Tuesday, March 19, 2024

Foresters fear carbon auction’s implications

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Forest Owners Association president Peter Weir is troubled by Government proposals to use an auction system to allocate extra carbon units under a revised Emissions Trading Scheme.
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The proposal is for a sealed-bid, single-round auction where bidders submit their bids simultaneously. 

Each bidder can submit multiple bids, ultimately creating a demand curve ranking all bids from highest to lowest. A clearing price is then determined, where supply and demand meet.

But Weir is concerned the proposal is going to cause more problems than it solves. 

It is one of several amendments proposed after consultation for the Climate Change Response Act.

The purpose of having the auction is to set a clearing price for carbon units that helps a secondary market to grow, allowing auction participants to on-sell any surplus units or to buy any shortfall, maintaining market liquidity.

“My concern is that these units are not going to be backed by anything, unlike the forestry units that are underpinned by trees. 

“This is like quantitative easing for carbon units, it is not a good thing.” 

When New Zealand subscribed to the first round of the Kyoto Agreement on climate change the units were backed by United Nations-sanctioned standards, called Assigned Amount Units.

However, because NZ was not an signatory to the second round of Kyoto the units are no longer backed by the standard. 

Weir is also concerned no clear indications have been given by the Government at what point the auction will be initiated.

“Auctioning will create huge uncertainty for foresters. 

“We do not know when the Government will intervene with the auction. Will they start when the carbon price goes to $40, $60?

“This makes it hard for people who want to buy land to know at what point will the Government take the heat out of the market.”

Weir said the carbon market already risks a liquidity crisis, partly as a result of a strong surge in carbon prices locally in recent weeks. 

Last week the carbon price was at $24.05 a unit, up from $18 a year ago. 

With the price capped at $25 a unit Weir said that value is starting to resemble a fixed carbon tax for emitters to work from.

“Everyone will start to use the Government’s fixed price ($25) to settle any liability on NZ carbon units.”

Even capping the market was odd when other trading markets are free to trade at whatever the market determines.

“So it looks like a carbon tax rather than a true market value.”

Overall though foresters are happy with most of the changes proposed. 

They include being able to get carbon credits until year 20 on a forest with no harvest liability to pay at felling. However, there was a sting in the rules.

“When you harvest your forest it reverts to pre-1990 liability. If you change your land use you will be liable for the carbon cost. It’s excellent if you wish to stay in forestry, which this is trying to reinforce, but not if you want to change land use.”

He also welcomed the retention of carbon in harvested wood products.

“The current scheme makes no allowance for the fact carbon remains locked up in timber for potentially longer than the life of the tree it was produced from. 

“This is recognised internationally but here in NZ it doesn’t flow through for the benefit of forest growers or wood processors.”

Anecdotal feedback from the industry is that interest from sheep and beef farmers in forestry is on the rise and any ability for carbon credits to rise over their $25 a unit cap will be further encouragement, he said.

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