In a recent open letter to Minister Shaw (Scoop,12 July), we pointed out fundamental flaws in the NZ ETS Review as it relates to existing forests.
Our particular concern was that NZUs from existing forests, most of which won't be available to be purchased by emitters on the market, are included in the forestry NZU supply which the Review concludes will lead to oversupply and falling NZU prices.
Since then, Government officials have hastily disclosed the modelling used in the Review and hosted a webinar on less than 48 hours’ notice.
MPI projects that around 80% of existing post-1989 forests will be harvested over the next decade (para 5.3 the Elvidge paper). If correct, this would leave less than 140,000 hectares of post-1989 forests as of 2033.
Of course, new forests will be established, but like all afforestation since the start of 2023, these will not be stock change accounting forests like those registered in the NZ ETS prior to 2023.
It is these post-1989 stock change accounting forests (and the NZUs they generate) which are the primary focus of the Halt NZU Grab Campaign.
According to the EPA, the stockpile of NZUs from existing post-1989 forests as of 31 December 2021 comprised 75.8 million units.
The Ministry for the Environment expects that 300 million NZUs will be allocated to the then remaining post-1989 forests over the 29-year period between 2022 and 2050 (inclusive), while 209 million NZUs will be surrendered during that period, primarily because of harvest liabilities (page 16, Summary of Modelling).
That represents a net gain of 91 million NZUs, which would take the forestry NZU stockpile from 75.8 million to 166.8 million.
Using the same methodology as that used by the Climate Change Commission in 2022 to analyse the components of the total NZU stockpile in order to determine the “surplus” available to be purchased by emitters, we calculate that around 78% of that 166.8 million stockpile would not be part of the "surplus".
That would leave 22% or around 36.7 million post-1989 forest NZUs which could possibly be available to emitters on the market (i.e. “surplus”) over a 29-year period.
That averages out to around 1.3 million NZUs per annum. As the Summary of Modelling concedes, sales of “surplus” NZUs over time will reflect economic decisions, such as perceptions of future price rises.
Even if the apportionment figure was to be, say 33%, instead of 22%, the “surplus” available on the market to emitters would on average be just 1.9 million NZUs per annum until 2050.
Admittedly, an amount of 1.2 million to 1.9 million NZUs per year is not de minimis, but it is not by itself enough to overwhelm the NZU market and collapse prices and materially impact gross emissions reductions.
Even when this 1.3 to 1.9 million NZU “surplus” is aggregated over 29 years, it's a lot less than the "hot air" NZUs which Government auctions can be expected to inject into the market over just the next decade.
Nor is this “surplus” sufficient to justify the Government reneging on the inducement it gave foresters to make long term commitments based on the continued availability of NZUs.
And the possibility of a couple of million “surplus” NZUs coming to the market on average each year is certainly insufficient to condone forcing existing foresters out of the NZ ETS and into an inferior scheme, where they will receive "removal units" which will only be able to be sold to the Government at prices and at times and on conditions which it dictates.
And it's no reason for the Government not to confirm that existing forests will be grandfathered from the ETS changes contemplated by the Review and thus give certainty back to the NZU market.
And finally, small annual “surplus” NZU sales cannot begin to justify the delay and the cost the Government will suffer, and the damage that will be done to the relationship between the Crown and Māori, and the avalanche of litigation and Treaty of Waitangi claims that will inexorably flow if the Government proceeds with a huge expropriation of private property rights as contemplated by option 4 of the Review.
Giving less than 48 hours’ notice, Government officials yesterday hosted a webinar on the modelling which underlies the NZ ETS Review. They also released the associated data sets in the form of pages of excel spread sheets.
Why the Government left the release of this modelling so late, with just 2 weeks left in the consultation period, boggles the mind. Officials said the modelling hadn’t been released earlier because it “wasn’t crucial to the Review” and was only being released now because “someone asked for it.”
Attendees were told that the modelling doesn’t analyse the 4 options put forward in the Review document. This was because “the options had not been specified in enough detail to permit modelling”.
In just 20 minutes the 3 presenters took us through a series of charts leading to (their) conclusions that:
Offered in support of these conclusions was an MPI technical paper titled NZ ETS Forestry Allocation and Surrender Forecasts (the Elvidge paper). This paper reveals that the modelling is heavily dependent on a 2021 survey by the University of Canterbury School of Forestry (UCSF) which asked forest owners about their afforestation intentions.
One of the attendees, who described himself as the owner of a small forestry management company, queried how scientifically robust the survey was. He explained that he had participated in the survey and had simply been asked over the phone what his forestry plans were for the next couple of years. He said he didn’t have confidence in the survey numbers. The officials quickly moved onto the next question.
When one of the presenters was asked about future afforestation assumptions, with it now looking like there would be a downturn in planting over at least the next 2 years, he answered that the modelling was “not responding to what was happening on the ground”. In other words, what is happening in the real world. Another official insisted that, rather than a forestry planting downturn this year (as many forestry leaders claim), there was evidence that 88,000 hectares of exotics would be planted this year. He didn’t care to elaborate.
Understandably, there were a lot of Q&As. We asked the following questions but were told the Ministry would respond by email.
1. The 2021 UCFS survey is obviously a key document in the forecasts. As the Elvidge paper concedes at para 6.1, the uncertainty analysis in that survey excludes changes to the ETS settings over 2023 - 2027 recommended by the Climate Change Commission (and now accepted by the Government). Also excluded is the scrapping of most new forest plantings in 2023 and perhaps longer. At what point does all this uncertainty mean that the forecasts risk becoming meaningless?
2. The forecasts presumably underlie figures 3, 4 and 5 in the NZ ETS review consultation. Fig. 3 in that document shows NZUs held by existing forestry participants to meet future harvest obligations, and notes that it is generally not expected these NZUs would be supplied to the market. Where in the forecasts does it explain why these NZUs have been included in the expected future forestry supply (of NZUs) shown in figures 4 and 5?
3. At para 5.3 of the Elvidge paper it says that a significant proportion (around 80%) of the post 1989 forest estate is projected to be harvested over the next decade (to 2033). Why then does figure 5 in the Elvidge paper show the rate of future NZU allocations from existing stock change forests continuing to grow from 2033 to 2050?
Frankly, we learned little more than we had already surmised, namely that the modelling which underlies the Review document is based on questionable assumptions and that the objective of the Review is to create an incentive scheme for forestry outside of the NZ ETS. We remain concerned that the Government is determined to amend the Climate Change Response Act 2002 to (1) force existing forests out of the NZ ETS and into that new scheme, where they will in future be allocated inferior “removals units” instead of NZUs, and (2) reclassify more than 96 million forestry NZUs currently held in private ownership, as removal units. As we have previously noted, a legislative change of this kind is a classic illustration of expropriation involving the taking or impairment of private property rights.
If you are someone who could be adversely affected if the ETS changes contemplated by the Review end up becoming law, then we encourage you to make a submission before 11 August 2023. A quick submission can be made at:
Farmers’ lobbies must be patting themselves on the back. Not only do they appear to have put off meaningful climate change action affecting farmers (which will be put off even more if National/Act become the government), but they have managed to furtively pass the blame onto foresters. It is a neat trick.
If farmers had to account for their GHG emissions in the NZ ETS there would never be enough forestry NZUs to cover them. Not accounting in the NZ ETS for agricultural emissions is a disguised subsidy to farmers with forestry being attacked as a consequence.
If farmers had to account for even part of their methane emissions, we would never be having the current Review of the NZ ETS, or at least not in any recognisable form.
Shaw and his officials would never be having to explain why there will be too many NZUs in the future knowing he has effectively stopped planting by even suggesting effective nationalisation of forestry returns. Nor would he have to justify his unreliable (and flawed) theories of future investments and market behaviour by recourse to dodgy assumptions (an earlier press release explained the mistakes in the Review when comparing diagrams 3, 4 and 5: Scoop,12 July).
Yes, farmers are responsible for $39b of export earnings a year and forestry only $6.58b. But forestry is all in the NZ ETS and agriculture all out. Why isn’t at least $6.58b of agriculture also in the NZ ETS? Good question. To understand the context further, agricultural emissions are counted towards our NDC totals which we will never meet if forestry is not encouraged. This means that by discouraging forestry, as options 3 and 4 of the Review do, New Zealanders are being asked to pay twice.
First, they pay (or at least their children do) for the increased costs of climate change, and pay they will, by not curtailing methane by putting it in the NZ ETS. As already noted, not doing so is subsidising farmers. Remember when the Lange Labour government had the courage to remove all Muldoon’s subsides for farmers? The roof did not fall in.
Hope that scientific discoveries will bring down agricultural emissions is no excuse to curtail forestry planting nor omit to take steps to protect our children if they do not eventuate. Our children need action, not hopes.
Second, New Zealanders, or at least their children, are paying for Shaw’s own goal in stopping forestry planting in its tracks by the ill-advised Review. To put this in context, as explained in an earlier press release (Scoop,17 July), leaving a years’ planting of trees out of our NDC, which will never be made up, could cost $9.6b between now and 2050, while agriculture is a sunset industry with fewer people eating meat and bio alternatives to milk become available. More food for thought.
But before farmers congratulate themselves too much, they had better first read the fine print in the recently concluded NZ/EU free trade agreement, because despite the spin the government wants to put on it, the FTA is as much a climate change treaty as a free trade one, and one suspects there will be more like it.
Art 19.6 of the FTA provides each party shall effectively implement the UNFCCC and Paris Agreement including refraining from any act or omission that materially defeats the object and purpose of the Paris Agreement. This requires the promotion of emissions trading as an effective policy tool for reducing greenhouse emissions efficiently.
Art 2 of the Paris Agreement provides in part “This Agreement … aims to strengthen the global response to the threat of climate change, in the context of sustainable development and efforts to eradicate poverty, including by: (a) Holding the increase in the global average temperature to well below 2 °C above pre-industrial levels and pursuing efforts to limit the temperature increase to 1.5 °C above pre-industrial levels, recognizing that this would significantly reduce the risks and impacts of climate change.”
Art 4 requires developed countries (NZ is one) to publish NDC’s every 5 years. These should reduce every period. … “In accounting for anthropogenic emissions and removals corresponding to their nationally determined contributions, Parties shall promote environmental integrity, transparency, accuracy, completeness, comparability and consistency, and ensure the avoidance of double counting, in accordance with guidance adopted by the Conference.”
Stop right there. In complying with the EU/NZ FTA is New Zealand promoting emissions trading as an effective policy for reducing greenhouse gases when it leaves 50% of its emissions out of the NZ ETS (agriculture)? And when it wants to take forestry out of the NZ ETS causing the NZU price to tank and future plantings to drop dramatically, based on contrived and dodgy suppositions?
This is not a debate which will need to be determined because the NZ/EU FTA provides that if the relevant EU Minister believes doing either of these things is a breach of the treaty, and the NZ counterparty Minister can’t be convinced that it is, the EU can terminate the FTA there and then. Oops.
Art 27.4 of the FTA also provides that an act or omission that materially defeats the object and purpose of the Paris Agreement will invoke “appropriate measures” as defined in a procedure set out in Art 54 of the EU/NZ Partnership Agreement . Those “appropriate measures” are the ones that effectively give the EU the unilateral ability to terminate the FTA for failures to have an effective NZ ETS.
In addition, the Art 27.4 procedure applies if there is a serious and substantial violation of relevant international human rights instruments which would include the United Nations Declaration on the Rights of Indigenous Peoples. Depriving Māori of $16b of forestry returns by options 3 or 4 of the Review would almost certainly be caught even without considering the effects of climate change on Māori of not planting as many trees as they want to.
There is also an argument that exacerbating climate change by denying Māori the right to economically plant trees, the Convention on the rights of Children is seriously and substantially violated because Māori children are being denied their declared rights to have their best interests considered as a ‘primary consideration’ and they are being denied their right to the enjoyment of the highest attainable standard of health.
Doubtless any of these can be seen as potential breaches of theTreaty of Waitangi as well. It is somewhat ironic that farmers who are so transfixed on not being brought into the NZ ETS are ignoring the fact that in not doing so they likely will lose market access, as the EU/NZ FTA so clearly shows. Not that having a treaty is necessary to cause this. An easy prediction is it will not be long before most importing countries will want to see effective climate responses from farmers (not pie in the sky hopes) as a condition of entry. Politicians presently see farmers as untouchable, hence putting what should be farmers’ obligations onto foresters. What goes around comes around.
NZU spot prices shot up around $12 after last week’s High Court decision ordering the Government to reconsider its unit limits and price control regulations by September 30. But prices have since sulked at around $50 on little trading activity.
In conceding that it had made a mistake and the regulations were not lawful, the Government no doubt calculated that this would fix the carbon market and restore the NZU price to around $88. But again, it has miscalculated market reaction.
There are two reasons for this miscalculation.
First, while many market observers expect the new regulations will largely mirror the settings in the Climate Change Commission’s March 2023 advice, this is far from guaranteed. This Government has a habit of doing the unexpected so most market participants will be waiting to see the final product before diving back in.
Second, there is the NZ ETS Review. The market is understandably deeply suspicious of the Review consultation document. What was expected in this review was a thorough assessment of the issues identified by the Commission and an equally thorough assessment of the costs and benefits associated with any proposed reforms. At the forefront of this expectation was a careful assessment of the assumptions employed by the Commission in concluding that we face an avalanche of new forests which will collapse NZU prices in the 2030s.
Instead, the consultation document simply adopts the Commission’s reasoning and seeks to use it to reach the conclusion the Government obviously favours (the so-called Option 4).
If you analyse the document carefully it is a backward argument. In a traditional argument, you begin with the premises (statements and evidence that are assumed or proven true) and then logically derive a conclusion based on those premises. In rational discourse, it’s essential to construct arguments using a logical approach arriving at a conclusion based on evidence and reasoning. In a backwards argument you work backwards to choose premises and evidence, no matter how weak, irrelevant, or misleading to support the conclusion you want to reach. This is a manipulative tactic.
One indicator of this tactic is the lack of detailed modelling and analysis. In this regard the consultation document says (page 54) that before the Government makes its final decisions on the NZ ETS review, detailed modelling and analysis will be undertaken and this analysis will examine how proposals will be applied to existing NZUs and existing forests and will be informed by evidence gathered through the consultation. In other words, we are still working on the premises and evidence which support the conclusion we want to reach.
Another indicator is the use of figures 3, 4 ,5 and 6 in the document. Figure 3 shows a forecast of NZUs expected to be produced by existing forests in coming years. While the notes reveal that these NZUs are not expected to be available to the carbon market, figures 4 and 5 include those NZUs in expected forest supply which will be available to the carbon market. This is simply misleading. Figure 6 is little more than propaganda. It shows a linear fall in NZU prices based on projected future NZU supply and demand. Of course, there has been a significant price fall this year, but it is entirely attributable to the effect which the Government’s invalid regulations had on the market and nothing to do with an oversupply of NZUs.
Yet another indicator is the identification and analysis of options. These largely duplicate the options which the Commission identifies in its draft advice but with key differences. For example, no mention is made of the Commission's proposal to limit the area of new forest that can register into the ETS each year using an auction quota system. This is the most logical approach to deal with the risk of an oversupply of forestry NZUs in a cost effective and timely manner. The Commission also proposes a separate mechanism to incentivise future forest establishment but doesn’t suggest that existing forests should be included. The Government’s Option 4 does. Table 6 compares the 4 options identified by the Government and gives Option 4 the top mark, identifying it as the logical option to support (and evidencing the Government’s bias).
Then there are the Minister Shaw’s furtive responses to questions about the inclusion of existing forests under Option 4 (which contemplates forestry being moved into a new scheme delivering foresters inferior results when compared to the NZ ETS).
If existing forests are forced out of the NZ ETS into a new scheme and 96 million existing forestry NZUs are reclassified as removal units under that scheme, then that will constitute the largest expropriation of private property rights in this country since the 1930s (when the Crown expropriated all underground crude oil in New Zealand).
The Minister first tried to say that such a suggestion was misleading because no final decision had been made.
He then said there was uncertainty about whether the review would be applied retrospectively to existing forests and that New Zealand governments have always been cautious about retrospective law, particularly where it impacts on existing property rights. This is political doublespeak at its worst.
The enormity of this proposed expropriation of existing property rights is such that the Minister should be falling over himself to explain it. But no, not only is the consultation document completely silent on the rationale for this expropriation (let alone providing some cost/benefit assessment), but the Minister won’t discuss it.
And PM Hipkins won’t respond to open letters pleading for existing forests/forestry NZUs to be grandfathered. Like Shaw, the PM is aware that until there is grandfathering, or the Review is ditched, there will be few new forest plantings (with a potential cost of billions to New Zealand for NDC compliance) which further undermines the forecast of an oversupply of NZUs in the future.
So, what’s going on here? As mentioned, the Commission doesn’t recommend including existing forests and existing forestry NZUs in a separate scheme for forestry. The Government is therefore considering an enormous step beyond the Commission’s advice without any form of proper explanation.
And it truly is an enormous step for a Green Minister and a Labour PM. With 40% of plantation forestry being owned by Māori, they will be disproportionately affected if the Government pursues Option 4 in relation to existing forests and forestry NZUs. ETS registered forests being forced into a separate scheme under which inferior removal units are issued that can only be sold to the Government is a form of expropriation all too familiar to Māori. Not only could we expect enormous Treaty of Waitangi claims but the Crown’s relationship with Māori could be set back 90 years.
Market traders, foresters, forestry investors and others having an interest in the carbon market see all this and sensibly remain wary of the Government’s final agenda. Until that agenda is revealed the NZU price is likely to go nowhere fast.
The High Court Changes The Rules
Just after 5pm last Thursday night, the High Court released a judgment finding Government regulations which did not follow the Climate Change Commission’s 2022 advice on NZ ETS unit limits and price control settings for 2024 - 2028, were not lawful.
The Climate Change Response Act 2002 requires the Minister (Shaw) to satisfy himself as to certain matters before regulations are promulgated. Shaw agreed with the Commission’s 2022 advice. He didn’t think the cost-of-living impact was relevant to future price and supply settings for the ETS. The Cabinet did, but it was not its call to make. Shaw then promulgated regulations in accordance with Cabinet’s view, but not his own.
The High Court has given Shaw until 30 September to reconsider his view. Unless the Government changes the law, it appears they are bound to accept his view, although they retain the right to persuade him to theirs. If, in coming to a view, he considers irrelevant considerations, or fails to consider relevant considerations, he will likely be judicially reviewed again.
What the High Court decision shows is two things: first, the ETS is not a government plaything, liable to be pushed out of shape by political and ideological considerations. The Court has a role to play in ensuring the Minister and the Government don’t try to make it one. Second, and subject to Court control, it is the Minister and not the Cabinet that is in control when it comes to price and supply settings.
The Full Implications Of The High Court Decision Are Yet To Be Felt
Before the invalid regulations were promulgated last December, NZU spot prices were near $90/NZU. As a result of those regulations, reflecting the Cabinet’s views but not Shaw’s, the price fell to around $53/NZU as buyers refused to pay more for NZUs when it appeared Cabinet could change ETS settings for political and not climate reasons. Then the Government scored an own goal on 19 June 2023, when it launched its ETS Review consultation, by further signalling to the market that it cannot be trusted not to change the rules for 28-year investments after they were made, causing prices to drop as low as $34/NZU.
The full implications of the High Court decision have yet to be felt. First, the auction in early September of NZUs will be under the invalid settings, but little probably turns on this as the consensus is it will likely fail as the last two this year have. Second, after the auction, but before 30 September 2023, the Minister must satisfy himself on new price and unit settings under the ETS for 2023-2027. And third, invalid decisions have legal consequences, and no doubt someone will seek legal redress for losses the invalid regulations have caused them, at least if the NZU price doesn’t recover sufficiently and they haven’t been forced to sell in the meantime. Below we look at the second of these.
What The Minister Must Consider Before 30 September
The main matters the Minister must consider, amongst others, are anticipated volumes of GHGs to 2028; the proper functioning of the ETS; international climate change obligations, the effect on the NDC and the 2023 recommendations of the Commission. The impact of emissions on households and the economy is only an “additional” matter.
Shaw could of course determine that he was right all along to agree with the Commission’s recommendations in 2022. He cannot accept the Commission’s 2023 recommendations because they do not reflect the new realities below.
If Shaw determines he will not accept the Commission’s 2022 recommendations (which he agreed with last year) or prefers the Commission’s 2023 recommendations, then he walks a perilous legal path.
The world has changed since 2022 when Shaw agreed with the Commission’s recommendations. He must make new decisions and satisfy himself on real facts, not ones that inhabit an alternative political or ideological universe. If he doesn’t, he will be open to further review (even if he is no longer Minister after mid-October). Those facts are:
(a) Forestry investors have no confidence that the Government will not continue to meddle with the ETS on spurious grounds. Left as things are there will be no planting in 2024 and in the years after, again assuming this Government is re-elected: see Treadwell “Carbon News 4 July 2023”. That will hugely impact on our international obligations and the NDCs. Every year without planting leaves a deficit that will never be made up (e.g., 60,000ha x 50t CO2/ha x 20 years x NZD160 = NZD9.6b). The Minister’s officials only need to pick up the phone to find seedling contracts for next year are being cancelled wholesale and no new contracts are being offered to forestry workers for planting.
(b) The Minister has continually stated new forests are necessary to meet net carbon zero in 2050.
(c) The Review of the ETS has signalled that forestry NZUs may in effect be nationalised by 2025 (only the Government will buy at a price and time it chooses) with dramatic consequences for Māori and other investors, as well as tens of thousands of people that rely on forestry, such as workers, seedling contractors and so on.
In addition to these facts, the Minister now likely has the UN breathing down his neck. (TV1 News 15 July 2023).
Can The Minister Ignore The Review When Making His 30 September Decisions?
He is bound to because it is a flawed document. He must treat it as a dead horse for two reasons. First, because it is premised on oversupply of NZUs by 2037, as were the Commission’s 2023 recommendations. But these gravity defying assumptions overlook the fact investors will not plant if they think there will be no market for NZUs in 24 years, quite apart from the fact they will not invest while the prospect of nationalisation of their NZUs is being considered. And second, because of the Review’s error in not counting NZUs that are held against deforestation costs, as recognised in Figure 3 of the Review, but including them in Figures 4 and 5 to arrive at the scenario of a supposed future oversupply.
In terms of the decisions to be made before 30 September, Shaw cannot ignore the Review without the prospect of another judicial review. Shaw is bound to recognise that NDC deficits will be larger and our international obligations harder to meet unless he or the Government:
(a) ditches the Review, or
(b) at the least, tries to convince investors to start planting again by grandfathering existing forests from the Review (signalling to investors that if they plant their risk/reward assumptions will not be altered by the Government).
Less forest removals likely means that, to comply with the Act, Shaw must go further than the Commission’s 2023 recommendations and satisfy himself that the only way to comply with 2050 zero net carbon, and not force higher costs on future consumers or tank the economy going forward, is for even higher carbon price settings and/or less units coming onto the market.
Shaw, The Government, And The Market
The Government must pull the Review immediately to rescue forestry planting going forward. That would make Shaw’s 30 September decisions less legally hazardous. Grandfathering would be a second-best option, if it restores investor’s confidence to plant (a big if) but may not be enough to satisfy Māori aspirations. If neither happens, Shaw will probably have no alternative but to satisfy himself that even higher NZU prices and fewer auctioned credits are necessary. And Shaw must also be cognisant that the market will never recover to do its job (one of main considerations he must take into account) if the Review does not grandfather existing plantings.
There is a political aspect to this. Pulling the review or at least grandfathering is so obvious a step that it is hard to understand why the PM is not insisting on it. Voters in marginal electorates and Māori are currently being adversely affected by Shaw’s refusal to pull or grandfather the Review, whatever becomes of it, and the Government is 90 days out from an election. It’s a dead horse anyway.
Why isn’t grandfathering Of Existing Forests And Forestry NZUs A Pre-election Priority To Restore Market Confidence And Prevent Billions Of Dollars Of NDC Exposures?
All commentators, including ourselves, note with increasing concern your refusal to engage with media and interested parties on the topic of grandfathering existing forests and forestry NZUs under the Government's NZ ETS Review.
As you know the Review contemplates that existing forests may be forced out of the NZETS and into a new scheme and that around 96 million existing NZUs generated by those forests will be reclassified as removal units under the new scheme. We have described this as a huge expropriation of private forestry rights.
The genesis of the new scheme appears to be a proposal by the Climate Change Commission that “a separate mechanism could be created to incentivise afforestation”(April 2023 Draft Advice on 2nd emissions reduction plan, page 65). What the Commission obviously has in mind is a separate mechanism that enables direct control over the rate of future forest establishment.
As we pointed out in our first press release (Scoop/ 4 July), nowhere in the Commission's proposal does it suggest that existing forests should be forced into the separate mechanism or that NZUs generated by those forests should be classified as removal units.
There was a good reason why the Commission did not do this. Existing forests registered under the NZ ETS before this year are almost all stock change accounting forests. This means that while the foresters concerned receive NZUs as the forests are growing, they must surrender a large proportion of those NZUs back to the Government when the forests are harvested.
The Commission has determined that these foresters will retain the bulk of the NZUs they receive to enable them to meet harvest liabilities. Of course, they can use them in the meantime e.g., as security for loans.
Obviously, the NZUs which are so retained are not available to be sold to emitters. They therefore cannot contribute to any surplus which could impact future NZU prices - which is the concern underlying the Review.
In its July 2022 advice on NZ ETS unit limits and price control settings for 2023 – 2027, the Commission determined that an estimated 52 million existing forestry NZUs were not part of the "surplus" NZUs in existence at that time. This was because they were not available to the market and therefore were less likely to present risks to emissions budgets (July 2022 advice, page 40). You can see the Commission's analysis at pages 19 – 23 of Technical Annex 1 to the July 2022 advice. This analysis was relied on again by the Commission in its March 2023 advice (page 37).
Based on this analysis, it can be expected that around 78% of forestry NZUs from existing forests will not be released on to the carbon market.
The Review itself also separately identifies forestry NZUs having harvest liabilities (i.e., from pre-2023 forests).
This is presented in diagrammatic form in Figure 3 (above) of the Review consultation document. Figure 3 distinguishes NZUs with harvest liabilities from NZUs having no liabilities.
The note below Figure 3 includes the statements:
“The light green area is the estimated number of NZUs from forestry to be potentially available to the market that can be traded. These are largely from new forests either on averaging accounting or in the permanent forests category. The dark green area represents NZUs held by existing forestry participants to meet future harvest obligations. It is generally not expected these NZUs would be supplied to the market.” (Emphasis added).
For some reason, the distinction between (1) NZUs from pre 2023 forests (stock change accounting) which are not expected to be supplied to the market and (2) NZUs from 2023 onwards forests (averaging accounting and permanent) which are potentially available to the market, has not been maintained in figures 4 and 5.
Both types of forestry NZUs appear to have been included in “Expected forestry supply”. This means that pre-2023 forestry NZUs, which won’t be available to emitters on the market, are included in the NZU supply which the Review concludes will exceed demand from emitters, leading to falling NZU prices. This suggests to us that the Review is fundamentally flawed.
However, that is not our immediate concern which is the need for the Government to stabilise the carbon market by announcing that existing forests and forestry NZUs will be grandfathered under the Review regardless of its outcome.
The rationale for doing so is simple: If the vast majority of NZUs generated by existing forests do not contribute to the NZUs available to the market for emitters to buy, then there is no reason why those NZUs and the forests which generate them should be forced into a new scheme. In other words, they should be grandfathered. Failure to do so in the Review consultation document has caused a meltdown in the carbon market and brought future forest establishment to a complete halt. If, as some forest industry leaders are predicting, no net afforestation occurs next year that is a loss which is never made up and is carried forward every year.
If the Government doesn’t act now, then the cost, particularly in terms of future NDCs, will potentially run into the billions of dollars. Financial benefits gained by the Prime Minister's recent EU treaty efforts pale into insignificance when compared to the damage done in going outside of the Commission's advice and not grandparenting existing forests and forestry NZUs. The two are related of course. Failure to meet our NDCs will apparently result in trade embargoes (thereby nullifying some of what has been gained) as well as penalties under the EU trade treaty itself.
The Government needs to act now to stabilise the carbon market pending a final decision on the Review by unequivocally declaring that all existing forests and NZUs allocated to them will be grandfathered from any changes to the NZ ETS rules.
Halt NZU Grab
Option 4 in the recently announced NZ ETS Review looks to be the Government’s preferred option. It would take forestry originated NZUs out of the NZ ETS and create a separate market for them, one which can’t be accessed by emitters. They will be reclassified as “removal units” in a new scheme.
So, who will buy these removal units? “Good” corporates (fat chance); overseas buyers (why?). The Government is the
only realistic buyer. But there will be no commitment on its part to buy at parity to the NZ ETS market. The Government will buy as it sees fit. It will set the price and determine who can sell and when. Sound like a soviet command economy?
It's certainly not a fair deal for those with existing forests. Many of them planted because the Government induced them to make long term commitments based on the continued availability of NZUs. In exchange the Government received an economic benefit through a reduction of its financial exposures under various treaties. The Government has
achieved its goals but is now considering whether it should renege on the inducement it gave foresters. Minister Shaw says no decisions have been made yet. But if the Government does decide to renege, then existing foresters may have to cut their losses by walking away from their forest investments or looking at early harvest options, in the hope
they can cover their liabilities from harvest proceeds.
And it looks like a financial trainwreck for those holding the 96 million forestry originated NZUs which could be reclassified as removal units. Billions of dollars are at stake here. Again, the Government says that no decisions have been made. But there is clearly a real risk here. Otherwise, the Government would have made it clear that these NZUs would be grandfathered along with the forests which gave rise to them.
Putting aside the enormous damage that will be done to those with existing forests and forestry NZUs, just how successful is this new scheme likely to be when it comes to incentivising new forests?
To begin with, if the Government goes ahead and changes the rules for existing forests, no one will trust them not to change the rules for future forests. With an investment horizon of 26 plus years, no investors will plant on uncertain future returns. This is predictable and has already happened simply because the Government has announced it is considering Option 4.
In Carbon New, 4 July 2023, James Treadwell, New Zealand Institute of Forestry President, says people who were looking at investing in new planting have suddenly stopped completely. Foresters are planting around 75,000 hectares this year. But Treadwell says the number will be much lower in 2024. “We’re looking at only zero to 10,000 next year”.
Treadwell is one of many forestry experts saying the same thing.
Also predicably, many holders of NZUs are selling for fear they will be worth nothing if Option 4 is adopted. Consequently, the Government’s flagship ETS has seen prices plummet from $88 dollars to as low as $34 – close to the Government’s $33 auction floor price this year.
If only 10,000 hectares are planted each year, it will cost billions to buy the overseas carbon credits which the Government will need to meet our treaty commitments. Then, cost in the health, economic and social costs to further generations for not meeting and maintaining net carbon zero,
which we have to do with trees, from 2050 to (at least) 2100.
Even suggesting Option 4 was a colossal home goal. It pushes huge climate costs onto future generations and makes the Government’s proclaimed carbon goals even less likely. What’s behind it?
The obvious explanation is ineptitude. If so, the Government should immediately withdraw the Review as it patently proceeds on a false premise; namely, that without intervention there will be a surplus of NZUs in 2037. We know that with intervention there will be a deficit.
If the Government is not prepared to do this, we must try to guess why it really wants to pursue Option 4, even though this will impose huge costs on New Zealanders, both now and in the future.
Could it be socialist envy? The Review (p60) hints that wealth transfer is a concern: “… (the) purchase of NZUs allocated for removal activities …functions as a wealth transfer from the public to foresters, with no public benefit.” The thought of people making money out of NZUs seems to motivate at least one of the recent commentators endorsing Option 4.
This grossly distorts how and why the ETS functions. Foresters have been encouraged to plant forests to help with our NDC obligations and to help meet net carbon zero from 2050. To achieve these goals the Government gives free NZUs to foresters, which foresters are then able to sell to emitters and others. There is no public cost involved here. In
fact, there would be a clear public cost if this wasn’t done. Governments will have to spend billions to fight climate change if we don’t plant enough trees, including unfunded liabilities for NDC deficits.
Could the Minister have been captured by a special interest group, which ignores views other than its own and disregards the costs to future generations of planting only slow sequestering trees (natives), and would prefer no trees are planted but natives? What a colossal presumption to suppose they speak for future generations
Whatever is behind Option 4, the Government needs to act now to stabilise the carbon market pending a final decision on the Review by unequivocally declaring that all existing forests and NZUs allocated to them will be grandfathered from any changes to the NZ ETS rules.
Confronted with the need to grandfather existing forests to bring some confidence back into the carbon market, something which would not lead to oversupply of future credits now investors are aware of the risks of overplanting, the Minister is digging in. He is doing this even though the
market is telling him that the basis of his review, low NZU prices due to oversupply, will not happen.
Option 4 is now shown to be unnecessary and there is no commercial case for it; in fact, it will cost the Government billions. There are many ways to incentivize both forestry and emissions reductions inside the ETS. But the Minister is deaf to them because he would prefer to harm the planet, harm future generations, and destroy any confidence that the
Government is a reliable business partner, rather than face facts. His behaviour is beginning to look very “Trumpist”: keep reiterating "alternative” facts even when proved wrong.
In our first press release (Scoop, 4 July) we warned that the Government’s NZ ETS review contemplates a huge expropriation of privately owned assets. This is because the consultation document makes no mention of a “grandfathering” arrangement for forests currently registered in the NZ ETS and the existing 96 million forestry NZUs.
Not only is the consultation document silent on this grandfathering, it also expressly states (page 66) that an important design decision (for Option 4) is whether the new restriction on use of removal units will relate to units currently held in the stockpile and, if so, whether and how units in the stockpile could be categorised as a gross unit (NZU) versus a removal unit. Then at page 67 it considers what will happen if restrictions are applied to all units regardless of allocation date. On top of this there are reports of officials openly discussing the benefits to the Government of not grandfathering.
Despite the imprecise messaging in the consultation document, it is clear the Government is contemplating changes to the NZ ETS which, if implemented, would amount to an expropriation involving the taking or impairment of private property rights.
But Minister Shaw seeks to deny this. He says that no decisions have been made yet and he characterises our campaign as misleading (Carbon News, 6 July).
In saying this he would have us believe that the Government has given no consideration to changes to the ETS which would
withhold grandfathering from existing forests and forestry NZUs.
This looks to us like the Minister is engaging in misleading conduct.
In reply, we say that if the Government intends to grandfather all existing forests and forestry NZUs then it should come out and say so in the clearest terms.This is an issue which impacts not only on the credibility of the Minister but also the credibility of the Labour Government.