BNZ Carbon NewsFriday 22 Jul 2011  Firstly, thanks to all that attended the Carbon Forestry 2011 conference last week in Auckland. This article is being written with the benefit of two days of intense discussion from all areas of carbon forestry. The amount of research and initiative provided from economists, politicians, forestry analysts and analysts from emitters provided a balanced framework for discussion and debate. This article will focus solely on the recently introduced Carbon Pricing Mechanism in Australia. This will be a large driver of activity in our own market, so it is worth covering off the Scheme in detail in this months' article. The Scheme will impact on the New Zealand carbon market, in two ways. Firstly, our scheme was designed in conjunction with the Australian scheme - our EITE assistance was based off Australia, this means that to the extent that there are any major differences we can expect to see some level of convergence on the two schemes, of particular note is the differences in the two schemes' approach to forestry, which will be covered off later. Secondly, the price of A$23 is far higher than our own, it is our understanding that the Government and the review panel are intent on designing a scheme that fits in the middle of other national schemes, neither on the restrictive side or lenient side. At today's rates the Australian carbon price is nearly twice our own, so it is possible that changes may be made to bring the NZ carbon price in line with Australia's. The Australian Government plans to introduce the Carbon Pricing Mechanism legislation to Parliament during the Spring sitting in September with passage through both houses completed before the end of the year. Despite being a minority government, at this stage the Government appears to have the support of the independents and Greens. The Carbon Pricing Mechanism adopts a "tax and trade" model for emissions trading, with an initial 3 year fixed price period. For the first 3 years units can be purchased off the Government starting at A$23/t, increasing at 2.5% + CPI (pegged at 2.5%) per annum. Permits purchased at the fixed price cannot be traded or banked, they be automatically surrendered on the company's behalf and will not be able to be traded. Any free permits distributed during the same period can be traded, sold back to the government, or surrendered. Full Trading Scheme Period commences 1 July 2015. Annual emissions cap to be advised by the new Climate Change Authority. A price collar will exist until 2018-19. The floor will start at A$15 and increase at 4%+CPI p.a., the ceiling will be A$20 above the expected international price and increase at 5%+CPI p.a. Banking is allowed and borrowing is limited to 5% of annual liability. Only four of the six Kyoto gases will be covered; carbon dioxide, methane, nitrous oxide and perflourocarbons (from aluminium smelting). This leaves HFCs and sulphur hexafluoride to be managed via direct regulation as ozone depleting substances. Covered sectors will include stationary energy, industrial processes, fugitive emissions (emissions that escape through leakage - except those from decommissioned coal mines), and emissions from non-legacy waste (waste deposited after the Scheme starts). In addition to these covered sectors a proxy carbon price will be applied via separate legislation to certain business transport emissions, non-transport use of liquid and gaseous fuels and the two excluded Kyoto gases mentioned above. As previously announced agricultural and land sector emissions are excluded, this should come as positive news to our own agriculture sector, however, Hon. Nick Smith's comments in the opening speech of the Carbon Forestry 2011 conference indicate that he is undeterred by Australia's agriculture exemption. Also excluded, is allocation of units to all post-1989 forestry. Forestry allocation comes under the Carbon Forestry Initiative that (CFI) that was announced earlier in the year. The rules that apply are similar to our own PFSI rules and essentially prevent credits being issued to a traditional rotating forest. This lines up with the scepticism seen towards carbon forestry by other offshore markets, notably the European domestic carbon trading scheme that will not accept forestry units. The CFI legislation has already passed the lower house and will be considered at the next sitting of the Senate. Compensation to Australian emitters will come in four key areas, Emissions Intensive Trade Exposed (EITE) will receive 94.5% or 66% free permits depending on the level of emissions intensity. Examples of a 94.5% EITE include steel, glass and cement manufactures, 66% EITEs include plastics and chemicals manufactures. Non-trade exposed manufactures will have the benefit of a A$1.2bn Clean-tech fund, whereas Emissions intensive power Generators (i.e. brown coal plants) will have a A$5.5bn fund. Households will receive tax and welfare adjustments to help with increased costs. More than 50% of the revenue raised is to be used to compensate households. Approximately 90% of households will be compensated, with ~70% fully compensated and ~over 4m vulnerable families over-compensated. The assistance will be permanent and rise over time. The main mechanism for compensation is via an adjustment to the tax-free threshold, which will be increased from A$6,000 to A$18,200 in July next year, and then increase again to A$19,400 from July 2015. Pensioners and low income families will receive additional assistance via the welfare system. The Australian scheme is not accepting international units until the full trading scheme starts in 2015 and from 2015-2020 only 50% of an emitter's liability can be met with international permits. Furthermore from forestry perspective, unless rules are aligned with regards to accepting units from a traditional rotating forest the ability for Australia to accept units from a post-1989 forest appear limited. To cover off, the scheme has more similarities than differences with our own scheme, and despite the higher fixed price on carbon the coverage appears to be narrower and the compensation more generous. We would expect to see some alignment of the two schemes, however, this appears to be some way off at this stage. On the domestic pricing front, NZUs are currently trading at $16.85 with CERs trading slightly below at $16.65, with the $25 cap on NZUs there is no reason why CERs should trade at a discount to NZUs. The fall in the CER price comes on the back of the extraordinary events in the European economy, particularly in the regions of Portugal, Italy, Spain Greece and Italy. The economies of which have had the dual effect of lowering projected emissions and decreasing the EUR/NZD rate.
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