On 19 June 2023 the Government launched a consultation process around possible changes to New Zealand’s emissions trading scheme. Our Forestry Team looks at key features.
Cyclones, flooding and other weather events brought forestry practices (and the associated environmental impacts) into sharp focus in early 2023.
With the Government’s opening up of a review of the Emissions Trading Scheme (ETS), it seems attention on the forestry industry is set to remain for some time.
The purpose of the review is to assess whether the current settings of the ETS adequately incentivise emissions reductions, whilst also supporting carbon dioxide removal from the atmosphere through forestry. Additionally, the review looks at proposals to redesign the ‘permanent forestry’ category within the ETS.
The review is a consequence of 2021 advice on emissions budgets from He Pou a Rangi | Climate Change Commission, noting the importance of gross emissions reductions as linked to New Zealand’s contribution to the global efforts to address climate change through to 2050 and beyond.
ETS Scheme: Minor Changes or Major Overhaul?
The Government is proposing four options, which represent different degrees of change to the current ETS regime. The Government may also decide (depending on consultation feedback) to take an approach which combines various options. The options proposed by the Government in discussion documents, are as follows:
Option 1 – Decrease the amount of emissions units so that the carbon price rises
This proposal involves using existing levers under the ETS Scheme such as auction volumes or price controls to artificially reduce the supply of New Zealand Units or NZUs (being the primary unit of carbon trade, with one NZU representing one metric tonne of carbon dioxide). The Government has recognised that with more removals from activities like forestry the price of carbon would be likely to drop and so this option could be less likely to drive gross emissions reductions in the long term.
Option 2 – Increase the demand for emissions units by allowing the Government and/or overseas buyers to purchase them
The discussion document notes that this option is uncertain in terms of its possible effectiveness, as demand from overseas carbon markets is likely to be limited.
Option 3 – Restrictions or conditions are placed on removal activities
This means emitters will need to purchase more emissions units from the Government or draw from stockpiled emissions units. The discussion document notes that this option may encourage emitters to reduce their emissions, but it may not encourage new forests to be planted.
Option 4 – Creating separate incentives for gross emissions reductions and emissions removals
This option envisages the creation of two NZ ETS markets, one for gross emissions and one for removals. Emitters would only use NZUs from the Government for surrender obligations, with removal activities incentivised through a separate market. This option would represent the most extreme overhaul of the ETS.
Permanent Forestry Category Redesign
A separate consultation document is released regarding a possible redesign of the permanent forestry category (which currently covers post-1989 forest which will not be clear-felled for 50 years). At present, exotic or indigenous forests can be registered in the permanent forest category. Options proposed under this consultation would restrict this category significantly, including only allowing indigenous forests or transitional forests to participate under this category of the ETS.
Next steps in Consultation
The ETS consultation closes on 11 August 2023. Our Forestry Team will be following developments closely.
If you would like further information about any of the matters discussed in this article please get in touch with our Forestry team or your usual contact at Hesketh Henry.
Disclaimer: The information contained in this article is current at the date of publishing and is of a general nature. It should be used as a guide only and not as a substitute for obtaining legal advice. Specific legal advice should be sought where required.