Edmonds Judd

emissions trading scheme

Emissions Trading Scheme

Two discussion papers invite submissions

 

The Emissions Trading Scheme (ETS) is the primary regime used by the government to achieve its long-term commitment to reduce New Zealand’s greenhouse gas emissions so that our international obligations are met.

Through the ETS, a price is set on emissions by charging certain sectors for the greenhouse gases they emit. Emitters must acquire and surrender New Zealand Units (NZUs) to account for their direct emissions or emissions associated with their products. Emission units (often called ‘carbon credits’) are traded between participants in the scheme. One emission unit can either represent one metric tonne of carbon dioxide, or the equivalent of any other greenhouse gas.

The government has acknowledged that the current framework is not perfect and the ETS must adapt.  In June, the government released two discussion papers as part of its consultation process on proposed changes.

Document 1: Encouraging greater gross emissions reductions

The first document provides four options to encourage greater gross emissions reduction in the ETS while, at the same time, continuing to support forestry removals. It highlights the role that forests have in New Zealand’s response to climate change as well as the associated challenges with widespread exotic forest.

The four options proposed are:

  1. Using existing ETS levers to strengthen incentives for net emissions reductions. The government could reduce the supply of NZUs and therefore reduce net emissions through existing levers such as auction volumes, price controls or industrial allocation. In short, if fewer NZUs are available then fewer emissions would be offset resulting in reduced emissions being produced.
  2. Creating increased demand for removal activities to increase net emissions reductions. Additional entities (such as the government or offshore buyers) could purchase NZUs. This would help to attain the Nationally Determined Contribution (NDC); offshore buyers might purchase them to meet voluntary emissions targets or support voluntary market claims. As the discussion paper notes, there is no evidence of significant demand from offshore buyers and the effectiveness of this options is expected to be limited.
  3. Strengthening incentives for gross emissions reductions by changing incentives for removals. This option would create two prices: one for emissions reduction activities and another for removal activities. A lower price would apply to removal activities, making them less financially attractive. The prices for reduction and removals would still be linked, because an increase to the price for units sold at auction would likely increase the price paid for removal activities.
  4. Creating separate incentives for gross emissions reductions and emissions removals. The fourth option would create two markets with two separate prices: one for gross emissions reduction activities and another for removal activities. Emitters would only be permitted to use units sold at auction, or allocated for emissions-intensive and trade-exposed activities, to meet their surrender obligations, while removal activities would be incentivised through a separate market.

 

Document 2: Redesign of permanent forest category

The second discussion paper outlines the government’s proposal to take a cautious approach to the redesign of the permanent forest category in the ETS.

It acknowledges both the potential environmental and economic risks associated with large-scale transition of land to permanent forestry. The paper notes that the current ETS settings incentivise increasing levels of permanent exotic afforestation, in particular Pinus radiata, as it provides a much higher return on investment relative to other competing land uses including indigenous forests and some pastoral systems.

Three design choices are presented in the paper and, within these design choices, options are presented.

  1. Which forests should be allowed in the permanent forest category?
  2. Only transition forests and indigenous forests can enter the permanent forest category, or
  3. Exotic forests allowed to enter under limited circumstances. This could, for example, include long-lived species, Māori-owned land or small-scale exotic forests planted on farms.
  4. How should transition forests be managed to ensure they transition from exotic to indigenous forest and reduce the financial risks to participants?
  5. Retain the status quo – no new specific carbon accounting method for transition forests or
  6. New mandatory specific carbon accounting methods for transition forests in the permanent forest category.
  7. How should permanent forests be managed?
  8. Retain the status quo – no additional forest management requirements introduced for forests in the permanent forest category
  9. New minimum forest management requirements, specific to the permanent forest category, are introduced for all registered permanent forests (exotic, indigenous and transition forests), or
  10. New forest management requirements are needed for transition forests.

The consultation for both discussion papers ends on Friday, 11 August 2023. A summary will be published once submissions close. Individual submissions on the discussion papers may also be made publicly available online. It is noted that late submissions may be accepted however they may not be considered in time to inform the next steps for the ETS review.

If you would like to make a submission on the ETS before Friday, 11 August, click here.

The ETS is complex and the two discussion papers contain considerable jargon that can be difficult to interpret. If you are interested in how these proposed changes may impact you, please don’t hesitate to discuss this with us. We are here to help.

 

 

DISCLAIMER: All the information published in Rural eSpeaking is true and accurate to the best of the authors’ knowledge. It should not be a substitute for legal advice. No liability is assumed by the authors or publisher for losses suffered by any person or organisation relying directly or indirectly on this newsletter. Views expressed are those of individual authors, and do not necessarily reflect the view of Edmonds Judd. Articles appearing in Rural eSpeaking may be reproduced with prior approval from the editor and credit given to the source.
Copyright, NZ LAW Limited, 2022.     Editor: Adrienne Olsen.       E-mail: [email protected].       Ph: 029 286 3650


Forestry update

Challenges ahead

Forestry is attracting a great deal of interest and opportunity right now. This rapidly growing area faces challenges in terms of public opinion, regulation and general understanding. With all that is going on, where does this leave the agricultural sector in terms of sequestering carbon and the Emissions Trading Scheme (ETS)? We update you on some current issues.

‘Forest land’ and the farm

Forestry is a big player in sequestering carbon, however, not all forestry on a property can be registered in the ETS. The ETS defines ‘forest land’ as an area that is at least one hectare in size and has (or will have) tree crown cover of more than 30% in each hectare of forest species, at least 5m in height at maturity and an average width of at least 30m.

This set of rules restricts the parameters of registerable areas for carbon sequestration and, in particular, discounts some current developments and areas on farms. The scheme, for example, rules out smaller areas of riparian planting that many farmers have invested in to improve the ecology and environment on their land. However, if He Waka Eke Noa achieves its alternative emissions goal, this could change and, while these areas would not generate the same economic gain as ‘forest land’ under the ETS, they could create reward for existing on-farm sequestration.

Carbon accounting

Carbon accounting is the method by which an ETS participant calculates and reports changes in the carbon stored in a forest. To determine how many units a participant is entitled to earn (or must surrender), an emissions return must be completed and filed with the Ministry for Primary Industries. An emissions return must be made at least once during an emission return period; the current period runs from 1 January 2018 to 31 December 2022.

The 2023 ‘rush’

If an eligible area is ETS-registered before the end of the current emission period (see above), significant returns could be leveraged by a participant claiming carbon units back to the start of the return period – 1 January 2018. This opportunity will, however, lapse by the end of 2022 when the next emissions period begins, thus creating an incentive (or ‘rush’) for landowners to consider the ETS in a more serious light in order to reap this financial reward.

2023 also introduces a change to carbon accounting. All post-1989 forests currently registered in the ETS use the stock change accounting method for carbon units and will continue to do so until 2023, at which point a landowner can decide whether to move to averaging accounting or remain in stock change accounting. From 1 January 2023, however, if a post-1989 forest is registered in the ETS the participant can only use the averaging accounting method unless the forest land is registered in the permanent forest category. The permanent forest category (see below) will continue to use the stock change accounting method despite this change.

Stock change accounting: as a forest grows it stores carbon and the participant earns units; however, if the carbon stock decreases then carbon units must be surrendered, that is, harvested. In other words, stock change accounting focuses on short-term increases and decreases in carbon storage in a forest.

Averaging accounting: the participant will earn units for the first rotation growth, until the forest reaches its ‘average age.’ Averaging accounting means that if an area is replanted within a reasonable time period, the landowner is entitled to keep harvesting and not surrender credits.

While a participant can earn more carbon units under stock change accounting compared with average accounting, a participant will earn fewer ‘low risk’ units under stock change accounting. Low risk units are less likely to need to be repaid or surrendered.

Permanent forest category

2023 will bring about an additional category in the ETS called the ‘permanent post-1989 forest’; it replaces the current ‘permanent forest sink initiative.’

The new category is for forests that will not be clear-felled for at least 50 years. This option has generated much interest as an attractive investment opportunity for forestry owners and, more particularly, landowners seeking to turn farmland into economic gain. With the carbon price at upwards of $80/tonne, it is unsurprising the permanent forest category, and ETS generally, is pushing many farmers to consider forestry as a more viable practice in the future.

But is this set to change with the government’s recent proposal?

Proposal to exclude exotics

Under the current rules, a permanent forest category allows both exotic and indigenous forests to be registered in the ETS and earn New Zealand units (NZUs). The government has now, however, proposed excluding exotic species (such as pinus radiata) from the permanent forest category in a bid to better manage carbon farming in New Zealand.

The government’s proposed change (click here) has been generated from significant feedback and concern from scientists, primary industry and community groups, and local government with the increased rate of planting of exotic carbon forests on productive farmland.

Carbon farming is a hot topic not only in the rural sector, but also in environmental circles. Hopefully, the government’s proposal is the first step to a more strategic and managed process for the ETS in New Zealand.

In an ideal world we will have balanced opportunities for farmers to harness an income stream from their less productive land, while cultivating more valuable and sustainable areas of farmland for food production.

 

DISCLAIMER: All the information published in Rural eSpeaking is true and accurate to the best of the authors’ knowledge. It should not be a substitute for legal advice. No liability is assumed by the authors or publisher for losses suffered by any person or organisation relying directly or indirectly on this newsletter. Views expressed are those of individual authors, and do not necessarily reflect the view of Edmonds Judd. Articles appearing in Rural eSpeaking may be reproduced with prior approval from the editor and credit given to the source.
Copyright, NZ LAW Limited, 2022.     Editor: Adrienne Olsen.       E-mail: [email protected].       Ph: 029 286 3650


He Waka Eke Noa

Options out of the ETS for the primary sector

He Waka Eke Noa (HWEN) is a partnership established to reduce the emissions generated by the primary sector. It works to equip farmers to measure, manage and reduce on-farm agriculture greenhouse emissions and to provide sustainable farming practices for future generations.

More importantly, HWEN is developing a suitable emissions pricing scheme as the entire primary sector is not currently covered by the Emissions Trading Scheme (ETS). The government’s approval to this industry-led approach, however, comes with a large caveat – the ETS is the backstop for pricing agricultural emissions if HWEN does not deliver an effective and workable alternative.

HWEN has put forward two options to the ETS:

  1. A farm-level levy: this will calculate emissions using farm-specific data and the farm will pay a price for its net emissions, or
  2. A processer-hybrid levy: this will calculate emissions at the meat, milk, and fertiliser processor level, based on the quantity of produce received from farms or, the amount of product sold to farms. It will be paid at a processor level. This levy is likely be charged through to the farmer based on the quantity of product processed or supplied.

These options went out for public consultation earlier this year; HWEN will provide its recommendations to the government in late May.

These options aim to provide farmers with a practical and credible emissions pricing framework enabling them to control how their farm is operated. Crucially, the alternative mechanisms delink the methane price from the carbon price and give greater recognition of the sequestration on a farm, that is, a split gas approach.

Both the farm level levy and the processer-hybrid level acknowledge on-farm sequestration. For example, it would recognise native regeneration, riparian planting, shelter belts and other non-ETS eligible tree lots. This would be a significant win for many farmers who have invested heavily in improving the ecology and wellbeing of their land over the last few years.

What if either option is rejected?

If these two options are rejected, the sector will be subject to the ETS and the split gas approach will not be available; this means that the methane price will be linked to a rapidly increasing carbon price.

While agricultural emissions would be calculated at a processor level initially to create a ‘financial incentive’ for farmers to reduce emissions, it is likely that this would be passed on to farms based on the quantity of produce processed or product purchased. There is no doubt that costs for farmers would continue to increase annually, together with the ever-growing carbon price, despite continued work to reduce emissions.

‘Know your number’

Another milestone for HWEN is to ensure that all farmers and growers in New Zealand will know the annual methane and nitrous oxide emissions for their farms by December 2022. This has been dubbed ‘know your number’ by many in the primary sector. By 2025, each farm must have a written plan in place to measure and manage these emissions.

HWEN has defined a ‘farm’ as any farm over 80 hectares, or a dairy farm with a milk supply number or a cattle feedlot as defined in the National Environmental Standard for Freshwater. HWEN is supporting and assisting farmers in this process of knowing their numbers. While this space is still evolving and subject to change, the sooner farmers determine their numbers, the sooner they can understand where the emissions are being generated, and what actions may be taken to manage, mitigate or reduce them on farm.

Looking ahead

Regardless of the outcome that HWEN generates, the ETS and New Zealand’s international obligations create a need for better integration between forestry, emissions and the farming landscape. Farmers need to know their numbers so they can begin leveraging opportunities, and ensure they are in a good position for meeting legislative requirements.

To know more about HWEN and how it is working with the primary sector, click here. For advice relating directly to your farm or forestry situation, please don’t hesitate to contact us.

 

DISCLAIMER: All the information published in Rural eSpeaking is true and accurate to the best of the authors’ knowledge. It should not be a substitute for legal advice. No liability is assumed by the authors or publisher for losses suffered by any person or organisation relying directly or indirectly on this newsletter. Views expressed are those of individual authors, and do not necessarily reflect the view of Edmonds Judd. Articles appearing in Rural eSpeaking may be reproduced with prior approval from the editor and credit given to the source.
Copyright, NZ LAW Limited, 2021.     Editor: Adrienne Olsen.       E-mail: [email protected].       Ph: 029 286 3650


Business briefs

Unfair contract terms regime extended to small business contracts

The Fair Trading Amendment Act 2021, which was passed into law in August, bans unconscionable conduct in trade and prohibits businesses from having unfair contract terms in their small business contracts.

The Act amends the Fair Trading Act 1986 in two key ways.

  1. Unconscionable conduct: The legislation prohibits unconscionable conduct in trade. It does not define what ‘unconscionable conduct’ is, but it does provide a list of factors for the court to consider when assessing unconscionable conduct, including:
  • The relative bargaining power between the person engaging in the conduct and the person affected by the conduct
  • The extent to which the trader and an affected person acted in good faith, and
  • Whether unfair pressure or undue influence was used.
  1. Unfair contract terms: The Act extends the existing protections against unfair contract terms in standard form consumer contracts to include small business contracts.

The legislation defines this as a contract for the provision of goods or services between businesses where the value of the relationship between the businesses is less than $250,000 (including GST).

These two changes will come into force on 16 August 2022. This gives businesses just under one year to review their small business contracts to ensure they comply with the new requirements. The Commerce Commission is expected to release guidance on what unfair terms might look like for small business contracts.

Be aware, however, that some minor changes in the legislation are already in force.

If you would like some guidance on how this legislation affects your business, please feel free to contact us.

Many welcome new sick leave provisions

One employee’s sick leave may have doubled, but another employee’s sick leave may still only be five days. How does this work?

On 24 July 2021, minimum employee sick leave entitlements increased from five days to 10 days per year[1]. Key points for employers are below.

When does the entitlement start? Not all employees will get the increase in sick days at the same time. Employees will get an extra five days’ sick leave when they reach their next entitlement date. This is either after they reach six months’ employment or on their existing anniversary.

For example, if your employee’s anniversary date was 10 June, they become entitled to 10 days’ sick leave on 10 June 2022, but until then, their entitlement remains at five days.

What remains the same?

  • Employees who already get 10 or more sick days a year will not be affected by this change
  • The maximum amount of unused sick leave that an employee can be entitled to accrue remains at 20 days, and
  • The change applies to all employees whether they are full-time or part-time.

Remember, it’s your obligation as an employer to ensure you’re aware of your employees’ entitlements.

Changes to the retention money regime for construction contracts

The new Construction Contracts (Retention Money) Amendment Bill proposes to change the way contractors hold retention money under construction contracts.

The current regime allows contractors to mingle retention money with working capital, which can result in subcontractors missing out on money owed to them if the contractor goes into liquidation. This happened in the liquidation of Mainzeal Property and Construction Limited in 2013.

The proposed legislation aims to put clear rules in place around how retention money is to be held to provide protection for subcontractors.

Key changes: The Bill proposes that contractors must:

  • Place retention money on trust as soon as possible and keep it separate from other money or assets, and
  • Hold retention money in a trust account in a registered bank in New Zealand or in the form of complying instruments (such as an insurance policy or a guarantee).

The Select Committee is expected to report on the Bill in November 2021. Contractors will need to be prepared for the changes when the Bill passes, as failure to comply could result in significant fines.

[1] Holidays (Increasing Sick Leave) Amendment Act.


Emission control

What the Zero Carbon Act means for business

One of the most significant pieces of new legislation introduced last year was the Climate Change Response (Zero Carbon) Amendment Act 2019, more commonly referred to as the ‘Zero Carbon Act’.

The legislation outlines the government’s targets over the next 30 years (by the year 2050) of net greenhouse gas emissions of zero and to reduce methane emissions by up to 47%.

Continue reading


On-farm emissions reduction

Five-year joint action plan launched

On 24 October 2019 the primary sector launched the ‘Primary Sector Climate Change Commitment: He Waka Eke Noa – our future in our hands to manage agricultural emissions.’

He Waka Eke Noa kicks off a collaborative five-year joint action plan between the agriculture sector, the government and iwi with the target of decreasing farming emissions and developing a farm emissions pricing scheme. If the action plan produces satisfactory results, agriculture will not be brought into the Emissions Trading Scheme (ETS) under the proposed Climate Change Response (Emissions Trading Reform) Amendment Bill.

Continue reading


Complex task ahead

In contrast to the review of the NAIT system that we discussed in our previous post, it will be challenging for the government to get a consensus on the recently announced review of the resource management system. The four leading political parties have differing views on how to manage resource management issues. In particular, the Coalition government has three partners – all of which have somewhat contrasting policy positions.

The review will be undertaken by a resource management review panel made up of people with skills in relevant areas. The panel is chaired by Tony Randerson QC, a retired Judge of the Court of Appeal. Additional members will be appointed in the coming months.

Continue reading


Emissions Trading Scheme

Implications for owners of forestry blocks

New Zealand’s Emissions Trading Scheme (ETS) was established by the Climate Change Response Act 2002. The ETS was created as the vehicle for New Zealand to meet its obligations for the reduction of greenhouse gas (GHG) emissions under the Kyoto Protocol. The purpose of the ETS is to achieve a reduction in GHG emissions through emissions trading. Emissions trading is the exchange of carbon credits between those parties with surplus credits and those who are required to contribute credits as compensation for their production of GHG emissions.

Although the ETS affects nearly all New Zealanders in some way, it has significant impact if you are buying or selling forestry blocks, and/or own a forestry block. The first part of this article focuses on the implications of buying and selling of forestry lots, or land destined to be planted in forests. The second part gives you some background on the ETS, New Zealand’s obligations under the Kyoto Protocol and this country’s acceptance of the Doha Amendment. Continue reading


Welcome

Welcome to the Edmonds Judd blog. Here we update the latest news and events at both Edmonds Judd and in the legal world.

Here is the link to the latest Rural eSpeaking

Rural eSpeaking

In this issue:

  • Personal Property Securities Act Pitfalls: take care when goods are leased or being stored elsewhere
  • The ‘Moderated’ Emissions Trading Scheme: what’s the deal?
  • Over the Fence: Sharemilkers and Fonterra’s capital restructure – New minimum wage rates – Holiday entitlements for Easter – Holiday entitlements for ANZAC Day

The next issue of Rural eSpeaking will be published in mid-July.