Clock is ticking for cheap credits

Cheap imported carbon credits comprised 99.5 per cent of the units New Zealand emitters used to meet their obligations under the emissions trading scheme last year, Environmental Protection Agency figures released yesterday show.

Just under 91 per cent of the units surrendered by emitters were emissions reduction units (ERUs) created under the Kyoto Protocol. They represent emission cuts in former Soviet bloc countries that their governments certify arise from projects and investments which would not have occurred had they not given rise to these tradeable credits.

The European ETS strictly limits European emitters' ability to use ERUs for compliance purposes but New Zealand does not, resulting in extremely low prices and the crowding out of NZ units (NZUs) from the domestic carbon market.

One result is that more than 100 million NZUs allocated by the government to eligible forest owners and trade-exposed industrial emitters remain outstanding, held by market participants either to meet their own future obligations or for trading.

The Government has got New Zealand excluded from the international carbon markets from next year and 2014 is the last year emitters will be able to use imported Kyoto units to meet their ETS obligations. So uncertainty surrounds the net balance of supply and demand in what will become an insular ETS going forward. But the scheme's design allows for the auctioning of NZUs by the Government. The rules on that are likely to be a subject for a scheduled review of the ETS next year.

Last year 45.5 million units were surrendered to the government under the ETS, an increase of 18.4 million on 2012.

Almost all of the increase, 17.3 million, related to the forestry sector.

Some of it arose from physical deforestation and some related to hundreds of post-1989 or Kyoto foresters opting to withdraw from the scheme and thus surrender units to cover those they had got for carbon their trees sequestered since 2008.

The 2013 figures show net deforestation, that is a contraction in the total plantation forest estate, for the first time since 2009, but the full extent of it will not be known until the four years' grace period landowners have to replant has expired.

Labour's climate change spokeswoman, Moana Mackey, said Labour had been calling on the Government to restrict access to cheap international units since 2012.

"Labour will support the forestry sector by restricting cheap international units, removing the two-for-one subsidy for polluters, and fixing the ETS. The only reason we came out of the first commitment period of Kyoto [2008 to 2012] in the black was because we planted enough trees to offset our ever-increasing gross greenhouse gas emissions," she said.

"We are heading towards the edge of a cliff post-2020. We need to be providing incentives to plant trees now to offset the level of deforestation which we know is coming."

The Greens want the ETS replaced with a carbon tax, while Act just wants it scrapped.