The Emissions Trading Scheme review was scrapped – what’s happening with forestry?

Environment & Planning
Renewable Energy & Climate Change
Rural & Agribusiness
Feb 08 2024

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.

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