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What Is Behind Option 4 Of The NZ ETS Review And Why?

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.

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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.

Halt NZU Grab

Campaign Co-convenors: H. Bradbury and S.Thomson

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