On 23 February 2012, the Ministry of Foreign Affairs and Trade (MFAT) held a useful 'debriefing' about the international 'agreement' reached by the parties to the United Nations Framework Convention on Climate Change (UNFCCC) and the Kyoto Protocol (KP).
MFAT officials advised that there has been a 'gentlemen's agreement' for a second commitment period (CP2) of KP, which is to start on 1 January 2013 and end on 31 December in either 2018 or 2020 (the end date is yet to be agreed). Aspects of the KP for CP2 are still to be agreed, but the following forestry-related rules have been agreed as part of this 'gentlemen's agreement':
- There is a cap on the amount of emission units the New Zealand Government would be awarded under CP2 of KP for its pre-1990 carbon sinks (being a small percentage calculated on its base year emissions), but there would be no limit on its liability as a Government for any deforestation liability for pre-1990 forest land.
- In certain circumstances off-setting of pre-1990 forests would be permitted under KP (e.g. the Government would not have to account in its deforestation liability for pre-1990 forest land deforested from one piece of land and moved to another piece of land, provided it complied with certain rules).
- In certain circumstances the Government would not be liable under KP for natural disturbances of forest land, e.g. as a result of certain events such as wildfire, extreme weather and insect disease.
- The accounting rules for harvested wood products under KP would no longer assume, in certain circumstances, that all of the carbon sequestered during the life of the tree was lost on harvesting, but rather would capture that some of the carbon is stored. Liability for harvested trees would depend on the use of the harvested wood (e.g. use for paper, or wood panels, or as sawn wood).
- The rule that effectively limits liability for post-1989 forest land to the amount of units received (i.e. to the benefit received for the forest since 1 January 2008) would not be continued in CP2 under KP. This means, at the international level, once the agreement for CP2 KP comes into effect and the New Zealand Government opts in with respect to post-1989 forest land, it would be liable for all of the carbon emissions (such emissions being calculated on the basis of the new rule mentioned above) arising from the harvesting of post-1989 trees, including the carbon that was sequestered prior to 1 January 2008.
We are not aware of any modelling being released as to the overall impact on New Zealand of the forestry-related package agreed for CP2 KP. It may be that some of the benefits, for example, the benefit referred to in paragraph (d) would mitigate the impact of full liability referred to in paragraph (e). We would hope that Ministry for Agriculture and Forestry (MAF) officials would publish such modelling shortly.
It is important at this point to note that the 'gentlemen's agreement' reached in relation to the KP CP2 would not be legally binding until such time as it came into legal effect in some form. We understand from MFAT officials that this would require 142 countries to sign up to the CP2 agreement. They consider this may take a number of years, and may not occur during the period of what would be CP2. Each Government has to make a decision as to whether it will agree to the CP2 agreement under KP or whether it will pledge a commitment under the UNFCCC but not the KP. If a Government follows the latter option, it would state the basis on which it was making that commitment (in accordance with rules applying on the same basis as KP or with certain rules but not others applying). We understand that the New Zealand Government has not yet made a decision as to which route it will take, but MFAT officials emphasised the importance for Governments to agree a common rule set or to as much commonality as possible in order to provide integrity and a stable environment for the continuing operation of the market mechanisms that have arisen as a result of UNFCCC and KP.
MFAT officials informed us that the relevant Ministers were currently considering the 'agreed' rules for CP2, including the forestry-related rules package, as part of the Government's response to the NZ ETS Review Panel's report last year. Ministers are expected to respond to the review during this year, but it is uncertain when during the year such a response would be provided. It is anticipated that the Government's response would include proposed amendments to the Climate Change Response Act 2002, and we would hope there would be some consultation, or there should at least be the opportunity to make submissions on a Bill.
It is possible that the Government may propose (in some form) the domestic adoption, under the New Zealand emissions trading scheme (NZ ETS), of some or all of the forestry-related rules that form part of the gentlemen's agreement under a KP CP2. In the event that the international rule referred to in paragraph (e) above was adopted as part of the NZ ETS this, taken in isolation, would likely have a significant (adverse) impact on the liability of a post-1989 forestry participant for older post-1989 forests. It may be the adoption of a rule under the NZ ETS similar to that referred to in paragraph (d) would mitigate that impact to some extent, depending on the use of the harvested wood.
It is uncertain whether the Government will even agree to KP CP2, or whether it will adopt and reflect the forestry-related rules for CP2 in the NZ ETS. It may be that it adopts all or some of these rules domestically, or that it does not adopt any of them under the NZ ETS. Alternatively, it may be that it adopts the 'new rules' from a certain date under the NZ ETS and any registrations from that date are governed by the new rules, whereas the existing registered participants and land are governed by the 'old rules'. It is simply uncertain as to what will happen, but we considered it prudent to draw this issue to our clients' attention so that one can factor it in to one's decision making (to the extent one wishes to do so, bearing in mind the current uncertainty as to its future application, if any, to the NZ ETS) in relation to carbon forestry matters.
We hope that the Government will provide some certainty shortly as to whether it will be ratifying the 'agreement' to KP CP2, and in any event to what extent (if any) it proposes to adopt any of the forestry related rules that have been agreed as a package to apply at an international level for CP2.