More than 12 months after the Government was first alerted to post-1989 forest arbitrage, the loop hole has finally been closed. However many forest owners have already exploited the loop hole and much damage has already been done, both to the integrity of the NZ ETS and also to the market fundamentals.
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.
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.
One must also ask who has benefited from the forestry arbitrage which has been referred to as "winning the lottery"? Much of the forests in New Zealand are owned by a few large entities, many of which are foreign. While approximately 25% of participants de-registered from the scheme in 2013, this accounted for 40% of the total registered forest area. Similarly just 48 participants that de-registered in 2014 accounted for 10% of the total post-1989 forest area.
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.
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.
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