In September 2011 the New Zealand Emissions Trading Scheme Review Panel published a report on the scheme (for further details please see "Report recommends changes to New Zealand Emissions Trading Scheme"). Although its title - "Doing New Zealand's Fair Share" - stresses the overall national focus of its conclusions, the report has particularly significant implications for certain sectors of New Zealand's industries, including agriculture and forestry.
The agricultural sector has long had concerns about entering the scheme in 2015 and has been lobbying for exclusion ever since the scheme was introduced. It is argued that New Zealand would be the only country to treat agriculture in this way, and that inclusion would have a huge negative economic impact on the competitiveness of New Zealand agriculture internationally, with little opportunity for the sector to mitigate its emissions.
The panel recommends that agriculture remain within the scheme on the timetable set out in existing legislation, but with a range of transitional measures aimed at giving the sector a reasonable period in which to adjust to a carbon price on biological emissions. However, in keeping with previous statements, Climate Change Minister Nick Smith has recently commented that agricultural emissions will not be included in the scheme unless technologies are available to allow farmers to reduce their emissions, and unless New Zealand's trading partners make greater progress on measures to reduce emissions.
The panel recommends a transitional phasing-in for the agriculture sector. The recommended level of surrender obligation for 2015 and 2016 would be 50%, rising to 63% in 2017 and 87% in 2018. The full 100% level would not be reached until 2019.
Point of obligation
The panel recommends that the point of obligation be shifted from the processor to the farm gate. The purpose of the shift is to provide stronger (and more direct) incentives for farmers. However, the panel recognises that this proposal would create certain practical challenges around administration, monitoring and verification, and suggests further investigation. The Agriculture Emissions Trading Scheme Advisory Committee is working on a report on how the point of obligation could be shifted to farmers. The report is due to be submitted to the minister of agriculture by December 31 2012.
The advisory committee's report to ministers on June 30 2011 has recently been publicly released. It recommends specific changes that relate solely to the agriculture sector, including an annual review of emissions factor methodologies. The success of the committee's recommendations - like those of the final report - is likely to be subject to the make-up of the next Parliament.
Forestry was the first sector to enter the scheme in 2008. The forestry sector is divided into two for the purposes of the scheme, so that pre-1990 and post-1989 forests are treated entirely differently, reflecting the current Kyoto Protocol rules.
One of the panel's key concerns for the sector is the emphasis on the Kyoto Protocol in framing New Zealand's commitments, especially as a different international climate framework may emerge in future. Bearing in mind the constraints of the international rules, the panel calls on the government to make a "hard-headed national interest assessment" to ensure that the scheme appropriately accommodates New Zealand's unique position.
The 16 recommendations made specifically in relation to the forestry sector include the following.
Owners of pre-1990 forests of a certain size are compulsory participants in the scheme and, as such, are liable for deforestation. In return for assuming this potential liability, such owners are eligible to receive an allocation of units, in two tranches, from the government. The liability for deforestation imposes a significant cost on land-use change (and thus on property values) which is not fully compensated by the pre-1990 forest allocation of units. Pre-1990 foresters' concerns about the scheme have tended to focus on seeking flexibility to change land use without incurring significant costs. They have also been concerned to obtain maximum benefit through the pre-1990 forest allocation of units.
The panel recommends that pre-1990 forestry offset planting be introduced from 2012. This would effectively allow deforestation, provided that a new forest is planted elsewhere. The scheme already provides for offset planting to be permitted if international rules change to allow it. The panel recommends that the government take a hard-headed approach in assessing the panel's recommended changes and, if necessary, make unilateral changes to the scheme, even if such changes depart from international rules.
The panel recommends that if offset planting is permitted, the government should claw back some of the second tranche of the pre-1990 forestry allocation. The rationale for this recommendation is that the allocation is designed as partial compensation for pre-1990 foresters for costs imposed under the scheme in the event of a change of land use. The introduction of an offsetting regime is intended to reduce those costs.
Timeframes for allocations and exemptions
The panel recommends that the government consider extending the current application timeframes for allocations and exemptions, on the basis of submissions from some foresters. A significant proportion of those eligible for the pre-1990 forestry allocation have not applied for their allocation and the deadline for doing so is November 30 2011. Many large foresters have applied for their allocation, but a large number of smaller forest holders appear not to have done so. This suggests a lack of understanding of the fundamental rule in the scheme: if a person or entity has more than 50 hectares of pre-1990 forest, liability for any deforestation will still apply, regardless of whether an application has been made for the allocation.
Post-1989 foresters are voluntary participants in the scheme. They earn units for carbon stored in their forests and are liable for carbon stock decreases. Post-1989 foresters have a fundamental opposition to the arbitrary nature of the rules which deem emissions to occur on harvesting, when in reality carbon continues to be stored in wood products for many years. The sector has also been grappling with how to benefit from the scheme while also managing its liability to surrender units on harvest, or when catastrophic events occur, such as forest fires. Other key issues include how to account for the scheme and how to measure changes in carbon.
Emissions to atmosphere
The panel recommends that scheme rules in relation to post-1989 forests should not deem emissions to occur on harvest, but should reflect an 'emissions to atmosphere' approach if international agreement is reached on this issue. This recommendation is consistent with New Zealand's approach in international negotiations. The legal fiction that emissions arise on harvest reflects the Kyoto Protocol rules. If this recommendation is taken further, more detailed rules will need to be developed in order to specify when emissions occur with respect to the end of a wood product's life. For example, when would emissions occur if trees are felled and used for structural timber in buildings, compared to wood used for paper?
The panel recommends that the concept of averaging should be available from 2012 to assist in the management of harvest liabilities. The panel's recommendation that averaging be made available is designed to alleviate the open-ended harvest risks faced by post-1989 forest owners. In essence, averaging involves issuing units in respect of post-1989 forests up to the long-term average forest carbon stock level for carbon earned for post-1989 forests from January 1 2008. On harvest, instead of requiring units to be surrendered, there will be no obligation to surrender units if the forest is replanted.
A number of the panel's recommendations have the combined potential to alter the balance of supply and demand in respect of units in New Zealand. For example, extending transitional measures will reduce demand for the number of units required for surrender under the scheme for the period from 2012 to 2015. This is likely to have an impact on the carbon price that can be achieved, notwithstanding the increasing price cap recommended by the panel. It will also be highly relevant to any modelling undertaken for future investment decisions in the forestry sector.
The New Zealand Emissions Trading Scheme has always suffered from uncertainty due to the politics that surround climate change, but the panel's report offers useful guidance on where the scheme is going. Perhaps the strongest message is that, fundamentally, the scheme is here to stay. Future adjustments will depend on the post-election make-up of Parliament.
More than 20 of the report's recommendations relate directly to agriculture and forestry, and many others may have a potential impact. Sector participants will be carefully scrutinising the details of the panel's recommendations and monitoring the next steps. Pending more certainty on how the scheme might look in future, a cautious approach will be prudent for decisions beyond 2012.
For further information on this topic please contact Elisabeth Welson, Craig Nelson or Joanna Lim at Simpson Grierson by telephone (+64 4 499 4599), fax (+64 4 472 6986) or email ([email protected], [email protected] or [email protected]).