Fewer trees expected to be planted
GLOBAL carbon credit prices have fallen to all-time low levels in recent weeks because of a combination of economic downturn and market over-supply.
Price movements in Europe are directly affecting domestic carbon prices, sparking debate about the efficacy of the New Zealand Emissions Trading Scheme (NZETS) and its impact on the forestry sector.
So what are the drivers of international prices, why do they dictate the price of carbon in New Zealand, and what does it mean for agriculture and forestry?
The European emissions trading scheme was the first, and is the largest, carbon trading scheme globally.
The European scheme operates by allocating European Allowances (EUA) – essentially a permit to emit greenhouse gases – to industry.
If a company emits less carbon dioxide (or other greenhouse gases) than expected it can sell the excess to other companies.
Fundamentally, the price of carbon is driven by a number of factors, including economic activity, the demand for electricity, the price of commodities such as gas, coal and crude oil, the weather.
During the past 18 months a combination of over- allocation of EUAs and a reduction in demand because of the severe economic downturn in Europe has seen the price of EUAs plummet from about €17 (NZ$27) eighteen months ago, to under €7 in recent weeks.
European emitters are also able to use some UN-issued carbon credits to supplement their EUA allocation.
The most common UN-issued units are the CER (Certified Emission Reduction – for emission-reducing projects in developing nations) and the ERU ( Emission Reduction Unit – for carbon reducing products in developed nations). These UN-issued units number in the billions, adding to the oversupply in Europe.
As the NZETS stands, domestic emitters can buy and surrender either the domestic carbon unit (NZUs) or any eli- gible ‘‘ Kyoto Unit’’ (foreign carbon credits) to cover their obligations.
As the price of foreign carbon credits has fallen, domestic emitters have bought offshore units, primarily CERs and ERUs in preference to NZUs.
This has had the effect of decreasing demand for the local carbon credits, forcing down the price of NZUs.
While European emitters are limited in their ability to use cheaper UN credits, local emitters face no such restrictions and are able to buy and surrender unlimited amounts of cheap foreign carbon credits. Domestic prices are therefore being dictated by global drivers and massive oversupply.
The impact on domestic prices has been serious, to say the least.
Only 18 months ago NZUs were trading at $20 a tonne, but had fallen to under $4 a fortnight ago.
Despite being responsible for almost 50 per cent of the nation’s emissions, the agricultural sector has yet to feel the direct impact of the ETS.
The sector was always scheduled to be the last of the emitting sectors to enter the scheme and recent changes to legislation mean the earliest this can occur is post-2015.
The Government has deferred the introduction of the agricultural sector until:
Technologies exist to enable the reduction of biological emissions, and
Our international competitors in the sector are also taking action to reduce their emissions. The impact of low carbon prices has been very different for the forestry sector however.
Forestry was the first sector to enter the NZ ETS, which makes a distinction between pre-1990 and post-1989 forests. This reflects a desire to reduce deforestation and promote aforestation.
The rules for pre- 1990 forests are intended as a disincentive to change the use of forest land. Should the owner of a pre-1990 forest wish to deforest the land permanently (in order to convert to dairy, for example) they are liable for the entire carbon stock of the forest. With the price of carbon at $20 a tonne this represented a cost of almost $16,000 a hectare for the carbon liability alone – a significant disincentive.
As the price of carbon has fallen, so the financial disincentive to harvest and deforest permanently has decreased.
Perversely, the price of carbon is now so low it is providing an opportunity to deforest in preference to replanting.
ALL TIME LOW: Global carbon credit prices.