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:
- 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
- The design flaws that permitted large numbers of CER into the scheme, some of which are not acceptable in the main market the EUETS
- Design factors that have disguised information and led to disinformation and lack of information
- 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.
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.