Carbon Monitor Volume 16 Issue 2 – March 2011

 

NZETS Firms as Allocations and CER Affect Price

 

In the recent month we have seen the NZETS dominated by CER credits from off shore projects change into a market more driven by free allocations from the forestry sector and industries at risk.

 

The firming of CER prices and the weakening of the NZ dollar have removed, at least at this time the CER price from driving the NZETS price. CER are now $22NZD. Some brokers have advocated selling CER for a quick profit and purchasing NZU units to cover obligations. This is exactly what we anticipated when we wrote the article in the Reuters carbon market Australia New Zealand January edition.

 

As a result and despite allocations of NZU being sold the market has firmed with sales reportedly in the mid $19 range.

 

Contact Energy reported recently its purchases of carbon credit averaged $21.22 NZD. Some $19.5m was spent in purchases over a six month period. This is significantly higher than the reported average price of NZU units which ranged from $18.40 to $20.50 during the same period. The volume purchased approached 2m units.

Sustainable Long Term Carbon Forestry – an Alternate to the NZETS?

 

While most foresters are now familiar with the NZ ETS few understand the lesser known Permanent Forest Sink Initiative (PFSI). Under the PFSI landowners undertake to maintain a forest sink on their land for at least 50 years with restrictions against clear-felling.

 

The PFSI works well with indigenous forestry because many native tree species are slow growing and can take hundreds of years to mature. However, the PFSI is also an option for exotic forests managed to maximize carbon sequestration in combination with conservation objectives or sustainable harvesting.  Around 60% of registered PFSI forests are comprised of radiata, Douglas fir, eucalypt and cypress plantings.

 

The Permanent Forest Sink Initiative will not be appropriate for commercial timber forests destined for early harvesting however it may be a good fit for those forests that are inaccessible and remote, uneconomic in terms of timber returns and are best managed for carbon. It is also a logical fit for conservation and amenity plantings where management for the long term delivers the best environmental outcomes.

 

Christchurch company Permanent Forests International Ltd have been involved in over 95% of all carbon transactions involving PFSI carbon credits. Permanent Forests say there are a number of carbon markets and buyers who recognize the added value of high quality carbon forestry projects and as a result are willing to pay premium for credits generated by these forests.

 

Pre-2008 ‘non-Kyoto’ carbon is also able to be sold from PFSI forests. Permanent Forests have created and sold more than 350,000 tonnes of pre-2008 carbon to voluntary carbon buyers in NZ, Europe, and North America. This means carbon generated back to 1990 from forests registered under the PFSI can be sold.

 

For those interested in the PFSI contact Ollie Belton at obelton@permanentforests.com

 

CDC Climat Report on Agriculture and Forestry in the NZETS

 

Mark Belton of Permanent Forests International has co-authored a paper[1] with CDC Climat about New Zealand’s climate change policies relating to agriculture and forestry.

CDC Climat, a subsidiary of French financial institute Caisse De Depots, is a major player in the carbon world. It provides carbon market services such as the BlueNext carbon exchange, invests directly in carbon reduction projects, and carries out research and provides policy advice for both the private and public sector.

The report describes New Zealand’s experience to date with its ETS in relation to the land use sector and includes a comparative analysis of NZ’s forestry mechanisms. The NZ ETS designs for inclusion of forestry and agriculture sectors are highly innovative and of great interest for other jurisdictions. France and other northern European countries are increasingly supportive of more effective inclusion of forestry in efforts to reduce GHG emissions. This support is important given EU ETS excludes forestry.

The report is available for download from the CDC Climat publications webpage (link here).

CDC Climat also hosts a carbon forest and wood club (Club Carbone Foret-Bois) for forest sector participants. Mark Belton is an expert advisor to the club.

 

VCS Projects Underway

EITG consortium partner Equitech is working on VCS carbon credit projects involving forest conservation and reforestation in Asia with EITG mentoring assistance and input.

 

Currently VCS credits are reportedly receiving 8-9 USD per credit in the voluntary market.

 

The projects involve in one case a rubber plantation and follow the VCS approved project for a rubber plantation in Guatemala. The additionality case in that project was that rubber plantations are not common practice in the region due to fungal problems with the trees. The plantations are characterised also by the need to fell the rubber trees and replant.

 

This raises the question if the carbon credit income reduces the risk of a project to what extent are these risks also risks to the carbon income. It would appear in the case of the Guatemala example the carbon income could be directly affected by the key risk the fungal problems.

 

So does the carbon income really reduce the risk – probably not.

 

The other approved VCS project a forest regeneration on slash and burn land in Kenya is modelled on another methodology. The volume of credits per hectare is modest in comparison to plantation forestry and the risks such as fire from drought are potentially quite high.

 

The VCS addresses this by encouraging a 20% buffer of credits to be withheld as part of the project.

 

Interestingly the methodologies for both projects have their roots in CDM Afforestation Reforestation approved methodologies.

 

The market for forest based CDM credits, so called temporary cers or Tcers or long term cers of Lcers is minimal, the latter are banned in the NZETS.

 

As you can see from elsewhere in this months CM the Europeans in particular are warming to the idea of forest credits in the EUETS in the future.

Strong Demand for CER from Europe

EITG has recently concluded a deal that involves sale of CDM credits or CER units to a major European purchaser of these credits. A large number of bidders were invited to resubmit offers post closing a week after the term sheet was issued in the market.

The contract is a long term off take agreement which covers 7 years of credits from a biomass power facility.

Currently EITG is in negotiation with buyers for 8 more similar projects located in Africa and China.

The aggregated volume of CER involved run into the millions of tonnes.

Deal structures that are achievable at present include up front payment for project development funding and long term either fixed or indexed price agreements.

Most bids did not require that the EUETS continue to permit CER units into the scheme.

The main factor project developers should be aware of is the reticence of buyers to look at projects registered post 31/12/2012.

 


[1] CDC Climat, ‘Good Shepherd or Black Sheep? Tackling Forestry & Agriculture Emissions In New Zealand’s New Carbon Market’ Climate Report (No 26, Nov 2010)

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One Response to Carbon Monitor Volume 16 Issue 2 – March 2011

  1. Retha Bollman says:

    Hello.This article was extremely fascinating, especially because I was searching for thoughts on this subject last Friday.

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