Recently, the Ministry for the Environment (MFE) released two consultations about possible changes to the NZ Emissions Trading Scheme (ETS). One doesn’t directly impact forestry, focusing on general regulations, the other on the annual updates to NZ ETS limits and price control settings for 2024 is very relevant for forestry participants. This blog post explores these consultations, including our perspective of the potential impacts for forestry in the ETS.
The consultations at a glance
General ETS Regulation Changes
The first consultation outlines various possible changes to the ETS regulations but excludes any forestry-specific proposals. So, any decisions from this consultation are expected to have minor and indirect impacts on forestry, mainly through changes in emitter NZU demand and entitlements.
Given the limited direct impact, CarbonCrop has decided not to submit feedback on this consultation.
Annual Updates to NZ ETS Limits and Price Control Settings for Units 2024
This second consultation is relevant to all ETS participants, including those in forestry. It covers key ETS price settings and unit availability, which directly influence the volume and pricing of supply. The government’s adjustments to these settings were a major factor in the price crash at the end of 2022. Understanding this consultation is crucial for forestry participants. You can learn more about it here.
CarbonCrop has submitted a response to this - check out a summary of our thoughts here.
Aligning with Climate Change Targets
One of the main considerations in the consultation is how the ETS aligns with New Zealand’s climate change targets. The options presented, aside from keeping things as they are, propose reducing the total budgeted emissions within the ETS. This alignment is essential for ensuring consistency between the ETS as a cap-and-trade framework and other climate policies.
CarbonCrop supports Option 3, which includes minimum adjustments plus additional adjustments to manage the impact of non-ETS policies.
For example, projects like the NZ Steel Electric Arc Furnace, funded by the Green Investment Fund, reduce NZ Steel's NZU demand by 800,000 tons/year. If the overall ETS budget is not adjusted accordingly, the net reduction in emissions would be zero. This adjustment is crucial for maintaining the integrity of climate initiatives funded by the Green Investment Fund.
Addressing the Unit Surplus
The surplus of units within the ETS is a significant issue.
The current surplus is larger than previously modelled, and addressing it is critical for the proper functioning of the ETS. CarbonCrop supports the Climate Change Commission’s (CCC) recommendation of Option 3, which involves a faster reduction of the unit surplus by reducing auction volumes. This approach signals a strong government commitment to core climate policy goals and principles.
We view auction volume adjustments downward as a “low regret” measure. If market behaviour suggests a smaller than expected surplus, the government can revise the auction unit allowances upwards later, potentially benefiting from higher unit prices. On the other hand, selling an excess of units now at low prices is unlikely to produce positive financial or environmental outcomes.
Price Control Settings
The consultation also revisits the price control settings, which had significant impacts a few years ago. Given the current unit surplus and the necessary NZU price corridor for achieving emissions reduction targets, we advocate for maintaining higher price control settings. We believe that lowering these settings would not support the proper functioning of the ETS and could undermine New Zealand’s climate change response.
Lowering price control settings may seem beneficial in the short term by reducing costs for the economy and households, but this approach risks increasing international liabilities under the Paris Agreement and negatively impacting New Zealand’s trade deficit. Maintaining higher price controls signals a strong commitment to rising emissions costs, ensuring that the ETS continues to incentivise necessary net emissions reductions.
The Way Forward for Forestry Participants
We encourage forestry participants to consider the long-term implications of these settings. Effective price controls and unit management could stabilise the market and enhance the incentives for forest restoration and carbon removals. Engaging with this consultation is a proactive step towards ensuring that the ETS continues to support forestry’s vital role in New Zealand’s climate strategy.
Check out CarbonCrop co-founder Nick Butcher's article here to understand the implications of this consultation.
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