Te Arotake Mahere Hokohoko Tukunga - Review of the New Zealand Emissions Trading Scheme

We don't agree with the assumptions made in relation to exotic afforestation nor do we accept the accuracy of figures 4, 5 and 6. Exotic afforestation plans have changed as a result of the NZ ETS Review. Option 4 (which is obviously preferred) would see forests (new and possibly existing) moved out of the ETS and into a separate scheme where they would receive removal units rather than NZUs. We agree with various commentators who say that this separate scheme will give inferior returns to foresters when compared to the ETS. For example, it looks like the Government will be the sole buyer and set the timing of purchases and prices which will not be linked to NZU prices. We predict that whatever form the separate scheme takes it will not find favour with investors who are looking at very long term forestry investments. Also, if the Government changes the rules for existing forests (by pushing those forests into the separate scheme and/or turning existing NZUs into removal units), those investors will not trust the Government to do the same to a separate scheme during the investment. The result of all this is that if the Government pursues option 4 and creates a separate scheme for forestry then afforestation will likely fall to very low numbers in the future, meaning that the expected forestry supply forecasts in the consultation document are basically meaningless. We also find figures 4 and 5 misleading because they include forestry NZUs which have no harvest liability. The notes to figure 3 say that these NZUs are generally not expected to be supplied to the market. If the assumptions on which figures 4 and 5 are based are questionable, as we suggest, then the whole premise on which the Review is based is faulty.

Owners of most existing (pre-2023) forests who receive NZUs retain them to meet harvest liabilities. They can be used in the meantime as collateral in various types of structured finance arrangements. We are aware of a few such owners who do sell some NZUs but they are usually small forests. Some of these foresters may end up putting off harvests to defer harvest liabilities. As the Review document says (page 25), at present , NZUs credited to forests are a small proportion of the overall supply of NZUs on the NZ ETS. This is because most NZUs from existing forests are retained and don't find their way onto the ETS market. As already noted, we don't see this proportion growing if the ETS is amended to give effect to Option 4 (or some of the option 3 proposals). In the year to June 30 2023 (which was a mandatory emission return year), 19.75m forestry units were allocated while 18.1 m forestry units were surrendered, meaning that in 2022 a net 1.64m forestry NZUs were added to NZU stockpile and most of these won't be available to the ETS market.

With respect, some of this looks to be irrelevant to the Review issues or marketing designed to put exotic forestry in a bad light. Long lived exotic trees like Douglas Fir are obviously crucial to NZ meeting its domestic targets and future NDCs. That doesn't mean that plantings of natives shouldn't be encouraged in some places but they are very much in second place when you do the numbers.

Incentives for removals, particularly forestry removals (until we have proper alternatives), are obviously of vital importance .

With 40% of plantation forestry being owned by Māori, we are deeply concerned that if the Government pursues option 4 in relation to existing ETS registered forests and/or existing forestry NZUs, Māori will be disproportionately impacted leading to enormous Treaty of Waitangi claims. We agree with various commentators that action of this kind would involve an expropriation of private property rights i.e. ETS registered forests being forced into a separate scheme under which inferior removal units are issued in place of NZUs and with those removal units only being able to be sold to the Government. Just articulating this makes us realise the likelihood that race relations in this country could be set back 100 years. This isn't about "retrospective" legislation as the Minister likes to describe it. It's about confiscation of existing property rights.

Removals and gross reductions can and should be prioritised equally under the NZ ETS

We agree that the NZ ETS should be used to drive removals not some separate scheme.

We reiterate that it is critical that the NZ ETS be used to drive both gross emissions reductions and emissions removals with equal priority.

Our greatest concern with this Review is that it is premised on the fundamental assumption that forestry (in particular exotic forestry) will deliver excessive amounts of NZUs on to the market when this is unlikely to be the case if Option 4 (obviously the Government's preferred course) is pursued in any form. The mere announcement of Option 4 caused NZU markets to collapse and afforestation to cease.

What about zero carbon targets, particularly 2050, which could be impacted if option 4 is pursued and existing forests end up being harvested early because of uncertainty over the application of a separate scheme for existing forestry?

As noted above, we don't agree with the so called primary objectives. Our view is that removals and gross reductions can and should be prioritised equally under the NZ ETS. Nor do we accept that there will be a over supply of forestry NZUs into the carbon market. For these reasons we see no need for any of the options to be pursued.

None.

If there was a convincing case for over supply of forestry NZUs impacting on pricing then we would suggest that it be controlled WITHIN the ETS by using the CCC's idea of an overall quota system (not even mentioned in the Review).

We would strongly oppose Option 4 unless existing forests/forestry NZUs were grandfathered so that the introduction of a separate scheme applied only to future forest establishment. This seems to us to be what the CCC is suggesting in its draft advice. Why the Government chose to go further than the CCC and propose including existing forests/forestry NZUs is beyond us (as noted above, NZUs from existing forests with harvest liabilities don't find there way to the carbon market) . If the Government pursues that change to the NZ ETS we predict a plethora of litigation and Treaty of Waitangi claims.

We would also oppose Option 3 if existing forestry NZUs were to be treated differently from other NZUs.

See 6.3 above

See 6.3 above

See our comments at 5 above

Incentives in the NZ ETS need to be prioritised for removals that will best meet future NDCs and carbon zero targets for 2050 and beyond. In our view this means long lived exotic species like Douglas Fir. Indigenous afforestation should be accommodated in the NZ ETS but not as a priority.

Yes but they should not be prioritised over the planting of long lived exotics like Douglas Fir (unless they are more effective at removal).

In summary, we believe that the Review is based on the incorrect assumption that there will be an oversupply of NZUs from afforestation. Our certainty in that regard will be close to 100% if the Government pursues Option 4 - particularly if it does not grandfather existing forests/forestry NZUs.