Your details
5. If on behalf of an organisation, what is its name?
Name of organisation
De Havilland Forestry Limited
Updating NZ ETS limits for units
3. What are your views on the estimates of the ‘surplus’ or ‘excess liquid’ component of the unit stockpile?
Please explain your answer here
While the surplus/excess liquidity may today be close to the CCC's estimate of 49 million (we think it is much higher), we believe that it is growing more rapidly than the CCC/MfE currently estimate. This is predominantly as a result of post '89 foresters (within the ETS), having banked NZUs to meet harvest liabilities, determining that NZU prices exceed harvest values and they can take value from their forests by selling units and leaving the forests unharvested. This contribution to excess liquidity is obviously over and above the contribution which the CCC/MfE recognise will be come from post 2021 forests where "averaging" allows units to be sold without the need to factor in de-forestation liability (provided forests are replanted). Both CCC and MfE recognise these contributions but they are not quantified. We believe that further interventions in the future, beyond that now proposed by the CCC/MfE will be necessary to prevent this growing "surplus" negatively impacting the ETS.
4. What level of ‘surplus’ or ‘liquidity’ do you think is required for a functional market?
Please explain your answer here
11 million units. Lack of liquidity is not currently an issue and, in our view, because the "surplus" will rise despite the CCC's proposed intervention, it will not be an issue in the future (absent other contributing circumstances).
Update price control settings for units
6. What do you think the main drivers of market demand for NZUs are?
Please explain your answer here
(1) satisfaction/hedging of future surrender obligations, and (2) transactional profit taking.
7. What do you think of the approach of setting price controls with reference to prices required to deliver gross emissions reductions?
Please explain your answer here
Agree. The primary function of price controls is to ensure that NZU prices (at auction) remain on track to deliver budgeted/targeted emissions reductions.
8. Do you think it is appropriate to consider inflationary impacts in adjusting settings?
Please explain your answer here
Agree. If targets are nominal amounts then inflation should be included.
9. What do you think of the proposed auction price floor settings? What impacts do you think will result from different settings?
Please explain your answer here
In our view the CCC's 2022 ARP recommendation is too low (and by implication, so are MfE's options). The ARP is an important signal to the market. It should be set at $100 in 2030 , discounted at 3%, plus inflation
10. Do you think the cost containment reserve should consist of one or two tiers?
Please explain your answer here
Yes. Two trigger points will slow demand better than two. Added complexity is minimal.
11. What do you think of the proposed cost containment reserve trigger price settings? What impacts do you think will result from different settings?
Please explain your answer here
We agree with the CCC's 2022 recommendations. The CCR should only be triggered if there are extremely high NZU prices, which the CCC has identified. There is also a helpful pricing signal from the CCC's trigger points which we don't believe the market has appreciated until now. Most importantly, pricing the CCR at these trigger points significantly reduces the risk of CCR volumes being added to the surplus.
12. How do you think of the cost containment reserve volume should be calculated?
Please explain your answer here
We agree with the CCC's 2022 recommendations.
14. Is it appropriate to rely solely on complementary measures to manage impacts?
Please explain your answer here
We believe that confidence in the NZETS will be undermined if NZU prices can be seen to be driven by anything other than pricing necessary to achieve budgeted/targeted emission reductions. Impacts should be managed exclusively by separate policy measures as the CCC recommend. A $25 increase in the price of NZUs potentially adds a cost of just 6.7 cents onto the price of a litre of petrol. A policy which assists those on low incomes to meet such cost increases won't be difficult to devise.
15. What role should price controls play in containing the level of impacts, and what price control settings would be required for this?
Please explain your answer here
As already noted, in our view price controls in the NZETR should not be used to manage impacts.
16. If prices reached those presented in the cost containment reserve trigger price options above, do you feel that you have options to change behaviours or make new investments to address the impacts?
Please explain your answer here
Yes. e.g. if the price of NZUs was to increase to $171/$214 (from $85) this would add $0.23/$0.34 to the price of a litre of petrol. This could be compensated by a 8%/12% reduction in vehicle use. This is in fact illustrative of the prices that NZUs need to go to in order to deliver materially less vehicle usage.
17. Could you change behaviours or make new investments to mitigate the impact of higher prices on yourself?
Please explain your answer here
Yes.