‘Silly Fool’ Sells NZU at $20, buys back CER at $13.50 and pockets $65,000

August 12, 2011

Back in March 2011 a Carbon Monitor reader wrote to us with the quandary of what to do with his post 1989 NZU units (those with a surrender liability for loss or harvest) suggesting if he took the funds, invested in real estate then he would be ahead even with a future liability. Here is the latest update on his story.

He writes:

So sitting here today 7th August 2011 and the “silly fool” didn’t buy the building because he’s been dithering around, being scared off by the USA and Europeans et al being more in hock than he is! And that was before the melt down on Friday in the international markets.

But he’s just bought 10,000 CER for 13.50 or NZ$135,000. Leaving a profit of $65,000 or around 32.5% and zero liability and still 10,000 units to sell again on top of the next years growth.

Back on march 7th, 2011 when he first wrote, these CER’s would have been $23 ‘ish while he sold his NZU’s for $20

Meanwhile the forest has grown half of the years carbon adding that to the now “free of any liability” for future sale or otherwise.

Mmm rollercoasters and plans and budgets and professional advice, ye-gods I would hate to be trying to anylise my way into recommending an investment path in these times.

Why CER and not European units? Australia has been described as “a huge sandpit full of natural resource” and relatively, not that many people…… so ultimately its dollar will be stronger than most other currencies because they can just keep digging a bigger hole and selling the spoil. The Europeans on the other hand have millennia of culture and peoples, rules and regulations, subsidy mentality and other restrictions to overcome…. This will all conspire to keep that currency “limited”. NZ on the other hand is so small that one “wealthy” person or company can make our currency rise or fall at their whim, let alone all of the other factors.

NOW CAN WE HAVE SOME FOREST PROFESIONALS COMMENT? …. DISCUSSION?….SOME FARM FORESTY MEMBER COMMENT….. Or are you all just reading the certified stuff that has been accepted into peer review. Sorry but my qualifications are simply a heavy transport licence and an ability to make serious capital using my intuition.

So have I left a profit for someone else or have I got the bottom of the market? I always reckon to leave a profit either way. Only a fool tries for maximum all of the time….. wonder if this fool should have bought back in bits and spread the risk? Time will tell and it would make it to hard to relate on this post if the trades were in bits and pieces!

Silly Fool

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Establishing the Liabilities due to Participation in the NZETS when selling or purchasing land

August 5, 2011

The NZEUR http://www.eur.govt.nz is the register where transactions are recorded under the NZETS. We asked the NZEUR the following question:

I have been asked how a prospective purchaser of forest land that is registered in the NZETS, and can be searched on the EUR, would know how many credits had been issued, sold or surrendered for a particular title.

The point being the liability is transferred with the land and an incoming purchaser would want to know (presuming the land is registered as post 1989 forest) the credit assets and liability position at the date of purchase.

Their reply was

You are able to search the Participant Register on the EUR and you can also search by Account Holder name. Neither of these searches however will give you details of credits issued, sold or surrendered for any particular title.

There are certain transactions which are required by law to be publically viewable such as those under the Permanent Forest Sink Initiative. You can view these via the ‘Ministers Directions’ tab.

Regarding the liability with a particular land title, my understanding is that due to confidentiality it could only be disclosed by the land owner themselves.

This in our view presents real problems for those purchasers of post 1989 land that is part of the NZETS. There appears to be no source of independent certification of the assets and liabilities tied to the land as there is with the land title registry. Searching and establishing such a NZETS liability as part of a land settlement statement would be essential?

 


Assistance for Pre 1990 Forest Owners in the NZETS as Deadline Looms

August 3, 2011


Those wishing to receive their free allocation of NZU units as compensation for loss of ability to change land use must apply before 30th November 2011.

In Southland 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


NZETS Questions from Forest Owners

August 3, 2011

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. If you are a ‘participant’ then the associated persons rules apply, that is if you are a beneficiary say of a trust with 10ha and own 95ha then in theory the total is 105ha and you must apply the FMA. Given this is specialist legal stuff we recommend you seek independent legal advice on this point. 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. Again the definition of ‘sold’ is wide and transfers of any kind can create 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 as to any outstanding liability but 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.

The 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) and also is ahead of any mortgage security. Buyers therefore need to be wary of what happens to deposits on unconditional date as mortgagors often don’t like to pass title without full discharge of mortgage. 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.

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 I 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. You are advised to seek your own professional advice from the appropriate specialists. EITG terms are at http://www.eitg.co.nz/index.php?option=com_content&view=article&id=87&Itemid=114


Carbon Monitor Volume 16 issue 7 – August 2011

August 3, 2011

Australian Carbon Scheme Announced

A price on carbon pollution creates incentives for businesses to reduce pollution and invest in clean technologies and clean energy generation. The claim is a market based approach ensures that pollution is reduced at the lowest cost to the economy.

Under the pricing mechanism, around 500 of the country’s biggest polluters will be required to pay for each tonne of CO2 they emit into the atmosphere. Modelling by the Australian Government suggests that this will create economic incentives to reduce pollution in the cheapest possible way. The carbon charge will be revenue recycled into industries at risk, low income families (less than AUD$150,000) and clean energy initiatives. This is intended to transform not only the tax system but the Australian economy triggering a ‘clean energy future’.

Australian Minister for Climate Change and Energy Efficiency, Greg Combet, stated the four key components of Australia’s policy to combat global warming:

  • Establishment of a carbon price;
  • Support for renewable Energy;
  • Support improvements in energy efficiency; and
  • Store carbon through changed land-use practices.

Key elements of the Australian Carbon Pricing Mechanism

Price

The carbon pricing mechanism will commence on 1 July 2012 with a price that will start at AUD$23 per tonne indexed to increase at 2.5% per annum.

The carbon tax will transition to an emissions trading scheme, with the price determined by the market.

There will be a price cap and floor that will apply for the first three years of the flexible price period. The price cap will be set at AUD$20 above the expected international price and will rise by 5% each year. The price floor will be AUD$15 rising annually by 4%. ($15 AUD is around $19NZD cf NZU price of $17?)

The Australian scheme pricing pricing based on forward EUA and CER prices on July 11th 2011 may look like this

Source ideacarbon.com

Coverage

There will be broad coverage from the commencement of the program encompassing approximately 60% of Australia’s emissions (360mt per annum) in the stationary energy sector, transport, industrial processes, non-legacy waste and fugitive emissions.

International Linking

There will be international linking to credible international carbon markets and emissions trading schemes from the commencement of the flexible price period (i.e. 2015). At least 50% of a liable party’s compliance obligation must be met through the use of domestic permits or credits (i.e. Australian Carbon Credit Units – ACCUs).

Carbon Farming Initiative – CFI

Subject to a 5% limit during the fixed price period Kyoto-compliant Australian Carbon Credit Units (ACCUs) created under the CFI can be used to meet a compliance obligation under the carbon pricing mechanism.

At this stage commercial forestry appears to be excluded from the CFI. Projects must meet additionality criteria (including not to have been business as usual ‘BAU’ in the absence of the carbon scheme)

For more details see our live tweets on www.twitter.com/eitg direct from the briefing. Extensive youtube videos of the briefing are on the eitg web site www.eitg.co.nz

Commentary – Linking to the NZETS

Forest carbon credits in the NZETS, the predominant source of ‘excess’ and therefore tradeable credits are not subject to an additionality test. The principal reason is that the forest owner remains liable for the loss of carbon at harvest, and eligible forests had to be non forest land as at the 31/12/89 meaning that from a Kyoto perspective they constituted additional carbon removed from the atmosphere.

The question is if the NZETS and the AUETS (or CPRS) are linked, and everyone is mooting this as likely then what instruments can trade across the Tasman. Certainly ACCU will be eligible in the NZETS, we don’t see a problem with that. However the other way around seems fraught.

However the other ‘gorilla in the room’  is that around 2020 New Zealand harvest of Kyoto Forest will create the ‘wall of wood’ has the potential to turn the forest industry into one of the single largest emitters. This will leave the Government (given many foresters have yet to opt in) with the liability to surrender credits to allow forest owners to harvest. The credits received from these forests (2008-) will have long been used for compliance and will be in effect cancelled.

So does linking to the AUETS (CPRS) help New Zealand post 2015 and when the wall of wood arrives? To early to call.

 

Japan Looks beyond Kyoto and Approves 29 Projects

With no treaty in place post 2012 Japan has approved 29 projects under an alternative mechanism to the Kyoto Protocol. The alternative mechanism involves bilateral cooperation with developing countries for technology transfer and easy finance.

Out of the 29 projects in the alternative mechanism nine projects are for energy efficiency, seven for REDD+, three each for transport, renewable energy, waste management and others and one for biomass utilization. The developing countries where the projects are located are Vietnam, Malaysia, Laos, Sri Lanka, Mongolia, India, Mexico, South Africa, Indonesia, Cambodia, Brazil, Angola, Thailand, China and Russia.

These projects are will be managed and implemented by Japan based entities such as Mitsubishi Research Institute Co., Ltd., Ichikawa Environmental Engineering Inc., Katahira Engineering Inc., Shimizu Corporation, Inc. Recycle One, Konsabesho International, Tepia Japan, Ltd., Mizuho Information & Research, Inc.

http://www.climate-connect.co.uk

 Carbon Positive Comments on Australian Carbon Scheme

Early estimates suggest Australia’s carbon tax rules provide potential demand for more than 50 million tonnes of forestry and farming offsets over its first three years. Canberra announced over the weekend a carbon tax of $A23 a tonne ($US24.65, €17.30) to apply to 60 per cent of the country’s greenhouse-gas emissions base (carbon dioxide, methane, nitrous oxide and perfluorocarbons) from July 2012. The tax will rise by 2.5 per cent plus inflation each year to a level around $25.50 by 2015.

The tax is a transitionary arrangement for three years after which an emissions trading scheme (ETS) will apply from mid-2015. Together the hybrid approach is designed to deliver 160 million tonnes of emissions reductions to meet the country’s target of a 5 per cent reduction in emission below 2000 levels by 2020. The carbon tax system and the ETS won’t cover agriculture but will recognise forestry and other land-based activity generated under the Carbon Farming Initiative (CFI) offsets scheme, a separate piece of legislation set to pass Parliament.

The carbon tax will apply directly to 500 large emitters in sectors responsible for around 350 million tonnes of CO2e emissions annually. These include the power generation, steel, aluminium, zinc, paper & packaging and waste industries, as well as the fugitive emissions from mining. Blanket coverage of transport fuels was dropped from plans late in the process but rail, domestic aviation and shipping remain included. Up to 5 per cent of any emitter’s obligation can be covered with offsets. No CERs or other international carbon instruments will be eligible in the carbon tax period, but the government has promised wide eligibility under the ensuing ETS.

The carbon tax needs the approval of the nation’s Parliament but this appears a near certainty, despite a fierce campaign against it by the opposition. A cross-party committee consisting of key non-government MPs and Senators – the Green Party and two conservative independents – required to pass the bill in both houses of Parliament has signed off on the plan after being deeply involved in it development. Another independent has signalled support, giving the government the numbers. Winning their approval required significant compensation payments for emissions-intensive industry and households already suffering sharply rising electricity prices. The government wants the carbon price legislation passed by September or October.

 

Offsets boost

The CFI bill has already passed through the lower house of Parliament and is expected to pass through the Senate in coming weeks. The CFI allows a range of activities of which only some are recognised under the Kyoto Protocol. Kyoto-compliant activities include reforestation, savannah fire management, livestock methane & manure management, landfill waste and fertiliser emissions. Non-Kyoto activities in CFI are avoided deforestation, soil carbon sequestration, burning of stubble/crop residue and rice cultivation management. CFI offsets eligible for use by emitters to reduce carbon tax obligations must be Kyoto-compliant. Non-Kyoto offsets can be sold to the voluntary market and won’t be counted towards the nation’s reduction target, providing additional, beyond-target abatement that will appeal to voluntary buyers.

With the CFI scheme only in its infancy, and the long lead times need to generate land-based offsets, supply is likely to fall well short of potential demand, at least in the first year or two of the carbon tax. Overall, however, there are significant incentives for investment in offsets supply. At a fixed carbon price level of AUD$23-25 a tonne, there is significant room for project developers in forestry and other land-use activity to deliver offsets at well below the tax price. The government has also announced it will spend AUD$250 million buying non-Kyoto CFI offsets over six years to help kick-start the voluntary side of the offsets market. The government will also facilitate the sale of Kyoto-compliant offsets overseas.

http://www.carbonpositive.net

New Zealand Pre1990 Forest Carbon makes offer to Market

 

New Zealand Pre 1990 forest carbon is offering to buy pre 1990 forest owners carbon credits. www.NZPre1990ForestCarbon.co.nz

These credits are issued to land owners in compensation for the lack of ability to change land use. The NZETS makes forest owners of pre 1990 forest liable to surrender credits for the total carbon content of their forest (some 800 units per ha) unless they reforest. Hence changing land use is economically no longer feasible.

The offer is $100 up front and another $225 at the end of 2011. This offer of $325 per ha values an NZU unit at $14 given the compensation maximum allocation of 60 units per ha 23 by end of 2011 (the balance of 37 for $425 in 2013)

The market opened at around $17 and has traded as high as $22 according to information supplied by Westpac.

The promoters of the scheme offer all the benefits of the pre 1990 allocation of 60 units such as tax free status on the basis of the forest owner extending credit to the scheme.

Unfortunately Carbon Monitor has to ask is this offer along the lines of low ball offers in the share market made to ill informed investors? The offer is at least 30% below what is generally accepted as a reasonable price for an NZU.

The promoters suggest they are taking the risk of the NZU price but supply no guarantees of payment.  Westpac Bank is noted as their carbon trading partner.

The company itself has only1000 shares.

Clean Development Mechanism Update

 

The CDM is a component of the Kyoto Protocol where developed countries can sponsor projects in developing countries that would not normally go ahead. These projects receive carbon credits in the form of Certified Emissions reductions or CER.

Business as usual or BAU meaning a project would go ahead without carbon credits fails what is called the additionality test of the CDM and would generally not receive credits. It is important not to make conclusions in this area without specialist advice.

Meanwhile the CDM RISO web site reported in their regular CDM update that in June 169 new CDM projects entered the Pipeline. We only saw higher values in the two months July 2007 and October 2008!

The average time delay from the start comment date to the registration date has decrease from 700 days in 2008 to about 230 days now. The average for all registered projects is 533 days.

The issuance of CERs in May was again high: 22.6 MCERs.  Our projection for the number of CERs issued until the end of 2012 is almost the same as last month: 1090 MCERs compared to 1080 a month ago.  The increase is caused by not using an earlier date for registration than the date of registration action for some projects. The amount of CERs issued is now 647 MCERs. The average issuance success is 94.1%.

The CDM Pipeline now contains 6416 CDM projects after subtracting the 935 CDM projects where the DOEs terminated validation, the 179 where the DOEs (designated operational entities the validators and verifiers of the CDM) gave a negative validation, the 198 projects rejected by the EB, and the 52 withdrawn projects. 184 are in the registration process.

North Korea is new to the CDM Pipeline with three 10 MW and one 20 MW hydro power projects.

The monthly number of new PoAs (program of activities) is again high. In June five new PoAs entered the Pipeline. The number of PoAs in Africa is now 22 or 23% of the 97 existing PoAs. This is a much higher percentage than Africa’s 2.6% of all normal CDM projects. In July 7 new CDM projects were submitted from Africa, only May 2009 was higher.

To new methodologies using baseline benchmarks were approved at EB61:

AM91: “Energy efficiency technologies and fuel switching in new buildings”

This is the first approved methodology that includes efficient thermal envelopes with efficient lighting, HVAC etc for new buildings (residential, commercial, and institutions).

ACM19: “N2O abatement from nitric acid production” with a benchmark decreasing from 5.1 kgN2O/tHNO3 in 2005 to 2.5kgN2O/tHNO3 in 2020.

There are now also an approved large scale methodology for mangroves:

AR-AM14: “Afforestation and reforestation of degraded mangrove habitats”

 

What is the Price of a Carbon Credit?

 

Much has been made about price in the “market”. The reality is there are many carbon credit markets, the EUETS, the NZETS and voluntary markets to name a few.

The Kyoto Protocol, administered by the United Nations issues assigned amount units or AAU units to participating countries in respect of their ‘cap’ from 2008-2012. New Zealand received some 394 million AAU units. The Kyoto mechanisms Joint Implementation (JI) and Clean Development Mechanism (CDM) projects create ERU and CER respectively, both of which are recognised by the UN for compliance with Kyoto.

So the NZETS and the Australian CFI offer the option to convert an NZU from forestry into an AAU or the CFI will issue AAU directly. Only New Zealand post 1989 credits from forestry either NZU or the PFSI are permitted to receive an AAU. The commitment period reserve of a country also restricts how many AAU can be transferred to another country.

So an AAU appears to be the best unit for Kyoto –right? Simply the answer is NO. The AAU is only useful for a country to comply with its obligations and has little use internally in an ETS like the NZETS or the EUETS.

The AAU market is thin and as a result there is little information. The first real Kyoto trade in the NZETS was for around 1 million AAU at around 11 Euro to Norway. Since then a few NZ AAU from forest went to Japan (certainly thousands at the outside) A number of others from European or former Soviet Union (FSU) went into Japan – this time by the million.

Early in 2009 optimism (not real market data) lead to estimates an AAU would fetch over $25NZD and forest owners clamoured to understand how to get an AAU.

Since that time however there has been little to no activity other than that noted above. In fact the BNZ Bank recently reported in its June 2011 Carbon Markets monthly that Lithuania sold some 30million AAU then reported in July it received some 150million Euro or 5 Euro per AAU. A further 20million are reportedly on offer.

So the reality is that an AAU is a poor cousin to compliance units such as an NZU, EUA or CER arguably fetching half to a third of their value or less.

Why? There is a substantial oversupply of AAU due to the collapse of the economies of the FSU post 1990 leaving their emissions significantly below 1990 levels and therefore lots of AAU.

This so called ‘hot air’ has been the root of many of the market design challenges for the EUETS and NZETS.

Countries looking to comply with Kyoto (such as Spain) are however ready to buy these AAU units. Meantime within their borders the EUETS operates to regulate local emitters.

Deadlines Loom for pre 1990 Forest Owners

Those with less than 50ha of pre 1990 forest must apply for an exemption from the NZETS before 30th September 2011 according to MAF

Those wishing to receive their free allocation of NZU units as compensation for loss of ability to change land use must apply before 30th November 2011

http://www.maf.govt.nz