Brian Fallow on the economy

Brian Fallow is the Herald's Economics Editor

Brian Fallow: Chainsaw massacre sequel looms

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Forestry association says collapse in carbon prices has resulted in a lack of confidence in new planting

The ETS ran as intended in its first year, encouraging people to go easy on fossil fuels and plant more trees. Photo / APN
The ETS ran as intended in its first year, encouraging people to go easy on fossil fuels and plant more trees. Photo / APN

Parliamentary Commissioner for the Environment Jan Wright says changes to the emissions trading scheme now being trundled through Parliament make a farce of New Zealand's climate policy.

Wright is wrong. A farce is comedy. This is tragedy.

To take one example: In the three or four years before forestry was brought into the scheme there was a chainsaw massacre, a scramble to fell pre-1990 plantation forests before doing so would incur a deforestation liability.

It added tens of million of tonnes to national emissions.

Now the Government is presiding over moves to further weaken the scheme, and setting us up for another chainsaw massacre.

It is not so much what it is doing, but what it is refusing to do.

That is to recognise that the international market in offsets is massively long, so that restrictions need to be placed on the ability of emitters to use cheap - really, really cheap - imported carbon to meet their obligations under the ETS.

To unpack the jargon, "offsets" and "carbon" here refer to an alphabet soup of CERs, ERUs and RMUs, which are different kinds of internationally tradeable UN-certified units created under the Kyoto Protocol which represent reductions in emissions and which can be used to cover or offset a country's or a firm's emissions when that would be cheaper than reducing their own emissions.

The theory is that the climate does not care where an emission reduction occurs and Kyoto's flexibility mechanisms, as they are called, allow emissions to be reduced at minimum cost.

The practice is a very different story.

A recent piece in the Economist on the CDM (the Clean Development Mechanism under which CERs are created) suggests it stands for Complete Disaster in the Making.

Nigel Brunel, a carbon broker at OM Financial, told Parliament's finance and expenditure select committee there are billions of CERs and ERUs in the system, with the prospect that Russia and the Ukraine will issue many more.

"The impact on us from that avalanche of offsets is simple.

"We only have demand for about 15 million a year and given these offsets number in the billions, the price of carbon risks going as close to zero as you can get it."

The use of Kyoto offsets to meet a country's obligations is supposed to be "supplemental" to domestic action.

Lizzie Chambers, managing director of Carbon Match, an online carbon marketplace, told the committee that the European ETS limits the use of CERs and ERUs to no more than 14 per cent of emitters' surrender obligations.

When Australia's carbon tax morphs into an ETS in 2015 it will limit the issue of UN offsets to just 12.5 per cent.

"South Korea's ETS will not allow any international offsets until 2020 and indications to date are that China's will similarly focus on domestic abatement opportunities only," Chambers said.

But the Government has ignored pleas, notably from forest owners, to restrict the ability of New Zealand emitters to import and surrender them to the Government, apart from those arising from certain industrial gases considered too environmentally dodgy even for us.

New Zealand carbon prices have plunged from around $20 a tonne early last year to below $4.

And the legislation would extend indefinitely a "transitional" provision allowing emitters to surrender only one unit for every two tonnes of liable emissions, which effectively halves even that price.

In practice it means that a large emissions-intensive but trade-exposed emitter faces a carbon bill that is some fraction of 1 per cent of its turnover.

One consequence has been to crowd New Zealand forest owners out of the market.

In its first year the ETS worked as intended, with money flowing from domestic energy users to the forestry sector, encouraging people to go easy on the fossil fuels and to plant more trees.

But the official tally for 2011 was that imported carbon of one kind or another accounted for more than 70 per cent of the units surrendered to the Government.

Forestry units generated in Hungary outnumbered New Zealand's by three to two.

Forest Owners Association chief executive David Rhodes said those who argued for the free market appeared to see no contradiction in also accepting massive subsidies.

"The argument for partial virginity has never been a convincing one."

The forest owners are calling for a restriction that would allow emitters to use imported units for no more than 50 per cent of their obligation.

"If this restriction helped lift the price of a New Zealand unit to around $15 while international units could still be accessed for $5 or less, then the average cost to an emitter would still be $10 or less, and of course that price then gets halved by the two-for-one subsidy," Rhodes said.

"The net result for emitters would be a price of $5, hardly putting them at risk with international competitors and still considerably more generous than in Australia or the EU."

Roger Dickie of the Kyoto Forestry Association said the collapse in prices had resulted in a total lack of confidence in new forest planting.

Brunel said it also created a massive deforestation opportunity.

Fifteen months ago, when the carbon price was close to $20, a forest owner who did not replant upon harvest would face a cost of $16,000 a hectare. With carbon prices now a fifth of that, the barrier to exit was correspondingly lower.

A survey of deforestation intentions undertaken for the Government by Bruce Manley of the University of Canterbury's school of forestry last year found that expected deforestation between 2013 and 2020 would be 16,000ha with the ETS but 52,000ha if there were no ETS.

The difference between the two numbers is comparable to the amount of deforestation during the chainsaw massacre period.

"The survey was carried out at a time when the carbon price was decreasing from $14 to $10 a New Zealand unit. At prices in this range the deforestation liability is still a deterrent to land conversion," he said. "If carbon prices reduce to even lower levels than $5 a unit the forecast for the no ETS scenario would become increasingly relevant."

The single most useful thing New Zealand can do to stabilise its net impact on global greenhouse gas levels over the coming decades, while it tries of figure out how to get cows to belch less methane, is to have an expanding forest estate.

The bill now before the select committee would have the opposite effect.

- NZ Herald

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