The New Zealand government is considering changing the accounting rules for forestry-owners in its emissions trading scheme, a move observers say could swamp the market with additional allowances in the short term but dry up supply further into the future.

As part of the ongoing ETS review, the Ministry for the Environment on Thursday released a forestry technical note, outlining options for changes to how the biggest-supplying sector of allowances in the scheme is treated.

The chief issue it sought feedback on was whether New Zealand should shift away from the current real-time accounting system for post-1989 forest-owners to a method of averaging in a bid to make ETS participation more attractive.

“Averaging accounting could potentially increase afforestation by providing a more certain incentive for some foresters to participate in the NZ ETS,” the paper said.

TECHNICAL, BUT IMPORTANT

Under current rules foresters report their stock to the government annually, and are given allowances – NZUs – as their stocks grow. When they harvest the forest, they must surrender NZUs equal to the emissions caused by the harvest.

This system accurately reflects the carbon saved or emitted from post-1989 forests, but is complicated and tedious. In addition, forest-owners run the risk of rising carbon prices ahead of harvest. As a consequence, many forest-owners have opted to not join the ETS (which is voluntary for post-1989 forest-owners, but mandatory for pre-1990 forest-owners).

Using averaging, forest-owners would receive a one-time amount of NZUs equal to the carbon savings the forest would achieve over its lifetime, which theoretically could be centuries. They would hold fewer NZUs than under the current rules, but would not have to worry about surrendering allowances at harvest as long as they replanted the forest.

“It should absolutely be made available to ETS participants. Harvest liability and risk of increased carbon prices at time of harvest is a major disincentive to participate in the ETS for some forest owners, particularly smaller ones,” Ollie Belton with consultancy Carbon Forest Services told Carbon Pulse.

“Averaging may also encourage a change in how forests are managed to increase the long term average carbon pools such as increasing rotation ages, which is a good thing,” he said.

SWAMPED

But Belton warned the change could cause major disruptions in market supply from forestry, the biggest source of allowances in the scheme.

“Under the current rules many forestry NZUs are held by forest participants to meet their harvest liability. These NZUs will never hit the market. With averaging, this harvest liability risk disappears and therefore these NZUs may hit the market. This could swamp the ETS with more NZUs in a rapid manner,” he said.

It is not known exactly how many NZUs forest-owners hold, but the government said last year some 140 million allowances sit in the national registry. A significant share of those is likely held by forest-owners who save them as they plan to harvest over the next five years.

The New Zealand carbon market has struggled with low prices for years, to the extent that a survey done by the government itself recently found that the scheme had been an inefficient tool to cut greenhouse gas emissions.

But signals that the government intends to beef up demand by tightening the scheme rules have caused prices to rise quickly in recent months. On Thursday NZUs traded in double digits for the first time since December 2011.

A rush of fresh supply would likely undo the recent gains.

LONG-TERM SUPPLY DROUGHT

But after the initial rush of supply, allowances from forestry-owners might dry up entirely, Belton said.

“Under averaging, the forests only earn NZUs at the start up, then there is no more issuance over the life of the forest land which could be multiple rotations over hundreds of years,” he said.

That would mean a quick – and lasting – carbon price hike in the New Zealand ETS as soon as the initial supply had been absorbed, although it remains uncertain how long that would take.

“There is also the question of how to deal with existing post-1989 forests that have already been allocated NZUs above their long-term average. Would these forests have to repay NZUs already issued?” Belton said.

The government stressed in Thursday’s technical paper that shifting to averaging is not an actual proposal yet, and that “following feedback on this technical note, the Government will then develop policy proposals for any potential changes over the next 12 months”.

Public consultation on the ETS review closes Apr. 30.

By Stian Reklev – stian@carbon-pulse.com

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