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?

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