One has to ask why has it taken so long for the Government to act? Ministry of Primary Industries officials were first alerted in early 2013 to the arbitrage, and the huge reputational and fiscal risk it presented. Yet it took Government a year to stamp it out. In the interim period nearly 25% of post-1989 ETS Participants de-registered in 2013, and at least another 5% have de-registered in 2014. As a result millions of forestry NZUs have become unencumbered meaning they are not linked to harvest liabilities so are more likely to be sold into a low priced carbon market for profit taking. The number of these unencumbered NZUs could number as many as 15 million units and add to a struggling domestic carbon market estimated as already oversupplied to the tune of 110 million NZUs.
The final question to ask is why the loop hole has not been closed for other sectors? For the year ending June 2013, fisheries, pre-1990 forestry, and industry received 36.5 million NZUs as free allocations. Yet, for the same period 95% of the credits surrendered to the Government for obligations were cheap overseas credits. The Green Party's Kennedy Graham pointed out that this arbitrage is a free gift of approximately $103 million from the New Zealand tax payer (watch his speech here).
As a not so surprising consequence, the Government's market intervention has seen prices jump by over $1/unit for NZUs. While this is positive for the NZ carbon market it is very very good for those forestry players that have already played the arbitrage hand and for the emitters sitting on millions of free NZUs accumulated over the last few years. All these parties have seen their stockpiled carbon jump by 20% in value in a day.