting it was time to take the money for his post 1989 forest carbon credits and run, forgetting the potential liability as the returns from the carbon credit sales made up for that risk.

 

Recently he wrote to us saying he has replaced the 10,000 NZU units he sold at over $20NZD with a similar number of CER units at $13.50 and collected a tidy $65,000 whilst at the same time covering his future harvest liabilities.

 

NZETS Selling Land Under the ETS and Information for Settlement and Price Negotiation

Requests for information about post-1989 forest land

 

s194 of the Climate Change Response Act covers the provision of information about the status of forest land. It states that MAF must, on request, provide information about any post-1989 Carbon Accounting Area to:

• a landowner if the holder of a forestry right or lease over that land is a participant; or
• a prospective transferee, or holder of a forestry right or lease who has the written consent of a landowner who is a participant.

The information must include the unit balance of the Carbon Accounting Area (i.e. the liability), and any emission returns that have been submitted and the periods they cover.

Further information on land transactions are set out in our Forest Land Transactions in the ETS publication – link on this webpage: http://www.maf..govt.nz/forestry/forestry-in-the-ets