The Emissions Trading Rort

The Emissions Trading Scheme being proposed by the Ministry of Economic Development will not reduce New Zealand's emissions but will result in New Zealanders paying a lot of money to dubious business-people overseas.

New Zealand is coming under intense consumer pressure to be seen to 'do something' about climate change. As our traditional customers for high value foods express disquiet about the long distances our exports must travel before arriving in their markets exporters seek methods to reassure them. The Government's response is an Emissions Trading System which frankly looks as if it has been designed by officials to benefit officials rather than do the country any good.

The New Zealand's Emissions Trading Scheme is to be "world leading". It will be world leading because it will embrace forestry (2008), liquid fuels (2009), and agriculture (2013). By contrast the European Emissions Trading Scheme (which has been in operation for two years) started only with large industry and electricity generators. In general New Zealand's examples of "world leading" developments in public administration have, to date, left rather a lot to be desired. This has not however dampened the enthusiasm of officials who are insulated from the effects of their miscalculations. Instead they are rewarded with trips to far off conferences to present papers on "lessons learned" – at taxpayer expense.

Like all markets the Emissions Trading System will be about demand and supply. Unlike fish or Securities, there is no innate demand for Carbon units. The only reason for any demand for carbon units is that those lucky firms designated by the Government will have to purchase them and/or face a range of chastisements from the Government. With the relish our Scottish heritage has for such things the officials have recycled chastisements from the Inland Revenue Department ranging from stinging fines to the incarceration of the Directors of uncooperative companies.

Each company designated as having an obligation to purchase carbon credits will be assigned a shopping list based on the level of emissions above those made in 1990. In some cases where emissions are less than the 1990 levels they will be assigned a credit. This means that the oil companies, electricity companies and agriculture which have all had significant increases in emissions face a large obligation to purchase carbon credits.

So who will supply them? Some, such as municipal waste processors who have installed methane capture technology, will have a few. But on the domestic market it is hoped, by officials, that the vast bulk of the supply will come from forestry.

The problem is there is an enormous spanner in the works. Under the Land Use and Land Use Change (luluCF) provisions of the Kyoto Protocol harvested wood is deemed to be released to the atmosphere the instant it is felled. Those logs you see being hauled around the country and stacked up in ports for shipping to other nations? Well, under Kyoto they don't exist. Some might say that's because the developed world didn't want to have to account for the huge amount of embodied carbon it imports from the developing world (but I couldn't possibly comment). For foresters, however, this has dramatic implications.

It means that under the Emissions Trading Scheme they will have credits to sell for each year's carbon sequestration from 2008. However when they harvest the forest they will have a carbon liability for every tonne of carbon sequestered since the forest started growing. To give you some idea of numbers a Pinus Radiata forest absorbs 40 tonnes per hectare (more or less) per year. But on harvest "releases" 800 tonnes a hectare. In other words unless the forest you enter into the scheme was planted in 2008 every forester must, under this scheme, eventually end up with a net loss (present value of cashflow excluded).

Under such rules it is very hard to see any incentive for foresters to enter the scheme. Moreover the Government has announced a $50 million afforestation package designed to stimulate planting in those forests that don't enter the scheme. In short there is a disincentive to participate and an incentive to not participate. Despite this Officials speculate New Zealand forestry carbon credits will be sold with a "New Zealand Pure" brand premium on international markets.

So if forestry isn't going to provide the bulk of the carbon credits who will? Officials leave open two additional sources, both from overseas.

Under the Kyoto Protocol every nation has so many "Assigned Amount Units" which is the level of CO2 equivalent each nation emitted in the reference year (typically 1990). Some nations, notably the Russian Federation and the Ukraine, today emit considerably less CO2 than they did in 1990. These extra Assigned Amount Units (colloquially termed 'hot air') may be sold (for real money) to other Kyoto signatories who need to balance the difference between their 1990 allocation and their current emissions. It is widely thought this is the only way Japan will meet its Kyoto targets. Officials have left open the possibility that obliged companies in New Zealand may buy foreign AAUs and convert then to New Zealand Units under the Emissions Trading System.

At present it is impossible to tell how much these units will sell for as none have been traded. The Russians and Ukrainians have a difficult balancing act in that their AAUs only have value under the Kyoto Protocol. If there is no continuation of the Protocol past 2012 their AAUs could be valueless. They also have so many AAUs that they could easily swamp their own market and devalue their asset. It is likely that during this commitment period (2008-2012) they will trickle AAUs on to the market keeping the pressure on in order to maintain prices until the very last moment.

Another provision under the Kyoto Protocol is the Clean Development Mechanism. Under the Clean Development Mechanism firms which invest in projects which reduce emissions over 1990 Business-as-Usual can have those reductions registered by the United Nations. These Certified Emissions Reductions can then be traded and will be able to be bought into the New Zealand market so long as they meet the market balance dates (end of the Calendar year). The price of CERs (or their derivatives) depends largely on how far long the certification process they are. In general projects tend to over-claim reductions in their initial phases ( attracting a discounted price) before they finally become certified (when they achieve a general market price).

Naturally the price of AAUs and CERs will depend on the market for them. Unfortunately the rules of many markets cited by New Zealand officials are unknown because they haven't been developed yet. It is notable that none of them will be as comprehensive (read "bold") as the New Zealand ETS. The exception is the European ETS which excludes Russian and Ukrainian AAUs altogether (because, one suspects, this would discount the value of British and German "hot air") and only allows firms to meet 10% of their obligation with CERs. Currently the UN has registered 80 million CER ( about what the New Zealand oil firms would need for the 2008-12 period) but has 2 billion worth of (high risk) projects registered for the 2008-12 commitment period.

The price for CERs on the European exchange will depend very much on the supply and demand for them. In March 2006 prices on the European ETS collapsed because it was discovered that the supply of credits was greater than the supply of debits so there was no scarcity. Previous to that the price was around 40 Euro. Today the price is around 17 Euro. Officials "think" the New Zealand price will be lower than that. Even so at 17 Euro New Zealanders would face an increase of about 10 cents a litre for diesel and 8 cents a litre for petrol. This money would be paid to those people selling the CER credits.

What does all of this mean?

One possibility Officials 'wink' about is the possibility that New Zealand will become a carbon laundering nation. That is selling "Pure NZ" forestry carbon credits, while covering itself with cheap Chinese CERs or Russian AAUs. Unfortunately such naivete does not wash with the Europeans who are more likely to blast us for such cheap tricks than participate in such a back-handed game.

One thing is certain and that is New Zealand consumers will end up footing the bill. All energy will cost more and farmers will end up spending a significant proportion of their income covering their carbon emissions. There is no guarantee that forestry will rebound from the deforestation that pre-Kyoto jitters and high land values have prompted.

But at least the officials will have a good story to tell in the far off capitals of the world on the conference circuit.

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