Carbon credits pricing crashes and burns

ROB STOCK
Last updated 05:00 04/12/2011

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Industry leaders call for limits on imports of low-quality European carbon credits, writes Rob Stock.

A crash in carbon credit prices means the government has no option but to ban or drastically restrict the use of imported carbon credits of dubious quality, or the emissions trading scheme (ETS) could become a national embarrassment.

The price of New Zealand units (NZUs) has crashed from $22 in May to about $11 last week, stifling interest in developing carbon offsetting initiatives here, according to carbon market participants.

The price crash has been so steep that by one calculation, if the price trend continued for another 100 days, the value of NZU credits would be zero.

The reasons for the crash appear to be the unfettered ability of New Zealand emitters to import credits of dubious quality from overseas, coupled with the recent dumping of international credits by cash-strapped European industrial and utilities companies selling down their stockpiles of carbon to realise cash as the debt crisis worsens, participants in the fledgling carbon trading market say.

Big emitters here have been able to buy the UN-backed Certified Emmissions Reductions (CERs) cheaply to surrender under the ETS, gutting the price of NZUs.

As a result, those who have created NZUs – perhaps through planting timber on part of their farm – have almost abandoned the market.

The only people offering NZUs for sale appear to be certain "emissions intensive and trade exposed" emitters (known as Eite, curiously pronounced as though it rhymed with yeti) who receive NZUs as compensation for increased costs under the ETS, market sources say. And even they are not willing to accept the prices bidders are putting on the table.

With the ETS having virtually no public visibility there is no pressure for businesses such as power companies or petrol retailers to support credits created in New Zealand.

Mark Belton, from Permanent Forests International Limited, a Christchurch business which works with farmers and others to establish permanent forests, said for the New Zealand carbon market to work, there has to be a bottom to the NZU price that is not too low, otherwise it loses its ability to function, and credibility.

"There's the reputational risk for New Zealand if we allow in units from offshore that are viewed internationally to be very suspect." He predicted a ban in CER imports, or a hefty restriction.

Certainly, the government has been made aware of the risk. In a prescient statement, the ETS Review Panel in a June report published in September said there was "a risk these units will flood the New Zealand carbon market and drive down the NZU price. This could impact on New Zealand's incentives to abate, including in particular on forestry investments and on the reputation and integrity of the ETS".

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The panel called on the government to urgently review the issue, and if a decision was made to exclude suspect units, it had to happen after a "reasonable notice period". Cabinet has not yet considered the issue.

Belton believes the creation of the ETS was something of a symbolic move by the government of the day, and that it was never designed to result in costs high enough to "de-carbon" the economy.

"What the government did not anticipate was the price of the CERs would collapse and embarrass the scheme," he said.

Belton is not alone in his belief the government, which is examining the issue now, will have to act if it wants the ETS to maintain any credibility and encourage behavioural change.

Lizzie Chambers, from carbon trading platform Carbon Match, said: "It is not enough just to have an ETS. You have got to decide what outcomes you want from it. If you want trees to be planted here and emissions reductions projects done here, you need a market that encourages it."

She said the market needs to be price stable enough to create the right environment for carbon credit production in New Zealand as the carbon market here has shown itself to be caught in a boom-and-bust cycle.

Chambers said when Europe recovers, as it eventually will, the price of imported credits will spike, and then emitters here will face suddenly spiking costs.

"Right now, things are in emitters' favour, but in a few years it could swing. When Europe recovers, prices of international credits might rise fast," she said.

"This is all as a market should function, but when New Zealand is so intricately linked, and no limits on using CERs apply here, these cheap credits will be all that local emitters buy, as they naturally focus on minimising compliance cost, like any other business cost." She said: "The issue of the `dodgy' credits is a subset, but an important one, as such credits account for about 70 per cent of CERs issued to date. There's just no way we should be accepting those going forward. But more generally we should probably have a general limit on imports or requirement to surrender NZUs.

"That's the only way to make sure that there is a consistent ongoing incentive to do part of the `emissions reductions' on New Zealand soil."

As reported in the Sunday Star-Times two weeks ago, big emitters, including petrol retailers and power companies, are believed to have set their energy prices based on carbon at $25 a tonne. As a result of being able to buy it more cheaply they have had a windfall.

Belton is cautious about how long the ETS and systems like it will survive. He believes the ETS has not altered behaviour because the price for carbon is not high enough, but that goes for schemes elsewhere too.

The amount it adds on to petrol prices is around 1 per cent, and the cost to big emitters has been nowhere near high enough to change their ways.

EMISSIONS TRADING SCHEME

The ETS began in 2008. Forestry was the first sector covered. Those covered by the scheme have to either pay the government $25 on their 2008 – 2012 emissions or acquire and surrender carbon credits. The cost of that is the ETS's incentive to change behaviour and cut emissions. In 2010 liquid fossil fuels, stationary energy and industrial processes were included. Agriculture will not join until 2015 at the earliest. New Zealand's target is to reduce greenhouse gas emissions 5% from 1990 levels by 2050. On today's trends – up 22% on 1990 levels by 2007 – New Zealand will not achieve that. Our emissions come from agricultural methane (32%), transport (19%), electricity and "other" energy generation (26%), agricultural nitrous oxide (15%), industrial solvents and processes (6%), and waste (2%).

- Sunday Star Times

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