A major rethink in underway about how the price of carbon will be set to discourage emissions. Consultation has started on revisions that will affect farmers in different ways to what was in place, arguably even more intrusively

The discussions will begin again with the Government releasing its review document for comment and submissions for changes to be made to the ETS. This comes out with the backdrop of HWEN still being under discussion (apparently the lull was due to the complex responses to Cyclone Gabrielle diverting government and the re-activation has nothing to do with opposition parties rattling their cage) and so until HWEN is settled there is going to be ongoing uncertainty for farmers and land owners.

But restarting discussions is a positive step forward.

For the rural sector the role trees are ‘allowed’ to play in future planning is a key issue in how they feel agriculture is being treated. (This is further covered several paragraphs down with a separate forestry review.)

There long has been recognition that the ETS has not been working, at least not to the level that is required to incentivise behaviour to lower emissions.

Due the current ‘low’ price of carbon emitters have found it is cheaper (economic) to purchase credits off tree growers rather than to lower their emissions.

As has been noted in the past New Zealand along with Kazakhstan are the only countries allowing all emissions to be met by offsets rather than having more stringent measures utilised to lower actual emissions to meet national reduction requirements.

The latest options to be made to the ETS are aimed to move away from an ‘offset’ driven model to one that better encourages reductions in actual emissions.

The challenge is to create enough incentives to plant some forests (but in the right places and not all at once) but not drive prices so low existing forests will be felled but also having a price high enough to dissuade business and public alike from emitting. Above all certainty about the future and its trends is required.

The four options are:

Option 1 – Use existing levers to strengthen incentives for net emissions reductions e.g., reducing the number of NZUs sold through auction. Thereby creating greater demand for credits and pushing up the price of carbon. Without ‘limits’ on tree plantings it could over time result in the price coming down due to forestry ‘removals’.

Option 2 – Increase the demand for emissions units by allowing the Government and/or overseas buyers to purchase them. Similar to above but increase demand for credits rather than reducing supply.

Option 3 – Strengthen the incentives for gross emission reductions by changing the incentives for removals. This is likely to mean putting restrictions on the amount of credits able to be obtained from removals by forestry.

Option 4 – Create separate incentives for gross emission reductions and removals. That is, having two separate ‘systems’ running alongside each other.

So, there are two systems; one for reductions, the second for ‘offsets’ and these through the management of credits will likely be priced differently. It is likely the removal/offset credits would be priced at a lower level to emission reduction credits thereby allowing government to manipulate the incentives for carbon farming.

Due to the great control government would have some believe this is the preferred option of the government. The downsides are that it would involve greater bureaucratic costs and complexity. The positives are that it may allow better control of the amount of forests planted for carbon credits alone.

The issues around forestry also link in to the release of the report into redesigning the Permanent Forest Category. Whatever option the government selects it is likely the price of carbon credits are going to be influenced to get more expensive.

The review of the Permanent Forest Category (PFC) is arguably a more complex conversation than the ETS review, although once the costs of the ETS start to hit the general public that may all change.

There are three main key questions which this PFC review raises;

Q1. Which forests should be allowed into the permanent forest category?

At the moment many are sceptical, especially with exotics, in the plant and walk away model (or degrees of it). As such many of the sub-questions are around what should be allowed to fall into the “permanent forest category”. That is, is it just indigenous, or indigenous and transition (to indigenous) or should some special allowances be made for exotics under special circumstances.

Q2. How should transition forests be managed to ensure they transition and reduce the financial risks to participants?

Defining what a “transition forest” would be a good beginning but broadly it is a forest planted with the aim of transitioning from perhaps exotic to an indigenous forest at some stage. As with permanent forests (which could also transition to an indigenous forest after 60 or so years) the interim management and the decisions around what carbon uptakes are need seemingly both research and discussion. The transition exotic forest is seen as a way to reduce financial strains on those wishing to set up a permanent indigenous forest with credits available early in the process. As with all exotic forests, keeping those who own them and claim the credits ‘honest’ in managing the forest right through to transition will be key to success. As the diagram below shows there is potential for new and novel management to reach the indigenous forest stage.

Source: MPI, A redesigned NZ ETS Permanent Forest Category

While not directly covered in the review report it must have occurred to some that there is potential for some of the East Coast forests planted on the less economic sites to potentially fall into this category.

Q3. How should permanent forests be managed?

The permanent forests and how they are decided upon and being allowed to qualify for the ETS needs working through along with requirements for risks. The review says:

We consider that permanent forests must be managed to minimise future risks such as, wildfire, pests and disease and wind-related risk, to protect enduring carbon sinks. Requirements for forest management in the permanent forest category could ensure these risks are managed.

So, plenty for those interested to consider and a ‘project’ which not only may have a large influence on the country’s ETS programme but also the shape of the rural landscape and society.

Already the process has attracted criticisms from diverse quarters with the Climate Forestry Association (largely made up from forestry industry sector interests) criticising the overall ETS from inevitably pushing up costs for everyone namely consumers, which is almost a given. Meanwhile Greenpeace are saying the government’s plans are not ambitious enough and incremental proposals such as being discussed “will not really cut it”.

What looked like tacit approval came from Beef+Lamb CEO Sam McIvor who stated (On TV1 News) he was glad that the government was acknowledging that the existing model (presumably ETS and plantation forestry) was not fit for purpose.

The consultation process for feedback and ideas is open now and closes on 11th of August.