The ETS and reality

I congratulate Shane

Jones on the progress in implementing the vision of the Provincial Growth Fund, especially the 3600ha of pine trees to be planted in the Far North.

The fund is intended to lift productivity potential in the provinces, creating economic development opportunities, sustainable jobs, enabling Ma¯ori to reach their full potential, and help meet New Zealand’s climate change targets.

This is truly an ambitious goal, with many challenges that will require collective wisdom and skills of many individuals and organisations to achieve. Policies and systems will need to be in place to create incentives and opportunities that encourage the desired outcomes of the fund.

One powerful mechanism I wish to suggest is the Emission Trading Scheme. The current

ETS focuses on creating financial incentives for businesses to reduce emissions through the trading of New Zealand emission units (NZU). An emission unit is one tonne of carbon dioxide, and the price can vary from year to year. In general terms, emitters of carbon dioxide are required to purchase NZUs from the government, and in turn the government purchases NZUs from greenhouse gas absorbers, like forestry.

The inherent problem I see is that it is a financial incentive scheme only, not necessarily connected with what happens in reality. The science around how much carbon is absorbed by various forest stands is very good, allowing for different growth rates both in the age of the trees and soil fertility, temperature and the like. However, when the trees are cut, it is generally expected that the accumulated NZUs will need to be paid back.

In reality, when a tree is cut it does not pop like a balloon and turn into a cloud of carbon dioxide. The forester is paid for a very exact quantity of timber and class, measured in JAS cubes. Surely the forester should be required to surrender only the NZUs left lying on the forest floor to rot, releasing methane or other environmental hazards. There will then be an incentive, equivalent to the current value of the NZUs, to collect the thrash and turn it into a marketable product, plus a strong incentive to engage in forestry, and even to harvest.

The same principle should apply down the chain. Namely, the miller knows exactly how many JAS cubes of logs are purchased and exactly the JAS cubes of lumber he produces. Like the forester, he should be required to surrender the NZUs based on the difference, the waste created in processing the logs, giving an incentive to reduce milling waste and create opportunities for further processing of waste. It would also encourage local processing of logs, as once a raw log is exported then it is no longer part of the NZ ETS, and therefore the exporter must surrender the NZUs to the government for the JAS cubes exported.

Linking our ETS with what happens in reality, backed by science, will create stability for investors and encourage behaviour that is directly connected to the desired outcome of reducing overall greenhouse gas emissions.

"Linking our ETS with what happens in reality will create stability for investors and encourage behaviour that is directly connected to the desired outcome"