Submissions on the 2012 Consultation Document “Updating the New Zealand Emissions Trading Scheme”

May 11, 2012

Submission on the 2012 Consultation Document “Updating the New Zealand Emissions Trading Scheme”

 

Environmental Intermediaries & Trading Group Limited has been involved in emissions trading and carbon forestry since 1995. We pioneered much of the work on carbon pooling with our 2000 proto carbon pool. www.eitg.co.nz

 

Since the inception of the NZETS, there has been much optimism for its success which has been dragged down by design flaws not expected or understood at its inception.

 

Success in this case is defined as providing a price for carbon that encourages changes in behaviour of emitters.

 

The factors that have affected the ETS in our view are:

 

  1. The lack of policing of the passing on of the cap to the consumer whilst prices fell. The potential rort on the consumer is substantial and should be investigated fully
  2. The design flaws that permitted large numbers of CER into the scheme, some of which are not acceptable in the main market the EUETS
  3. Design factors that have disguised information and led to disinformation and lack of information
  4. Lack of participation by post 1989 forest owners predominately due to the lack of understanding of risk

 

It is a plain fact to us that the Government is benefiting from the lack of forest owners opting in. This lack of participation also led to liquidity issues that then led to the emitters discovering CER in late 2010 and the arbitrage that followed.

 

We also believe the allocation model, that is all the returns are done in the same period, and the NZU all issued on the one date 31 March are significant design flaws that distort the market and place unnecessary pressure on compliance with the attendant costs.

 

The advent of the FMA also created a secondary and as yet unquantified risk for forest owners. Over allocation from the tables, corrected by the FMA will likely create unexpected cashflow consequences, and indeed produce perverse tax outcomes where tax has been paid on income that should not have been earned.

 

For this reason we recommend that for CP1 the Government absorb the impact of the FMA both positive and negative and use the FMA from 2013 onwards. Given only a small portion of post 1989 have opted in to the ETS there should be a buffer to cover this without recourse to provisioning in the Governments fiscal accounts.

 

We do not agree with the abandoning of the international instruments particularly CER from the CDM. It is a plain fact that CER are currently selling below cost and this and the EU set aside will in time resolve their downward price pressure. We should not overreact but let the market take its course.

 

NZ Inc has to do its share in buying CER to stimulate investment and change in developing countries for they are the ones where emissions are growing and will ultimately be the source of the problem if we do not provide assistance. This assistance is via the CDM.

 

Development of Biomass Power in the Pacific Islands is one area that would benefit from active involvement in the CDM. The savings and environmental benefits dwarf our monetary aid to the Islands. Much of this aid serves as we understand it to prop up a fossil fuel based economy.

 

Auctioning

 

We have singled this out for specific comment as we feel that there are significant lessons from the EUETS where misallocation is said to be the root cause of the price collapse. This collapse triggered the collapse in NZU prices via ERU and CER prices.

 

Revenue from auctions must be recycled but not in a way that distorts the economy. The logical conclusion appears to be that revenue should be used to aid and finance CDM with our near neighbours and the Government (or private sector) reaps a return on the CER income generated. Exporting NZ expertise and engineering rather than subsidise local activities for which the carbon price is arguably supposed to be the regulator of is in our view preferable.

 

Auction could if the Australian model proves workable be the source of some tax reform and redistribution of funds to at risk parties such as the aged and beneficiaries may hold some semblance of sense.

 

One has to be careful when auctioning as the Government has the role of the poacher and the gamekeeper. In the absence of an international cap what does one assume to be the local cap and how is it derived? One would assume that it is going to be a compromise of the lobbies from ‘at risk’ industry complaining that there is no international scheme?

 

The Future of the Forest Industry

 

Conveniently the Government is in surplus for CP1. Where did this come from? The forest industry and those post 1989 owners that have either not sold or opted into the scheme.

 

What happens long term when the forest industry turns into a significant emitter from the so called wall of wood post 2020?

 

It would appear that given the current expectation of a world wide regime by 2020 that the time leading up to will be filled using forest owners credits. What then happens in 2020?

 

Do we simply stop harvesting?

 

We certainly don’t have any of the expected new plantings that were to have resulted from the ETS. Notwithstanding this was probably a short term event as the carbon income would soon be reflected in the land prices.

 

Permanent Forests International

 

We have read and endorse PFI submissions dated 10 May 2012 and have added the above for purposes of clarification and reflection that we work in the post 1989 space with plantation forests.

 

 


The AUETS Funding Australia’s Projected 2015-2016 Deficit

May 9, 2012

The present Australian Government is expecting a carbon price of 29AUD in 2015-2016 to in part fund the deficit. Treasury has supplied their expectation of the price at 29AUD, yet if the price fell to the then applicable floor – there would be several billion short in terms of income, if the price fell to the current international carbon price in the absence of a floor the deficit would balloon to some 5.7bn AUD according to Climate Spectator

http://www.climatespectator.com.au/commentary/why-gillard-can-t-afford-drop-floor-price?utm_source=Climate%2BSpectator%2Bdaily&utm_medium=email&utm_campaign=Climate%2BSpectator%2Bdaily&utm_source=Climate+Spectator&utm_campaign=8385dd3f79-CSPEC_DAILY&utm_medium=email

The issue is of course that the structure of the CPRS is designed to raise revenue so speculation that if it was not in place the deficit would be some $6bn is moot. You may as well say if the top tax rate of 49% was reduced then the deficit would balloon also. Policy dictates the revenue and the policy is clear. The point on the modelling at 29 AUD versus the floor is a good one. No doubt treasury looked carefully at the EU intent to reduce their target to minus 30% with a stated objective of 30 Euro for an EUA by 2020

As they say only time will tell….


Problems Opening Carbon Monitor from the Email Newsletter link when using firefox

May 9, 2012

There is a potential problem when clicking on the read more link in the email Carbon Monitor Newsletter. This calls a link to the PDF version of the carbon monitor. Some users of firefox report this simply hanging and not opening the PDF. The following article will help resolve this http://t.co/2rMwcdT5

We apologise for any inconvenience you may have experienced from this problem

The latest Carbon Monitor can be viewed by clicking here


NZETS Proposed Changes – Supply of NZU Post 2012

May 4, 2012

The Government discussion document at http://climatechange.govt.nz/emissions-trading-scheme/ets-review-2011/statement-for-consultation.html excerpt on NZU supply post 2012

The situation

New Zealand’s ETS is linked to international carbon markets. ETS participants can buy eligible international units to meet their obligations and post-1989 forest owners or pre-1990 forest landowners can sell their units on the international market.

However, the current design of the ETS provides participants with limited access to NZUs and they are required to purchase international units in order to meet their surrender obligations under the ETS. This presents a real risk that New Zealand will end up holding more international units than it requires to meet its international obligations.

With the uncertainty regarding future international agreements, these surplus units may have no market value. This would result in an unnecessary flow of funds offshore which may have an adverse impact on the economy.

Other trading schemes, such as that in Europe from 2013 and the planned Australian Carbon Pricing Mechanism from 2015, plan to manage their level of purchasing of international units by selling additional domestic units through an auction. These schemes set a cap on the total number of domestic units supplied through auction and free allocation. This cap reflects their national targets, thus ensuring that overseas purchasing is no more than the level needed to meet their international commitments.

Cap and auction

The Government intends to introduce a mechanism through legislation that will allow the Minister for Climate Change Issues to auction NZUs. The number of NZUs auctioned, combined with the NZUs allocated to trade-exposed, emissions-intensive businesses, would not exceed the agreed target level of emissions in any one year.

Auctioning NZUs would not raise revenue for the Government as each additional NZU sold would mean one less international unit of equal value would be surrendered to the Government to meet participants’ obligations. However, auctioning would ensure the supply of NZUs to participants is consistent with New Zealand’s targets, avoiding excessive purchasing of international units and unnecessary offshore cash flows.

The use of this auctioning power, including the level of the cap and detailed auction settings, would be subject to a further consultation before implementation. The Government proposes to amend the legislation to allow these matters to be set out in regulations. The legislation would state clearly the matters the Minister for Climate Change Issues must have regard to when setting the cap, such as the level of any domestic or international target to reduce emissions. It would also set a process for amending the regulations.

Any auction would likely be introduced in 2014 or 2015, with a pilot auction held in advance.

What does this paragraph actually mean?

Auctioning NZUs would not raise revenue for the Government as each additional NZU sold would mean one less international unit of equal value would be surrendered to the Government to meet participants’ obligations. However, auctioning would ensure the supply of NZUs to participants is consistent with New Zealand’s targets, avoiding excessive purchasing of international units and unnecessary offshore cash flows.

It seems self evident as the Vendor the Government would receive money for the NZU it Auctions. The money would otherwise go to off shore vendors of JI or CDM credits. Moreover in the absence of an international agreement pre 2015 these NZU are from ‘thin air’ and don’t represent any link to an obligation other than one that is self imposed.

And what about the principal enshrined in international units under the JI and CDM, that is technology transfer, particularly in the CDM that investment in the form of purchasing units will save developing countries from repeating the creation of carbon intensive economies. Have we forgotten that post GFC and is the preservation of our balance of payments more important?


Carbon Monitor Volume 17 Issue 3 – April/May 2012

May 3, 2012

Forestry in the New Zealand Emissions Trading Scheme – Field Measurement Approach

All registered post-1989 ETS participants who have 100 or more hectares in the scheme are subject to the FMA. The FMA regulatory and implementation requirements can be found on the MAF website on the FMA page at

http://www.maf.govt.nz/forestry/forestry-in-the-ets/post-1989-forest-land-voluntary-participation/field-measurement-approach

FMA Information Standard

The FMA Information Standard was published on the MAF website, 23 December 2011. The Standard addresses requirements for data submission to MAF, including how to submit data electronically. It also provides tables of the species codes that must be recorded when participants are required to identify tree species in the field.

Parties interested in developing software for electronic submission of FMA information as set out in the FMA Information Standard should register their interest, by sending an email to climatechange@maf.govt.nz, with “FMA Data Capture” in the subject line.

Once registered you will receive any specialist technical updates on electronic data capture and submission. You will also be able to request an electronic copy of the file format specification (as an XML file XSD).

FMA Checklist

Don’t forget that MAF has created an FMA Information Checklist to assist forest owners and forest inventory crews undertaking measurements for the FMA. The checklist summarises all key details that must be recorded when collecting FMA information, and should be used as a reference by inventory crews.

This Checklist can be found on the MAF website on the FMA Process page at:

http://www.maf.govt.nz/forestry/forestry-in-the-ets/post-1989-forest-land-voluntary-participation/field-measurement-approach/field-measurement-approach-process

See the link under step 4: Collect FMA Information

Those who are subject to the FMA have exposed themselves to risk by selling NZU previously. The risk, identified in prior editions of the Carbon Monitor, is that the NZU have been over allocated using the look up tables. Such an over allocation requires participants to ‘square up’ their accounts by the end of 2012. The good news is they can purchase NZU at a fraction of what they may have sold them for. However the taxation implications, that is they have paid tax on something that the never should have had to sell, are interesting and worthy of asking for specialist advice. After all should there not be an adjustment to the income return for the period that over allocated credits were sold in? Or will they simply claim a deduction for the purchase of replacements? The odd tax structures surrounding forestry suggest that will not benefit or make good the fine tuning of the ETS for forest owners that have over sold credits.

Perhaps the simple argument is the FMA was expected and that an accrual should have been made at the time of sale in the income for potential liabilities. For those tardy with their tax returns it may be hindsight can help them?

Recommendation: please see our website terms and conditions. Consult an appropriately qualified tax professional for taxation advice.

 

Proposed Changes to See NZU Auctioned by Government

 

Part of the proposal to review the NZETS post 2012 includes the Government being able to auction NZU units. These proposals are somewhat murky given the principals on which the ETS is based.

NZU units are either created from an allocation being the CAP imposed by Kyoto, currently some 390mt (2008-2012) or from forest growth over the same period. At one time this was estimated as high as 90m units. The expected planting has not gone ahead so this may be as low as 50m.

On the other hand relatively few post 1989 foresters have opted into the NZETS leaving the Government flush with those forester owners NZU on the promise that some time in the future the Government will cover their harvest liability. These liabilities are expected to come home to roost when the ‘wall of wood’ is harvested around 2020. Recall this ‘wall’ arose from abnormally high planting rates in the early 1990’s which have tailed off since then even with the potential for carbon credit income.

So the Government has on hand quite a large volume of NZU units that it can use for its Kyoto obligations. There is nothing to stop the same units being exchanged for cash from some emitter.

So it this a carbon tax in disguise? And will the funds be targeted at developing renewable energy or is this simply a way of raising money for the consolidated fund? In any case the Government needs to put a sound argument forward that its not mortgaging the forest industry’s future to insulate New Zealand against the implication of not reaching its targets?

Confused – don’t be surprised – We would like to hear the explanation why auctioning is a functional development in the NZETS.

Or is it simply a reform following overseas examples – like the EUETS – which seems to have failed to judge its allocations yet continued to auction credits to raise revenue?

Changing the EUETS to Drive Prices Upwards

There seems to be no end to the prevarication and posturing around the EU attempts to save the EUETS by countering the changes in the carbon emissions that originally led to the allocation of EUA to emitters. The so called set aside has now suffered another set back with the Polish Government blocking moves to implement the policy and ultimately a 2020 target of minus 30%.

Pundits point to Poland’s extensive reliance on Brown Coal generation, something that is particularly carbon intensive.

Machinations continue whilst carbon sagged again on news of lower than expected emissions in 2011.

Some traders are said to be renegotiating their  forward contracts that are seriously underwater. The market has been said to be long on carbon and much of the slide in prices can be attributed to stop loss orders.

The EU generally remains bullish on its carbon market and in a process of almost continuous redesign in recent times will close trading to establish a single registry for the EU trading. This registry has been established to counter cross border fraud that emerged with state registries.

Clean Energy fund Launched in Australia

A substantial component of Australia’s carbon tax scheduled to be applied from July 2012 is targeted towards developing renewable energy to replace fossil fuels predominantly coal

Some 36% of the Australian carbon emission comes from electricity generators

The $10 billion Clean Energy Finance Corporation should apply capital to the clean energy sector ‘through a commercial filter’, according to the recommendations of an expert panel appointed by the Australian government released this month.

The Clean Energy Finance Corporation, to be chaired by Reserve Bank board member Jillian Broadbent, will have $2 billion to invest each year for five years from 2013-14.

The fund will largely co-finance investments and may direct some of its capital through intermediaries and pooled funds. The CEFC is expected to maintain the value of its $10 billion capital and to earn a positive return ‘over time’. The fund will not target demonstration projects, but will focus on technologies and projects ‘at the later stage of development’. During its early stages the CEFC is expected to invest via loans rather than equity. It will begin investment operations on 1July 2013.

Clean Energy Finance Corporation, Report of the Expert Review Panel (April 2012)

http://www.cefcexpertreview.gov.au

Has South Africa Missed the Boat on Carbon Credits?

According to the Department of Energy, the South African Designated National Authority South Africa has registered 21 Clean Development Mechanism (CDM) projects, and is processing 44 project proposals, ahead of  the December 2012 European Union cut-off date for this kind of carbon trade with all but “least developed countries”.

Looking their web site however it is clear that many projects registered as a PIN are unlikely to proceed further. Moreover the lack availability of validators for projects also make it difficult to advance projects.

According to Imbewu Sustainability Legal Specialists director Andrew Gilder, if the global carbon price was not so low because of the financial crisis, the push from South African firms to register CDM projects and programmes might have been harder. However it is CM experience that the CDM has been viewed with significant suspicion from many in South Africa’s business ranks the upshot being they have been too slow to capitalise on the opportunity.

Recent spot prices for carbon credits from so called Non Annex B or developing countries such as South Africa are around €4.05 per CER or certified emissions reduction. Robbie Louw, director of Promethium Carbon was reported as saying before the financial crisis projections were that the price of a CER was expected to range from €30-€40 by 2030. The climate-change advisory firm is developing seven CDM energy-efficiency projects for Nedbank , and has sent the paper work to UN-designated project auditors for the proposed projects to be validated. This will boost SA’s complement of CDM projects — last year the country had 20 registered projects and programmes and held about 30% of Africa’s share of the global CDM market.

Thompson Reuters Point Carbon reported in January the global carbon market was worth €96bn, with about 8.4-billion tons of carbon dioxide equivalent traded last year — a 4% increase in value over the previous year, and a 19% rise in traded carbon dioxide equivalent over the same period. EcoMetrix Africa MD Henk Sa was reported as saying Most of South Africa’s competition came from Kenya, Nigeria and Egypt.

On a more positive note the emergence of Carbon Check Africa’s only accredited UN validator has boosted the chance of projects being successfully registered. Carbon Check has an on ground team that is experienced in African operations. http://www.carboncheck.co.za