ETS Archives | Edmonds Judd

Emissions Trading Scheme

August 15, 2023

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:

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.
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.
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.
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.

Which forests should be allowed in the permanent forest category?
Only transition forests and indigenous forests can enter the permanent forest category, or
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.
How should transition forests be managed to ensure they transition from exotic to indigenous forest and reduce the financial risks to participants?
Retain the status quo – no new specific carbon accounting method for transition forests or
New mandatory specific carbon accounting methods for transition forests in the permanent forest category.
How should permanent forests be managed?
Retain the status quo – no additional forest management requirements introduced for forests in the permanent forest category
New minimum forest management requirements, specific to the permanent forest category, are introduced for all registered permanent forests (exotic, indigenous and transition forests), or
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

May 20, 2022

Alani

News, Rural, Your Own Business

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.

He Waka Eke Noa

May 20, 2022

Alani

News, Rural, Your Own Business

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:

A farm-level levy: this will calculate emissions using farm-specific data and the farm will pay a price for its net emissions, or
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

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