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Carbon trading in New Zealand                                

 
What does this mean for forestry?
 
Under the NZ Emissions Trading Scheme (NZETS) , foresters become participants in two ways;
 
1.     Pre-1990 forest – Compulsory participants
 
  • The forest is able to be harvested and replanted without incurring a liability.
  • An obligation is incurred if the land is deforested (unless exempt).
  • Foresters are able to apply for an allocation of New Zealand Units (NZUs) for forest sinks.(Unlimited NZUs will be issued in Commitment Period 1 (2008-2012)).
  • Forests are unable to earn NZUs for forest growth.
 
2.     Post-1989 forest – Voluntary participants
 
  • The owner chooses whether or not to bring the forestry into the ETS.
  • The owner can receive NZUs for the increase in carbon stored in their forests as they grow, and they may choose to sell these.
  • If the forestry owner chooses to participate, they must also surrender NZUs when harvesting as this results in a decrease in the carbon content of the forest.
 
What does this mean for companies?
 

Under the scheme, companies that undertake one of a range of emissions intensive activities must acquire one carbon credit for every tonne of carbon equivalent they emit. However, during the transitional phase (July 2010 to December 2012) liable entities only need to surrender ONE credit for every TWO tonnes emitted

 
Key impacts for New Zealand companies will include:
 
  • Reporting Emissions: The compliance cost of reporting emissions under the Climate Change Response Act framework.
  • Paying for Emissions: The cash flow impacts of purchasing carbon credits, whether via government or the secondary markets. It can also include investment in domestic or international projects to generate offset credits.
  • Reducing Emissions: Finance requirements for internal investment to reduce baseline emissions or increase energy efficiency.
  • Paying the Price of Carbon: Indirect costs associated with input cost increases (including electricity, gas, diesel, transport, packaging, manufactured goods etc) as the cost of carbon flows through the economy.
  • The domestic forestry sector has been participating in the scheme since January 2008 and has been eligible for offset credit generation and compliance liabilities over this period.
  • Liquid Fossil Fuels, Industrial and the Stationary Energy sector, began their first official compliance period as at 01 July 2010 with obligations against 50% of their emissions.
  •  A $25/mt price cap  is in place until the end of December 2012 after which the NZETS is currently legislated to move to a full floating price and 100% liability. Under the current Scheme, agriculture will be included in the NZETS from January 2015. 

 

We note an independent review panel is reviewing the NZETS at present and may recommend changes to the existing scheme when it releases its Review document in July 2011.

 
What is New Zealand’s national emissions reduction target?
 
New Zealand has committed to reduce their emissions back to 1990 levels over the period 2008-2012 with a further conditional emissions reduction target band of between 10% and 20% below 1990 levels between 2013 and 2020. This band reflects the balance required between the need to stay internationally competitive and the desire to see a comprehensive international agreement on emissions reduction reached.
 
What credits will be traded?
 
  • Compliance Permits: New Zealand Units (NZUs).
  • Domestic offset credits from forestry (also NZ Assigned Amount Units - AAUs).
  • International compliance and offset credits (AAUs).
  • International offset credits from developing countries: Certified Emissions Reductions (CERs).
  • International offset credits from other developed countries: Emission Reduction Units (ERUs).
 
Where do companies get credits?
 
There are a range of sources;
During the transitional phase, liable entities have the option to access NZUs from the Government for $25.
Emissions Intensive Trade Exposed (EITE) will receive an allocation of free permits from the Government.
By investing in domestic offset projects or international projects via the Clean Development Mechanism (for CERs) or Joint Implementation (for ERUs).
Alternatively of course, they can get all of these credits from Westpac.
 
What will impact the price of carbon in New Zealand?
 
  • Supply of, and demand for NZUs.
  • The price of international emissions offsets (AAUs, CERs etc) and the NZD exchange rate.
  • The present value of the NZ$25/mt cap price.
 
What products are Westpac offering?
 
Westpac has been responding to the challenges of climate change on our business for over 15 years and has been globally recognised for our expertise in this field recently being voted “Best Trading Company – Australasian Markets”[1]  
 
The development of the NZETS has extended Westpac’s capabilities, and cements our commitment to managing the risks and opportunities our clients will be presented with. As these markets develop Westpac will dedicate its resources to:
 
  • Providing timely and valuable expertise in environmental markets;
  • Offering hedging and risk management products; and
  • Structuring solutions to help transition businesses into a carbon economy.
 
This offering includes spot, forward, derivative and structured contracts for New Zealand Units, Australian Emission Units, European Union Allowances, Certified Emissions Reductions and Emission Reduction Units in a range of currencies.
 
Westpac has the experience and the expertise to assist our customers move into this new operating environment and successfully manage the risks and commercial opportunities involved.
 
 
For further information call Ben Coleman or Bridget Beals on 0800 659 301 or email us at Westpac_carbon@westpac.co.nz.
 
This email and any attachments are not intended to constitute any form of financial advice or recommendation in relation to securities or other financial instrument. We recommend that you seek your own independent legal or financial advice before proceeding with any investment decision.
 


[1] 11th Annual Environmental Finance and Carbon Finance market survey