There were two big announcements by Government entities in the last week of July affecting forestry rules and carbon pricing. To a large extent, the announcements escaped media scrutiny.
That lack of scrutiny was because explanations require an understanding of complex issues on which the general media is not knowledgeable. But let me be clear: the announcements were of huge importance. They encompass mega movements of both climate change and forestry policies with long-term implications.
The first announcement was the release by the Climate Change Commission (CCC) of a report that exceeded 80 pages, providing advice to Government on the auctioning of carbon credits for the period 2023 through to 2027.
The CCC is now advising considerably lower auction volumes, much higher minimum prices at auction, and much higher maximum prices before the cost containment reserve comes into play. These three proposals all feed into an aim of increasing the price of carbon.
The second announcement came one day later. It was a letter signed by Ministers James Shaw and Stuart Nash that they were stepping back from their proposal of earlier this year that long term and so-called permanent exotic forests should be excluded from the Emission Trading Scheme (ETS). The letter was sent to those of us who had submitted written responses to the proposals.
With the Ministers now stepping back, these forests will once again become eligible to enter the ETS, as had previously been flagged in legislation due to be operationalised on 1 January 2023.
This announcement by the Ministers represents a big about-face. It was made at least in part as a consequence of very forceful statements from within the Māori community, led by advocacy from forestry expert Te Kapunga Dewes.
I have been saying privately for some months that in a fight between Minister Nash and Te Kapunga Dewes there could only be one winner, and with an election only just over a year away, it would not be Minister Nash. Someone within the Government would have realised that all North Island Māori seats would become unwinnable if that fight continued. And so, the Ministers have had to step back.
However, there were other factors at play. Both I and others who provided submissions to the Ministers on their discussion paper, pointed out that the proposals were a knee-jerk reaction that was going to create more problems than it would solve. Also, MPI’s own underlying advice was that the implications of the proposals were profound but difficult to quantify. Essentially, this was a politely worded message, using coded civil-service language, saying ‘beware’.
First, I will explain some implications of the Climate Change Commission (CCC) advice, before returning to the change of heart by the Ministers.
The CCC has expressed three concerns about both the carbon market and the overall Emission Trading Scheme (ETS) being currently out of kilter.
The first concern is that current prices are sufficient to drive large-scale afforestation, i.e., conversion of farmland to forests, at a much greater rate than is considered desirable. However, the prices are insufficient to encourage a reduction in gross emissions, i.e., less use of fossil fuels within the broader community.
Second, the CCC is concerned that although the Government has said it plans to buy some carbon units overseas, it has not explained how it plans to do this. There is no obvious way as to how the Government will find these credits to purchase.
Third, the CCC is concerned that too many unit holders are holding their units as investments rather than cashing them in.
None of these concerns is surprising. I have raised all of them in forestry articles I have been writing for Farmers Weekly and at interest.co.nz over the last year. I will also be talking about them at the Carbon Forestry Conference in Rotorua in the coming week.
Given the current situation, the CCC thinks that the price of carbon needs to rise more quickly, thereby encouraging fossil-fuel users to change their behaviour more quickly and also supposedly encouraging unit holders to cash in their credits earned from forestry. However, the effect of these carbon price rises on afforestation rates does not seem to have been addressed directly in the report.
The measures that the CCC is suggesting will, if Government accepts the Commission’s advice, certainly raise the price of carbon rather quickly. Not accepting the advice would have big political implications. But whether or not the CCC proposal will encourage unitholders to cash in their existing units, is another matter. In isolation from any other measures, it certainly has potential to drive even more afforestation.
Taking 2023 as an example, the proposed plan is to limit the four 2023 auctions to a combined total of 16.3 million tonnes compared to the previous plan to auction 18.6 million tonnes. Also, the minimum auction reserve price is proposed to be $60 instead of $32.10. Further, the initial trigger price at which the 2023 cost containment reserve comes into play is recommended to be $171 instead of $78.40, with a further trigger being pulled if the price rises to $214.
To put that in perspective, the 2022 trigger price is $70 and the market price prior to this CCC announcement was $72. The price then jumped to just over $82 within hours of the announcement, but then came back over the next 24 hours to around $80.
Explaining this in different terms, the Government has tried in 2022 to hold the price to $70 but has failed to do so, having pulled the trigger and already expended all of its 2022 cost containment ammunition in the first two auctions, with two more auctions still to go. The law does not allow any more cost containment carbon to be added to the auctions this year. But the CCC is now saying that no new ammo should be loaded into the 2023 cost containment gun unless the carbon price rises above $171. And then, if that first firing fails to hold the price at that level, then the Government can load more ammo and pull the trigger again if the price reaches $214.
These prices are just for 2023, with the limits rising further thereafter. The CC is explicit that these are not target prices, but they are certainly indicative of where the price might head.
All of this advice was developed on the assumption that Ministers Shaw and Nash would proceed with their proposal to exclude long-term exotic forests from the ETS. With that situation now changing, the cats really are loose among the pigeons.
My own opinion is that Ministers Shaw and Nash have done the right thing to step back from their exclusion proposal. Their exclusion policy was a big mistake and they got out of that just in time. However, there are massive problems ahead as to how to get the ETS on track, both in terms of getting consumers to change their behaviours and also controlling the march of the pine trees across New Zealand.
The fundamental forestry problem is that the economics of carbon farming has made forestry look more attractive than sheep and beef on almost all classes of current sheep and beef land. This eventual outcome should have been apparent to the officials who designed the ETS back in 2008, but apparently it wasn’t. I can only assume the ETS was designed by desk economists who did not understand the interacting nodes of farming, forestry and consumer behaviour.
The question now is what will the Government do next? My assessment is that the only reason the market price of carbon is currently (2 August) only just over $80 is that the financial folk who determine the market price through their buy and sell decisions reckon the Government will have no option but to have another go at changing the rules. Those changes may relate both to the specifics of forestry and also a fundamental rejig of the ETS itself.
I note that Te Kapunga Dewes in his role as Chair of the Māori Forestry Association has communicated within his wide network that he thinks the Government is still not well informed on the relevant forestry science. On that point, based on what I have heard Government Ministers claim to be the forestry science, I agree with him rather strongly. Dewes also thinks the Government may now use regulations and perhaps other legislation to still thwart the wishes of Māori on these forestry matters.
There is now a lot of work to be done to sort out forestry policy as it affects all landholder groups, not just Māori, and also to give reconsideration to wider aspects of the ETS. Hold on tight as the ground keeps shifting. It is going to be some ride.
Posts from Keith Woodford 
Another great explanatory article, thanks Keith.
On a related matter, can you explain why the government imposes an approximate 18cents per litre charge for petrol, yet reduced the excise duty on a litre of petrol by 25cents…..to my mind negating the price increase.
Cheers John Clough Orewa
John,
Yes, you have highlighted how the Govt is being torn in two ways. The Government wants the carbon price to be high so that people change their behaviours and emissions drop. But they also want low energy prices to constrain living costs increases. They would probably argue that the 25 c excise reduction is a temporary measure to smooth out the long-term trend in energy prices.
I wonder… do the voters really understand that the CCC wants them to ‘change behaviour’ by not be able to afford to drive their cars, take holidays, and to pay far more for every item that needs to be transported or grown on a farm, etc? Do the voters want to take a step back from the modern world lifestyle in favour of a massive transfer of wealth out of their pockets into the hands of carbon farmers (and incidentally reduce our national protein products significantly in the process?).
For clarity’s sake, the 18 cents I’m talking about in my last post relates to the oil companies passing on their cost of carbon credit purchases, to offset their carbon foot print, to customers at their local petrol station. John Clough Orewa
Yes, understood, and to be clear, it’s not the footprint of the oil companies but the footprint of the team of five million who are consuming over 30 million tonnes of CO2 (fossil fuels) annually. Also, and confusingly, the ticket collector “emitters” at the top of the fossil fuel food chain are purchasing very few carbon “offsets” (NZUs) produced from forests. Instead, they are largely virtual (computer generated) NZUs produced by the govt via the govt auctions. And only a portion of the remaining NZUs come from forests but instead were allocated by the govt to the owners of over one million hectares of forests planted before 1990 as a token of compensation for loss of land value due to these forests not being permitted for entry under the NZ ETS to earn carbon credits.
The reason why very few NZUs come forests is NZ has until the last three years planted very few new forests, instead, since 1990 we have deforested over 200,000 hectares.
As Minister Shaw has clearly stated, to effect a change of fossil fuel consumption behaviour the price of carbon would need to be increased from the current price of $80/tonne to around $600/tonne that equates to the current petrol carbon charge of $0.18/litre to $1.30/litre! As Minister Shaw concludes, such a carbon price would destroy the economy (and the govt that installed it) and nor would it have any certainty of reducing emissions when compared to an incentivised approach to change the fossil fuel consumption behaviour by the team of five million.
The reality is (like HWEN) the NZ ETS is a tax or levy that is currently generating the govt via the auctioning of virtual NZUs, $2 billion annually that will likely rise to over $4 billion annually by 2030 that is already being spent on incentivised initiatives that transitions the team of 5 million away from its current addiction to fossil fuels.
As Keith says, “the NZ ETS is complex” and I’m afraid understanding the function of forests under the NZ ETS is even more complex and begs the question why NZ is the only country of 196 countries committed to the Paris Agreement that permits forests under an ETS?
Keith
Perhaps the time is right to more strongly flag the opportunity that agriculture can become part of the solution to the climate change/energy dilemma. In essence human society needs carbon to function and there are only three places to get this from – plants, the air/sea or the ground. Sources of carbon from the ground are not proving to be sustainable so that leaves the air/sea and plants. Farmers are very good at growing plants. The solution is simple but for some reason it is hard to implement politically! Some countries seem to be on this journey but New Zealand is not!
John,
I do not understand your suggestion. Are you suggesting that farmers grow crops instead of being pastoral farmers? Given that NZ is in general not internationally cost competitive for crops who would we sell those crops to? Also, ongoing cropping is not sustainable on most NZ soils.
KeithW
Thank you for your reply. NZ farmers could grow crops for muiltple products needed right here in NZ eg food, animal feed, energy, chemicals, fertilisers or for wherever reason carbon is needed. Such use would directly substitute for fossil fuel sourced carbon. But growing crops is not the only option as plant sources of carbon may include agricutural waste, woody based biomass grown on non traditional cropping land, and other organic waste sources on or off farm. Land use in NZ needs to become much more integrated across mulitple sectors and more diversified. It also needs to be an integral part of the NZs total carbon use and management system.
Great coverage, thanks Keith. What do you think about the idea of taxing NZU transactions, so that foresters and emitters get / pay different prices? It seems like a rather obvious solution – forestry removals could be capped at say $75/tCO2 (more than enough incentive), and emitter prices allowed to sky rocket under auction, with the government banking the difference and using it to fund climate mitigation / adaptation, ecosystem restoration, cleaning waterways, etc.
More generally, do you think that the ETS could be expanded and restructured so that:
a) it captures all emissions (in line with our NDC / international obligations),
b) forestry removals do not work against gross emissions reductions, and
c) any need for carbon removal is satisfied domestically instead of relying on foreign offsets?
So far NZ has made very little progress or commitments to decarbonising (with the ERP being mostly a ‘plan to make a plan’). It seems very likely that we will need to rely heavily on forestry expansion to meet future targets and obligations (beyond even the 30,000 hectares/year of exotic plantations that the CCC has already budgeted). Carbon removal in coming decades is likely to be much more important, and of much higher value, than most people realise.
Different prices for emissions and sequestrations is one option. It may lead, however, to sequestrations then being sold overseas under voluntary schemes outside the ETS.
Also, at present the Government does not pay for the sequestration. Rather, it offers credits which are then sold, not to the Government, but to emitters. So emitters pay those who hold sequestered units and then cancel their emission liabilities by giving the purchased units to the Government.
I have been mulling for some time the possibility of a carbon tax to go alongside the trading scheme. But I have not put anything into the public arena on that as of yet.
KeithW
Keith, thanks for this coherent update about more than 80 pages!
We know climate change is creating ‘winners and losers’ and via the ETS, as you point out there is an unforeseen problem on land value re sheep and beef and exotics. Jamie has suggested one way it might be possible to resolve the problem here, but as you say, already at $75 per NZU, most sheep and beef land is attractive. Previously, you have talked of ‘classes’ of land, with numbers defining ‘hard’ and steep hill country etc. Do you think the Govt should consider, if these classes are comprehensively defined already, nominating those where planting is OK, and excluding the ‘better’ land? Just a more specific way of allocating winners, but maintaining meat export productivity. Finally, again while I know it limits wealth for some farmers, would it not be reasonable not to allow offshore purchase of land for forestry? No votes lost from offshore. We’ve done it for existing housing. In principle, this won’t stop buying land for exotics, since NZ fund managers can do it with our money. I’m not sure why they are in this in such a small way so far – do you know?
The issues missed in this discussion are many but those of relevence to me are as follows:
effects on the environment ie spread of weeds – both coniferous and subcanopy species,
Effects on water sources – ie the drying up of groundwater
and effects on landscape quality – establishment of monoculture . Visual screening etc which affects communities and tourism!
Identification of land suitable for forestry via layering GIS info is possible.
Good summary Keith as we have discussed before.
The Genie is out of the bottle now – CCC says we need deeper cuts to emissions and constrain the amount of forest. Well whos going to be constrained ?
Maori? – as you described electorate wise thats hard and they have a fair point.
Foresters? – well overseas ones are being taken out so thats a start I suppose but everyday Kiwis when others are allowed? – equity and fairness issues.
Farmers? – late to the party but cranking up – do we stop them adding to on farm planting and sequestration ? – HWEN is telling them to get everything they can into the ETS plus its a good earner – I was on a farming call last week and a few farmers suggested exotics should be banned – well you should have seen the other farmers response who are in the ETS – they know where their bread is now buttered.
Also we have the emergence of the voluntary carbon market – a mess in NZ at the moment but if sorted out overseas demand makes the NZ ETS look like a kindy kids party. Who needs the ETS then?
I can see no matter what happens this train is rolling and its almost impossible to control as the demand for offsets and cuts grows. Which group above wants to be constrained? which political party can afford to annoy some or all of these groups?
Alongside this we have biomass demand growing at an unprecedented rate and likely to get even bigger.
I also know of 2 massive overseas companies wanting to set up mega wood processing plants as the effect of climate change on other forest supply and the Russia/Ukraine war seriously impact international wood flows for the foreseeable future.
Add all that together and it is going to be an interesting ride.
Great… so the NZ industry that is already very close to being carbon neutral (sheep and beef) gets destroyed so other industries can continue with their ‘pollute and plant’ approach to global warming. Pity about the 92,000 jobs and the $10B export receipts we will lose every year, not to mention the environmental disaster of rotting lumber and sediment that will eventually slide down our creeks and onto our beaches. What’s not to like about this….
Keith, thanks for the great summary. This is the topic that keeps on giving. I scanned the CCC 80 pages and come to the conclusion that they are going to have to cap the amount credits available/yr from forestry conversion, but not the ETS price itself. This will incentivise *reduction* of emissions from fossil fuels towards what they have planned. It also evades the question around permanent versus production forestry.