Farm Forestry New Zealand

Retrospective law affecting the ETS Bad government?

Stuart Orme, New Zealand Tree Grower August 2014.

Join NZFFA »

If you are ever in Siena, visit Lorenzetti’s ‘Allegory of Good and Bad Government’ found in the Palazzo Pubblico. The frescos show the results of corrupt tyrannical governing on the one hand with those of virtuous governing on the other. They were painted to remind the city’s leaders of the probable consequences of their actions.

Lorenzetti depicted the effects of bad government as devilish figures described as the ‘leading enemies of human life’ specifically the attributes of tyranny, cruelty, deceit, fraud, fury, division, war, avarice and pride. Those affected by the retrospective change to carbon trading law could be forgiven for recognising some of these attributes in the recent actions of the government.

Retrospective law

The change, announced in the May budget, was approved by Parliament on 16 May and the law retrospectively imposed from midnight on 15 May. Those most immediately affected are landowners with post-1989 Kyoto forests who were planning to leave the Emissions Trading Scheme using international Kyoto units, mainly Emission Reduction Units, to wipe out their carbon liabilities. Until the 15 May, landowners were able to voluntarily leave the ETS using an arbitrage process to surrender Emission Reduction Units (ERUs), rather than New Zealand Units (NZUs) which are those units allocated to New Zealand forest growers. By working the system in an entirely legal way, encouraged by the government, landowners had the opportunity to leave the ETS and wipe out their carbon liabilities at no financial cost.

At all times, landowners were operating under the Climate Change Response Act. They were also aware of the announcement made by Minister Simon Bridges in December 2013, when he confirmed that ERUs would be legitimate tender until 30 May 2015. The press release on that date stated that ‘...these decisions will give certainty to ETS participants as to the use of Kyoto Protocol emissions units over the next two years...’

Left in limbo

The law change particularly hits Kyoto forest owners who had already bought ERUs in advance of leaving the ETS but had not yet completed the process. Now these owners have been left in limbo, with units which cannot be used to offset liabilities. The ERUs are also worth much less than when purchased, if they can be sold at all. In some cases, forest owners exchanged NZUs, or sold them for cash flow purposes because they were under the impression that their carbon liabilities would be met. These people are now likely to have to buy back NZUs to meet their liabilities. This is a double whammy, especially as the price of NZUs has increased markedly since the budget announcement.

The budget announcement therefore means that private individuals operating within the law stand to lose out financially. The change has been described by one commentator as ‘the most inelegant move of all in the chequered and torrid history of the ETS’. We are baffled at the unfairness of the consequences.

Unanswered requests

After learning of the law change, we contacted Climate Change Minister Tim Groser for an explanation and received the following, by way of explanation, from the Ministry for Primary Industries −

The Government has recently passed a Bill to amend the Climate Change Response Act 2002 to prevent reregistration arbitrage. Reregistration arbitrage is where post-1989 forest participants profit by registering and deregistering the same piece of land in the ETS multiple times, each time receiving New Zealand Units while registered but surrendering cheaper international Kyoto units when they deregister. While there has been little arbitrage activity to date, the potential impact is significant, in terms of fiscal cost and reputational risk.

From our experience, very few forest owners were interested in multiple arbitrage activity. Most just want to leave the ETS because they are disillusioned with the scheme. By allowing those forest owners who had bought ERUs and started the de-registration process to complete it, the effect on fiscal cost and reputational risk to the government would be negligible. At the same time it would go some way towards restoring the faith of forest owners who have been unfairly treated.

We approached a number of relevant ministers, including Minister Groser again, requesting a simple explanation as to why owners forest owners caught mid-process cannot be allowed to complete it. Without exception, our requests went unanswered. Following pressure from other large forest owners affected by the law change, Minister Groser responded in early July with the statement that it is only fair that foresters surrender the same units as they receive from the government.

Unfair change

The forest industry has no problem with the government’s objective of closing the arbitrage loophole, or of owners only surrendering the type of unit they receive. It is the way that the law change has been made which is so unfair.

The unfairness of the change is only made worse by the fact that power companies and other major emitters are exempt from the decision. They can continue to offset emissions liabilities using Kyoto units until May 2015. In some cases they are still being allocated ‘free’ NZUs by a government apparently having no control on what these emitters charge consumers.

We are one of a number of forestry consultants who operate on behalf of private clients to add value to their forestry investment. Our clients are mainly ‘mum and dad’ New Zealanders, not international corporates. Landowners have been encouraged by the government to join the ETS, under the suggestion that there were opportunities for them to benefit while helping New Zealand meet its emissions reduction targets. MPI have helped and encouraged forestry consultants to bring clients into the ETS. In return, we have done our best to work cooperatively with teams at MPI and the Emissions Unit Registry for mutual benefit.

Now we, and others, are left nursing our wounds, with disappointed clients, and for having suffered reputational damage as a result of this abrupt and unexpected law change. We continue to lobby ministers for an extension for forest owners who were caught mid-way through the process, and who had bought ERUs specifically for the purpose of leaving the ETS, to be allowed to see the commercial process started through to completion.

Why the government has become so disconnected with the nation’s forest industry remains a mystery. The forest industry has real potential to contribute in a positive way to meeting New Zealands’s emissions reduction targets and mitigate climate change.

Stuart Orme of Woodnet is a Registered Forestry Consultant and based in Masterton.