The Government has launched consultation on potential reforms to the Emissions Trading Scheme (ETS). If adopted, these may significantly affect the benefits of having forest on your land in the ETS.
As we’ve previously explained in our crash course on the ETS, the ETS was set up under the Climate Change Response Act 2002. It aims to reduce the amount of greenhouse gas New Zealand emits into the atmosphere by requiring emitters to surrender credits for each tonne of greenhouse gas emitted.
However, there are also opportunities for profit. Those who own forest land, or have interest in forest land, can register it under the ETS and earn carbon credits for the carbon dioxide those trees have sequestered. These can then be sold, directly or through markets, to emitters.
The current consultation round has been prompted by advice from the Climate Change Commission that the current gearing of the ETS is not leading to meaningful decarbonisation of the economy.
A major issue identified is the low price of carbon credits. Carbon credits are currently hovering about the $50/metric tonne (of carbon dioxide) mark, and have historically been in the $40-$90/tonne range. The government has been advised prices are likely to drop further in coming years as an overabundance of forestry increases the supply of credits, reducing incentives to avoid emitting.
The government has put forward four options to attempt to drive up the future price of carbon. Their own consultation document identifies the potential issues with each option:
- Decreasing the total number of carbon credits allowed in the market. In the short term, reduced supply should increase the price. However, modelling suggests this effect may not last in the longer term, still leading to drops in the price.
- Allowing overseas entities and the government to buy carbon credits, increasing demand. Modelling suggests however that this is unlikely to generate significant interest, potentially doing little to increase prices.
- Restricting removal activities such as deforestation, or requiring more credits to be bought when land is deforested. Again, this is aimed at increasing demand for units to drive up prices. It is recognised that this is likely to discourage planting of new forests.
- Removing the ability of emitters to buy carbon credits directly from forest owners, and requiring them to buy from the government instead. The government would then
The consultation will also examine whether incentives should be provided to plant native trees for inclusion in the ETS, compared to exotics. Consideration will also be given to whether other forms of carbon capture than forests, such as establishing wetlands, should be included.
The consultation round does not close until 11 August 2023. With the election on October 14, and changes in climate change policy likely to follow whatever the result, there is a significant degree of uncertainty as to the future direction of the ETS.
Any of the four options being adopted could drastically affect the rate of return on planting land in forest or registering it under the ETS in coming decades. Those considering foresting to cash in on the ETS may wish to wait to see what policy emerges before investing.
Holland Beckett Law’s ETS experts and rural and agribusiness specialists will be pleased to assist with any queries you may have about joining the ETS, or your obligations if you already have land in the scheme.
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Meet Holland Beckett’s rural law experts at Fieldays
Perfectly placed to advise on rural legal challenges and opportunities, our rural law experts from Tauranga, Whakatāne and Rotorua are headed to Fieldays this year.
Fieldays is the Southern Hemisphere’s largest agricultural event and the ultimate launch platform for cutting edge technology and innovation. With around 1000 exhibitors showcasing rural products and services, Fieldays draws over 100,000 visitors each year who are seeking the best deals and first-hand information from the Primary Industry\'s most reputable suppliers and organisations. We\'re looking forward to being a part of this years event.
Come and chat to the team - Rural Living marquee - site RM148.
On site we will have expert lawyers covering all areas of the rural lifestyle, including:
Asset, estate and succession planning
Rural property law - whether it be buying, selling, subdividing, leasing, financing and operating rural property, farms and orchards.
Litigation and dispute resolution in a rural context
Environment and planning - helping to navigate increasingly complex regulatory environments such as resource consents and compliance, freshwater, significant natural areas, land development, farming regulations, reforms
Renewable energy and solar specialists - we guide and advise clients on every stage and legal aspect of an energy project, from planning and development to operation
Employment law for farms and farmers, including Health and Safety
Horticulture - from sale and purchase of orchards, to kiwifruit licences, boundary adjustments, packhouse agreements, orchard development and management agreements
Forestry rights and harvest agreements, transportation and logistics contracts, Emission Trading Scheme
Stuck in the Highly Productive Mud
The Environment Court recently released its decision in Blue Grass Limited v Dunedin City Council [2024] NZEnvC 83 which deals with the definition of Highly Productive Land (HPL) in the National Policy Statement for Highly Productive Land (NPS-HPL).
The Court has found that it is not open to applicants in consent processes to challenge the Land Use Capability (LUC) of their land as mapped by the New Zealand Land Resource Inventory (NZLRI), even if more detailed site investigations conclude that land is not LUC 1, 2 or 3. Put another way, land zoned rural that the NZLRI has mapped as LUC 1, 2 or 3 is ‘stuck’ as HPL for the time being, until regional councils introduce changes to their regional policy statements.
The Environment Court was tasked with answering the question of whether more detailed mapping undertaken by consent applicants since the commencement of the NPS-HPL (17 October 2022) using the LUC classification system could prevail over the identification of land as LUC 1, 2 or 3 as mapped by the NZLRI. This would in turn determine whether land is classified as HPL. The Court’s answer was no.
The NPS-HPL provides that regional councils must undertake mapping of HPL within its region and as soon as is practicable (but not later than 3 years from the commencement date of the NPS-HPL) notify a proposed regional policy statement that identifies all HPL by way of maps.
Regional councils are still undertaking this mapping and until this is completed cl 3.5(7) of the NPS-HPL sets up the interim definition of HPL as being land which “at the commencement date” of the NPS-HPL is (with some exclusions):
(i) zoned general rural or rural production; and
(ii) is identified as LUC 1, 2 or 3.
Dunedin City Council’s position was that the qualifier of “at the commencement date” in cl 3.5(7) means that the LUC mapping must have been in place at the commencement date. Its submission was that this creates a holding position for protection of HPL until the Otago Regional Council completes its long term mapping and undertakes a change to the RPS as required by clauses 3.4 and 3.5 of the NPS-HPL. That argument was accepted by the Court – the interim definition was intended to create a holding position protecting all land that may be classified as HPL by regional council mapping, until that mapping does occur.
Ultimately, what this means is that landowners and consent applicants are unable to undertake their own mapping of specific sites to seek to lessen the LUC of their land and therefore remove it from an HPL classification, in turn easing the consenting pathway. They must instead wait for the relevant regional council to notify a change to its regional policy statement relating to HPL, and then participate in that process if they seek to argue that their land is not HPL.
Alternatively, land owners and consent applicants will need to rely solely on the exceptions for use and development of HPL contained in cl 3.6, 3.8, 3.9 and 3.10. We expect applicants will seek to test the boundaries of these exceptions in light of this decision. Knowing the LUC classification of rural land as per the NZLRI mapping will have increased importance for purchasers considering potential development opportunities, given the restrictions the NPS-HPL contains and its lack of ‘wiggle room’.
If you require any assistance with or wish to discuss this decision or the NPS-HPL generally, please feel free to get in touch with a member of our specialist environment law and resource management team.
The Emissions Trading Scheme review was scrapped – what’s happening with forestry?
Last year, the New Zealand Emissions Trading Scheme (ETS) was brought under the spotlight after a High Court hearing and Labour government led review.
We have previously explained the ETS here. The ETS is governed by the Climate Change Response Act 2002 (the Act), putting a price on carbon emissions which certain industries must participate in. Every tonne of carbon emissions costs a credit, called a New Zealand unit (NZU). Participants who are emitters need to buy and surrender NZUs to the government to account for their emissions. NZUs can be invested or traded on the NZ ETS market. In 2021, auctioning was introduced where the Government sells NZUs to successful bidders.
Auctioning allows the government to control the supply of NZUs, and therefore the emissions of participants, to meet its emissions reductions plan. The plan outlines the strategies and policies intended to achieve the emissions budget for 2022-2025. Five year emissions budgets are mandated by the Act to assist New Zealand’s overall goal of net-zero greenhouse gas emissions by 2025.
The Climate Change Commission’s advice regarding Amendment Regulations to the Act in July 2022 recommended allowing NZU prices to increase, and to maintain consistency with the emissions reductions plan. The Labour government declined to follow this advice in the Climate Change (Auction, Limits, and Price Control for Units) Amendment Regulations 2022, instead depressing the market, by artificially reducing the price of NZUs in the emissions reduction plan, leading to plummeting NZU prices and a judicial review.
On 13 July 2023, the High Court found that Minister for Climate Change James Shaw made an error with his recommendations concerning the unit level and price control settings for 2023-2027 adopted in the Amendment Regulations. The Minister admitted not complying with the relevant requirements. The settings favoured by Cabinet did not accord with the 2025 target, and did not accord with or justifiably deviate from the emissions budgets and New Zealand’s contribution under the Paris Agreement. The Minister was directed to reconsider the decision.
Around this time, the Labour government launched a review of the ETS on 19 June 2023. A summary of that review can be found here. There was consideration given to forestry restrictions, to drive up the price of NZUs, creating uncertainty in the future of the forestry market.
The Government failed to sell the 15 million NZUs it made available during the four ETS auctions in 2023, as the clearing price was not reached. The units were consequently removed from the market. The failure to clear was largely due to the significant excess of units currently in circulation.
On 6 December 2023, the day of the final auction of 2023, the honourable Minister Simon Watts put out a press release. He said that the new coalition government is scrapping Labour’s ETS Review. They want a “strong and stable” ETS that gives “businesses certainty and confidence”. The Minister held these as the reasons of the NZU auction failure. There was no suggestion of another review.
On 12 December 2023, the Minister put out a second press release. The Government is considering a report from the Climate Change Commission as they prepare a second emissions reduction plan and have started “work on doubling renewable energy production”.
What does that mean for forestry?
Our current Government’s focus on “certainty” and “business” implies no significant changes will be made to the ETS in relation to forestry for the foreseeable future (presumably, within the next three years at least). Renewable energy seems to be the new government’s vehicle on the path to solving issues with the ETS.
Forestry investors, and relevant stakeholders, can put to rest any concerns related to Labour’s review. It appears as though forestry is not a key focus that the current Government has in relation to the ETS. For now, all obligations and legal implications around carbon credits and offsetting remain unchanged. If you have any questions around these obligations, please contact our expert team here.