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.