Under the NZ ETS, post-1989 Forest Owners can voluntarily exit and de-register from the scheme. Upon de-registration the forest owner is required to repay to Government the equivalent number of units they have been issued. Prior to the recent law change the units acceptable included cheap Kyoto units such as Emission Reduction Units (ERUs) which have traded for as low as 17 cents in recent weeks. The new law prohibits these Kyoto units from being used.
The Law change has major consequences for post-1989 forest owners which are outlined below in a series of Q&As.
What is the Purpose of the Law Change?
The Explanatory Note to the Bill states
"To correct an unintended consequence in the operation of the NZETS, which arises from a difference between the price of New Zealand units (NZUs) and the price of certain Kyoto units [...] allowing post-1989 forest land participants the opportunity to arbitrage NZUs by registering, deregistering, and reregistering in the NZETS for the same area of forest land [...] On deregistration, the participant may repay the unit balance using lower-priced Kyoto units. This activity is referred to as reregistration arbitrage. Post-1989 forestry is the only sector with the opportunity to engage in reregistration arbitrage [...] This Bill seeks to prevent reregistration arbitrage [...and] will, therefore, prevent significant reputational and integrity risks to the NZETS and fiscal costs to the Crown."
Who is affected by the ban?
It only applies to post-1989 Forest Owners. It does not apply to owners of Pre-1990 Forests, or to emitters who have obligations under the NZ ETS. For example polluters such as petrol companies can continue to use Ukrainian carbon credits until 31 May 2015 which cost 17 cents (at time of writing), while owners of post-1989 forests must now purchase New Zealand Units which cost $4.00 (at time of writing).
Which units are impacted from the ban?
All Kyoto Units. This includes Removal Units (RMUs), Certified Emission Reductions (CERs), Emission Reduction Units (ERUs), and New Zealand Assigned Amount Units (NZ AAUs). This means even NZ AAUs issued to wind farms or Permanent Forest Sink Initiative forests are prohibited.
What Post-1989 Forest activities are affected by the ban?
The new law is not restricted to Exiting and Re-registering Forest Owners carrying out an arbitrage activity. It applies to the removal of a Carbon Accounting Area (CAA) for any purpose. Examples include:
- Forest Owners wishing to de-register and have no intent to re-register (E.g. Owners disillusioned with the NZ ETS or new owners of forest who purchased an ETS registered forest with the intent to de-register)
- Forest Owners who voluntarily disclose a mapping compliance issue and need to remove areas of non-compliant forest
When does the Ban Take Effect?
The Bill is retrospective and comes into force from the 16 May 2014. Any applications to de-register an NZ ETS forest or to remove a CAA received on or after the 16 May 2014 will be required to use NZUs to meet surrender obligations.
What about Applications filed with Ministry of Primary Industries (MPI) prior to the 16 May 2014?
Any applications received by MPI on or before the 15 May 2014 to remove CAAs or de-register an ETS Forest will be able to use Kyoto units to meet surrender obligations.
What if a Forest Owner has sold their NZUs and purchased Kyoto Units but not yet filed the De-registration paperwork?
The law makes no allowance for forest owners who intend to de-register but have not yet filed the paperwork. In some cases forest owners have sold their NZUs and purchased replacement Kyoto units which means they are fiscally impacted. Forest owners only option to recover to their previous position is to sell the Kyoto units and re-purchase NZUs. The NZU price has jumped 20% since the ban was announced, ERU pricing is unchanged.
Why was there no Consultation or Exemptions for some Post-1989 Forest Owners?
In 2013 the Government banned industrial gas and Large Scale Hydro ERUs and CERs from use in the NZ ETS. This primarily impacted Emitters.
In that case the Government carried out extensive consultation and notice to enable affected parties to prepare and arrange their affairs. In addition, when the ban was finally implemented months after consultation, it took effect 6 days after coming into force, and there was an exemption for parties who already had purchased the banned units.
It appears there was concern that there would be a rush of de-registrations if there was consultation. At the very least, in the principles of fairness, forest owners who were in the process of de-registering should have been given some short notice to file their returns, and those parties who had already purchased replacement units should have been exempted.
Why does the Ban only Apply to Post 1989 Forest Owners and not Emitters?
Emitters such as Petroleum and Electricity companies are the largest purchasers of Kyoto units in New Zealand preferring to use the cheap credits over Forest NZUs. This has flattened the NZ carbon market and greatly harmed forestry under the Scheme. So why has the Government not implemented a flat ban on all cheap Kyoto units across the board?
The Explanatory Note to the Bill states that Post-1989 forestry is the "only sector with the opportunity to engage in reregistration arbitrage" and therefore this implies that the ban should only apply to Post-1989 Forestry.
This is not true. Other sectors under the NZ ETS receive millions of NZUs each year as free allocations. They can sell these at a higher price and surrender low priced Kyoto units, effectively engaging in arbitrage. This is true for some Industrial Emitters, the Pre-1990 Forest Industry, and the Fisheries sector.
However, there is a bigger possible arbitrage within NZ ETS which is costing NZ consumers millions each year and has huge reputation risk for New Zealand. Emitters are possibly charging an inflated carbon price to consumers while surrendering cheap Kyoto units to government to meet their pollution obligations. This means emitters are profiting from pollution at the cost of New Zealanders.
The Government has been asked for over two years to abolish this arbitrage and require carbon cost transparency and still they have not moved.