New Zealand’s Coalition Government plans to cap the amount of pine trees permitted in the Emissions Trading Scheme (ETS) to protect too much farmland from being converted into carbon forests. Source: interest.co.nz
This policy, if implemented, could increase the cost of carbon credits and force emitters to turn to more expensive kinds of offsets and reductions.
Climate Change Minister Simon Watts revealed the plan in a broad draft Emissions Reduction Plan published early on Wednesday morning.
It said the second emissions budget would be achieved through a mix of gross emission reductions and net offsets or removals such as forestry.
Planting permanent pine forests on cheap rural land has proved to be the most cost-effective way to remove or reduce a tonne of carbon from New Zealand’s emissions profile.
Some estimates have said forestry removals are often a quarter of the cost of gross reductions available to businesses. This has led to a proliferation of pine forests and ETS units.
The draft plan said exotic forestry was an “essential part” of achieving climate targets, but new rules were needed to manage “unintended consequences”.
“Forestry competes with agriculture for land. The NZ ETS creates powerful incentives that could result in large-scale afforestation on productive farmland and whole-farm conversions”.
“To manage this risk, the Government intends to introduce limits on the entry of new forests into the NZ ETS on productive farmland. Existing forests already in the NZ ETS will not be affected,” it said.
This will allow ETS participants to use the market’s price signals to optimize reductions and removals, just without being permitted to take over too much farmland.
The document also flagged other environmental risks that come with planting too many pine forests and that more regulations may be needed to manage other risks.
The Government also committed to not putting an expiry date on ETS units and not putting a different price on units that originated from the forestry sector.
These were both policies floated in the past that created uncertainty in the carbon markets, ultimately pushing down prices.
“Forestry competes with agriculture for land. The NZ ETS creates powerful incentives that could result in large-scale afforestation on productive farmland and whole-farm conversions”.
Work was also underway to review the free allocation of units to emissions-intensive and trade-exposed firms. The scheme was intended to avoid emissions leakage but hasn’t been updated since 2010.
The price of ETS units have been trending upwards over the past two weeks and closed at almost $54 on Tuesday evening, up from about $50 at the start of July.
The policies outlined in the emissions reduction plan are expected to reduce household consumption by just under half a percent by 2050, relative to taking no mitigation action.
“This is because added costs from changing to low-emissions production or from the NZ ETS raise the price of goods and services, so that people cannot purchase as much as they would have otherwise,” the document said.
“To manage this risk, the Government intends to introduce limits on the entry of new forests into the NZ ETS on productive farmland. Existing forests already in the NZ ETS will not be affected,” it said.
This will allow ETS participants to use the market’s price signals to optimize reductions and removals, just without being permitted to take over too much farmland.
The document also flagged other environmental risks that come with planting too many pine forests and that more regulations may be needed to manage other risks.
The Government also committed to not putting an expiry date on ETS units and not putting a different price on units that originated from the forestry sector.
These were both policies floated in the past that created uncertainty in the carbon markets, ultimately pushing down prices.
