By Mark Belton, Managing Director, Permanent Forests NZ
In New Zealand, the NZ ETS is the sole instrument used to reduce emissions. About 90% of emissions surrendered in recent years have been foreign Kyoto units, and the flood of these super cheap units effectively inverted the market’s intended function of ‘pricing carbon so as to reduce emissions’ to ‘paying the polluters’ and providing opportunities for a raft of arbitrage scams. The emitters made money and the environment missed out.
In 2012-2015 when the flood of Russian and Ukrainian ERUs were released, the tiny NZ ETS became the last market accepting them. This collapsed the NZ ETS price of carbon from about NZ$20/unit to about 20c/unit. NZ emitters naturally responded by meeting their surrender obligations with ERUs at a negligible cost (while back pocketing NZUs and making big arbitrage profits).
The NZ ETS perversely became the world’s second largest hot air laundering pathway for Ukrainian and Russian ERUs, while domestically it became a scheme that paid emitters for their pollution. The more they polluted the bigger the gain.
Emitters with surrender obligations had already built in an expected carbon charge of NZ$25 per unit (the NZ ETS price cap) into their projected overheads, and upped their charges for goods and services accordingly. However, courtesy of the ERUs they were able to meet surrender costs from 2012 onward at about 20c per unit and pocket the difference.
In addition, trade exposed industries that were gifted up to 90% of their surrender obligations were able to meet all their obligations with the super cheap ERUs and bank the gifted NZUs. Since 2012, NZUs have had much higher market value than ERUs, generally more than five times as high, hence the arbitrage opportunity. Never have polluters had it so good. They have made hundreds of millions in arbitrage profits.
Even more perverse is the NZ Kyoto forests story. NZ failed completely to reduce its emissions under Kyoto – between 1990 and 2012 they increased by about 25%. However NZ’s first commitment period obligations were able to be met by surrendering forest sequestration offsets sourced from its post-1989 Kyoto forests.
NZ experienced a boom in forestry investment in the 1990s, which resulted in over 600,000 ha of commercial pine plantations being established (which qualify as Kyoto forests). These forests were planted solely as timber investments (i.e. fail the additionality test) and are destined to be harvested after about 25 years. Following harvesting the sequestered carbon is released.
To address this problem, the NZ ETS required forest-owners who registered their forests under the NZ ETS so as to be issued tradable carbon units (NZUs) to surrender back approved units when they either exited the scheme or cut down their forests. The stage was set for owners of forests registered under the ETS to get issued NZUs for their 2008-2012 sequestration, which were typically sold for between NZ$15 and NZ$20 a unit, then exit the scheme, repay their obligations with ERUs at around 20c per unit, and pocket any remainder of higher priced NZUs. Some smart operators then re-joined the ETS within the calendar year, were re-issued the units for that year, and then exited and repaid with ERUs again.
Perfect money-go-round for laundering and arbitrage profit. Owners of timber forests were able to play the market and make millions in windfall profits. About 80% of NZ’s plantation forests are foreign-owned with their parent companies domiciled in offshore tax havens.
So we have seen a corrupt ERU money laundering scheme aided and abetted by an inept government. But how innocent is the NZ government, a devotee of market processes?
It needs to be remembered that business interests lobbied hard to make the NZ ETS more business friendly, and they succeeded. The NZ government is rated as one of the most just, lawful and competent in the world. Given the NZ ETS case study, what hope is there that ETS mechanisms, which are now the favoured mechanism around the world, will deliver emission reductions required to achieve the 450 ppm stabilisation target? It is a question that must be faced head on in Paris.
The NZ scheme illustrates how free-market approaches and lax government regulators can render ETS schemes into a farcical money-gaming play from which polluters and traders benefit, but more importantly, do absolutely nothing to reduce GHG emissions.