22 December 2011

Ban on dodgy carbon credits a welcome first step

Forest owners have welcomed the government decision to prevent emitters from using dodgy carbon credits to meet their obligations under the NZ Emission Trading Scheme (NZETS).

Banning the use of these industrial gas CER units was recommended by the independent ETS review panel earlier in the year.

“The ban was essential in order to give our market some integrity. But there is still more work to do if we want to avoid a major financial headache down the road,” says FOA chief executive David Rhodes.

“These units have created a perverse situation whereby it has become profitable to create some greenhouse gases and then destroy them and claim the credit. The international market is awash with these units and New Zealand risked becoming the only destination left for them.

“In Europe, their use is restricted and will be totally banned from April 2013. Australia similarly will have no place for them in its carbon market.”

The NZETS puts a price on carbon in order to change behaviour. The aim is to gradually adjust New Zealand to a world where fossil fuels are much more costly than they are today.

“This ban goes some way to achieving this but has not addressed New Zealand’s overall policy on international units,” Mr Rhodes observes.

“In Australia and the EU the policy is clear. A limit will apply to the proportion of international units that emitters can use to meet their domestic obligations.

“This is to ensure that emissions reductions also occur at home. This encourages their domestic economies to transition to a low-carbon future, rather than simply providing funds to help some other country adapt.

“Getting the balance between international units and domestic units and an appropriate pricing mechanism is as much an art as it is a science. If the price is too low there’s no incentive to reduce the use of fossil fuels or to plant more trees. If it’s too high, it unfairly penalises exporters and New Zealanders on fixed or low incomes.”

In recent months, the NZ carbon price has dropped to as low as $8 a tonne, removing the incentive to plant trees or for fossil fuel users to change their behaviour, Mr Rhodes says. Taking the government’s two-for-one concession to industry into account, the cost of compliance for industry has been as low as $4 a tonne. On the other hand the price being passed on to consumers could be up to $25/tonne.

“The Australians and Europeans don’t subsidise their emitters two for one as we do in New Zealand. Also the initial fixed carbon price in Australia, at $A23 a tonne from July next year, will be above likely market prices here,” Mr Rhodes says.

“We see no justification for continuing with the two for one subsidy given the expected price and availability of units.

“I imagine officials and the government will be keeping a close watch on price movements during the next two or three months, bearing in mind the need to align our ETS with those of our trading partners. The ETS is not functioning as intended and the question of what proportion of emissions reduction should come from domestic action still remains to be answered.”

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