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Open Letter To Minister James Shaw On Fundamental Flaws In The NZ ETS Review

Dear Minister,

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 NZ ETS 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.

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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 73% 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 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

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

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