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What’s Happening To The Price Of NZUs?

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).

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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. No mention is made of limiting 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 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.

Halt NZU Grab

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

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