Brian Fallow 's Opinion

The Economics Editor of the NZ Herald

Brian Fallow: Emissions scheme on a stretcher

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At current prices an industrial emitter could face a carbon bill of just $200 for every $1 million of revenue

Photo / APN
Photo / APN

The Government is set to put the emissions trading scheme into an induced coma - not dead, but not able to accomplish much.

New Zealand units are now worth around $2.50 on the carbon market or just 10 per cent of the indicative price assumed when the scheme was being designed.

If enacted as it stands, legislation reported back largely unchanged from select committee last week will do nothing about that. With United Future's and ACT's support it will pass.

The Climate Change Iwi Leadership Group points out that the NZUs allocated to iwi - around 30 per cent of the total so far - have dropped in value by more that $500 million compared with what they were worth in the first year of the scheme, up to mid-2011, when NZUs were trading at around $20.

They are not happy.

The finance and expenditure select committee, by a majority, rejected calls from the forestry sector to limit the extent to which emitters can use imported units, whose price has collapsed, to meet their obligations under the ETS.

The aim would be to underpin the price local sellers of NZUs could get.

It would not, however, raise emitters' costs correspondingly, because the bill also extends indefinitely a "transitional" measure which allows companies with obligations under the scheme to surrender one unit for every two tonnes of emissions they are liable for.

Buy one, get one free.

In the case of emissions-intensive, trade-exposed firms they only need units to cover 5 per cent of their emissions.

At current prices an industrial emitter could qualify for that degree of protection while facing a carbon bill of just $200 for every $1 million of revenue - hardly a crippling impost and not much incentive to reduce emissions.

Limiting the use of international units would align the New Zealand scheme with Europe's and Australia's (when its carbon tax morphs into an ETS in 2015).

It is hard to see how the New Zealand scheme could link with theirs in the future, boosting liquidity, without such a provision.

And it would honour the Kyoto Protocol's provision that the use of international carbon trading should be "supplementary" to action to reduce a country's own emissions.

The Labour Party's climate change spokesperson Moana Mackey says Labour will try to insert a provision into the legislation requiring at least 50 per cent of units surrendered under the ETS to be domestically sourced.

It will be one of four supplementary order papers Labour will put up when the bill reaches its committee stages.

Not everyone is impressed by the Climate Change Iwi Leadership Group's complaints about massive value destruction arising from the collapse of carbon prices, however.

Its critics argue the units allocated to owners of land under commercial forests planted before 1990 are compensation for being locked into forestry when that might not be the highest and best use of the land.

The lock-in arises from deforestation liabilities under Kyoto. When a pre-1990 forest is harvested and not replanted (or replaced by planting an equivalent forest somewhere else) the carbon stored in the trees is deemed to be emitted.

But a low carbon price lowers that barrier to exit and may make it commercially viable to switch the land use to dairying or dry stock farming - a switch encouraged, as the legislation stands, because agricultural emissions will remain outside the scheme indefinitely. The value of that land should rise accordingly, reducing the harm for which the allocation of units was intended to compensate them.

The units are worth less but the land is worth more, so where is the grievance?

It is not that simple, however.

First, the market value of land is irrelevant if you never plan to sell it.

Second, the allocation of free NZUs with respect to pre-1990 forests was rough justice, providing a windfall for owners of land for which a change of use is not a viable option regardless of the carbon price, while providing only a small offset for the expected cost of exit when land use change is an option.

There is also a Treaty dimension.

A letter from Apirana Mahuika, chairman of the Climate Change Iwi Leadership Group, to Prime Minister John Key and other political leaders, says the import cap issue also significantly impacts recent Treaty settlements, the Central North Island settlement for example, completed on the basis that ETS policy would remain stable, such that the value of credits transferred as part of that settlement would retain their value.

Meanwhile, Roger Dickie of the Kyoto Forest Owners Association, representing owners of post-1989 forests, also accuses Key of failing to honour ETS promises, citing in particular a speech to the National Party northern regional conference in 2007.

In that speech Key said the Government needed to send clear signals about longer-term intentions; that was just good economics.

"We will encourage tree planting. Labour's war with the forestry sector has led to a chainsaw massacre of trees. We will incentivise more planting and less cutting by giving some carbon credits to the foresters who planted the trees in the first place," he said.

Five years later, Dickie says, "we are now seeing deforestation taking place on an unprecedented scale. The National Party's environmental legacy will be a massive bill for all New Zealand taxpayers."

A survey of deforestation intentions undertaken for the Government by Bruce Manley of the University of Canterbury 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 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," Manley 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 select committee majority report justified its decision not to legislate a restriction on the use of international units by pointing to a provision in the existing act which gives the Government the power to place quantitative or qualitative restrictions on the surrender of units.

That power was used last year to ban some kinds of units and Climate Change Minister Tim Groser hinted last week at the possibility of more of the same: "I have asked officials to look at the environmental integrity of some units, following concerns raised that the restriction we placed on some certified emission reduction units last year were not encompassing enough."

But the problem with imported international units is not the environmental quality but the sheer quantity of those available.

The international market is massively oversupplied, which will only be worsened if recent reports of further restrictions on imports into the European scheme are borne out. And as for the Government's "No need to legislate. You can trust us" line, it would seem that trust is a debased commodity too.


Debate on this article is now closed.

- NZ Herald

Brian Fallow

The Economics Editor of the NZ Herald

Brian Fallow is the New Zealand Herald's economics editor. A Southlander happily transplanted to Wellington, he has been a journalist since 1984 and has covered the economy and related areas of public policy for the Herald since 1995. Why the economy? Because it is where we all live and because the forces at work in it can really mess up people's lives if we are not careful.

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