Government fails to calm jitters among carbon traders, flagging forestry industry review outside the ETS

Climate Change Minister Simon Watts says he's happy for forestry to continue being used to offset emissions under the ETS.

A change of government hasn’t seen the carbon price rise as expected, as market participants remain wary of their exposures to regulatory risk.

The previous Government gave traders of carbon units the jitters when it prevented the carbon price from rising in line with expectations in a bid to soften the blow of the cost of living.

It then created more uncertainty by consulting on making some potentially major changes to the Emissions Trading Scheme (ETS) aimed at reducing businesses’ reliance on using forestry to offset their emissions.

The coalition Government scrapped the review.

However, Climate Change Minister Simon Watts isn’t giving the market the certainty he says he is.

Speaking to the Herald, he said the Government would change the way it regulates forestry.

The pinch is, the aim of these changes will be to prevent forests from being planted on productive land, rather than to improve the functioning and effectiveness of the ETS.

How this will impact the carbon price, which needs to rise to incentivise businesses to reduce their emissions, is unclear at this stage.

“We’re not planning to undertake any major or significant reforms within the ETS market, but we are looking at doing some policy changes in regard to where trees can be planted. We’re going to do that outside the ETS,” Watts said, clarifying he still saw a role for using forestry to offset emissions.

Asked whether making it harder to plant trees on certain types of land would see fewer trees planted, he responded, “The market will determine that... I can’t jump to conclusions around what the exact [land use] mix will look like.”

Watts noted changes to land use rules were signalled in National’s coalition agreement with New Zealand First. He said the Government would have more to say on the matter later in the year.

Christina Hood, head of consultancy Compass Climate, feared uncertainty around the future of forestry, and therefore the carbon price, could slow the decarbonisation of businesses’ operations.

Businesses are going to be in a holding pattern as long as there’s uncertainty, she said.

Furthermore, Hood worried leaving the ETS as it is doesn’t solve the problem of an over-supply of units preventing the carbon price from rising.

The carbon price is just shy of $55, having surpassed the $70 mark earlier in the year.

The OECD, in a major report published earlier in the week, also identified New Zealand’s reliance on forestry to offset emissions as a problem.

It said the country’s ETS was unique internationally for not limiting the use of forestry removals.

It recommended the Government “develop and implement a plan for reforming the treatment of forest removals in New Zealand’s emissions reduction strategy that gives clarity to the market”.

But again, Watts said he wouldn’t change the treatment of forestry under the ETS, but would address forestry via other avenues.

ANZ agricultural economist Susan Kilsby said the increasingly widespread understanding of the ETS’ downsides was hampering investors’ confidence.

She believed a number of market participants weren’t actually that clued-up on the issues, but figured the carbon price surely had to keep rising over time.

Indeed, the likes of the Climate Change Commission has said this is what needs to happen, but there aren’t too many people forecasting what will likely happen.

What should, and what will likely happen are two different things that are easily confused, Kilsby said.

She concluded the carbon market has always been exposed to regulatory risk. Events of the past couple of years have just highlighted that risk.

Jenée Tibshraeny is the Herald’s Wellington Business Editor, based in the Parliamentary press gallery. She specialises in government and Reserve Bank policymaking, economics and banking.