| The NZ carbon price has fallen spectacularly in the last 2 years with cheap foreign credits swamping our market, making a mockery of the NZ ETS and marginalising forestry participation. Yet as depressing as the carbon market is for New Zealand forest owners there is also an opportunity to make good of a bad situation by exiting the ETS and eliminating the carbon liabilities accrued over the last 5 years for very little cost. |  |
International Kyoto units are the reason for our ETS failure with prices falling from $30 in 2010 to 13 cents in the last few months. This has been a boon for emitters who have been filling their boots with foreign credits (called ERUs) and booking big profits along the way. But this has been at the expense of forest owners, who have seen the value of their NZUs plunge 90% in 18 months.
Many of us pleaded with the Government to close the door on the cheap foreign credits to save the NZ market but it refused. So where does that leave ETS forest owners?
"If you can't beat them, join them..."
Ironically the same cheap carbon that has destroyed our market has also given forest owners an opportunity. Post 1989 forest owners can voluntarily leave the ETS at any time as long as they repay the carbon they have been issued and the Government will accept the cheap foreign credits for repayment.
Why is this such a good deal for foresters? For every carbon unit issued to a registered ETS forest attaches a contingent liability to repay that unit in the event it is released from the forest. Usually this would be at harvest, but it could also be earlier through an adverse event such as a fire. By exiting the ETS the contingent liability is zeroed at effectively a few cents per unit which leaves no carbon to be repaid at harvest.
Forest owners who sold carbon in the early days at $20/unit can now exit at <30c/unit and make massive windfall profits. Even with the current NZU price at only $2/unit there is an arbitrage opportunity for those with unsold NZUs to cash-in and exit.
Example: 40ha of radiata planted in 1995, Hawkes Bay
From 2008- 2012 the forest was issued 7,280 NZUs (36 NZUs/Hectare/Year x 5 years)
The owners sold 3 years of carbon in 2010 at $20/unit- 4,280 x $20 = $85,600
The owners exit the ETS in 2013 and repay at 0.30c/unit- 7,280 x 0.30 = $2,184
In this example the owners have netted around $83,000 and still have a balance of 3000 NZUs that they can either sell at $2/unit or hold for future sale in the hope prices will increase.
The opportunity only exists right now because the market and policy settings are right but both will change. The international Kyoto credits will be barred from use in NZ from 2015 because we are no longer part of the Kyoto Protocol. There is also the possibility the Government might change the rules sooner or the price of ERUs increases. By acting now this risk is eliminated.
Once a Forest Owner has exited the ETS and wiped their carbon liabilities they can rejoin again and start earning credits from 01 January 2013 forwards. It is a no regrets strategy to do this as you can sit and bank your NZUs. Best of all, if the market and policy settings remain in place or come up again in the future you can repeat the exercise all over again.
Many of us pleaded with the Government to close the door on the cheap foreign credits to save the NZ market but it refused. So where does that leave ETS forest owners?
"If you can't beat them, join them..."
Ironically the same cheap carbon that has destroyed our market has also given forest owners an opportunity. Post 1989 forest owners can voluntarily leave the ETS at any time as long as they repay the carbon they have been issued and the Government will accept the cheap foreign credits for repayment.
Why is this such a good deal for foresters? For every carbon unit issued to a registered ETS forest attaches a contingent liability to repay that unit in the event it is released from the forest. Usually this would be at harvest, but it could also be earlier through an adverse event such as a fire. By exiting the ETS the contingent liability is zeroed at effectively a few cents per unit which leaves no carbon to be repaid at harvest.
Forest owners who sold carbon in the early days at $20/unit can now exit at <30c/unit and make massive windfall profits. Even with the current NZU price at only $2/unit there is an arbitrage opportunity for those with unsold NZUs to cash-in and exit.
Example: 40ha of radiata planted in 1995, Hawkes Bay
From 2008- 2012 the forest was issued 7,280 NZUs (36 NZUs/Hectare/Year x 5 years)
The owners sold 3 years of carbon in 2010 at $20/unit- 4,280 x $20 = $85,600
The owners exit the ETS in 2013 and repay at 0.30c/unit- 7,280 x 0.30 = $2,184
In this example the owners have netted around $83,000 and still have a balance of 3000 NZUs that they can either sell at $2/unit or hold for future sale in the hope prices will increase.
The opportunity only exists right now because the market and policy settings are right but both will change. The international Kyoto credits will be barred from use in NZ from 2015 because we are no longer part of the Kyoto Protocol. There is also the possibility the Government might change the rules sooner or the price of ERUs increases. By acting now this risk is eliminated.
Once a Forest Owner has exited the ETS and wiped their carbon liabilities they can rejoin again and start earning credits from 01 January 2013 forwards. It is a no regrets strategy to do this as you can sit and bank your NZUs. Best of all, if the market and policy settings remain in place or come up again in the future you can repeat the exercise all over again.
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