Wednesday, December 6, 2023

ETS changes could open legal can of worms

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High court ruling orders government to reconsider emissions trading settings.
Climate Change Minister James Shaw agreed there were errors in law when deciding on Emissions Trading Scheme settings for 2023 to 2027.
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A high court judgment ordering the government to reconsider its decisions on Emissions Trading Scheme settings may help restore some confidence in the troubled carbon market.

However, foresters and others said the court ruling will not remove many of the uncertainties caused by the wider Emissions Trading Scheme (ETS) review. They said if ministers go ahead with retrospective changes this is almost certain to attract legal action, particularly from Māori forest owners.

On the eve of the Matariki long weekend, after secondary markets stopped trading, the high court released a judgment in which Climate Change Minister James Shaw agreed there were errors in law when deciding ETS for 2023 to 2027.

Last year, the government declined to follow the Climate Change Commission’s advice on tightening ETS settings. It was the first of a series of decisions and moves by the government that sent carbon prices plunging from nearly $90 then to below $40 now.

It was clear at the time that Shaw had argued against the decision but was overruled by his cabinet colleagues, who feared a higher carbon price would fuel inflation.

Lawyers for Climate Action New Zealand Inc (LCANZI) successfully argued in a judicial review that the settings were not in line with the government’s emissions budgets and also the commitments New Zealand made under the Paris Agreement to restrict global warming.

Justice Matthew Palmer said he would not quash the existing settings because of potential marker disruption. But Shaw must now reconsider the unit limit and price control settings for 2023 to 2027 by September 30. Cabinet is due to make decisions on ETS settings for 2026 to 2028 and Justice Palmer said ministers could do this and review existing settings concurrently.

All parties agreed it would not be practical to review the settings before the third auction of the year in September.

Those involved in carbon markets said the high court ruling may help even if it may only overturn the first in a series of moves that sent carbon prices plunging.

“I’m not sure. However, if it means that the Climate Change Commission’s advice is more likely to be adopted this year as a result then I’d say it won’t hurt,” one market player said.

Others agreed it may help, but said the lack of buyers is due to massive uncertainty about the future shape of the ETS and role of forestry in the scheme.

“Underlying all this is that no one knows what a New Zealand Unit [NZU] is worth now, let alone the future, as the threat of retrospective decision making is still there,” one trader said. An NZU is a proxy for a tonne of carbon. 

Another said there could be a chance that buyers might come back because the price is so low and future ETS settings might tighten.

“Luckily I can’t give financial advice, but buying NZUs at the moment, especially forestry ones, would be a risky move unless you are really worried about not having enough NZUs to settle emissions in the next year or so.”

It was recently reported that Shaw was trying to restore calm in carbon markets over ETS reform, saying NZ governments are “extremely cautious” about retrospective law changes.

Carbon prices fell from a high of $88.50 last year after a series of government decisions and announcements.  

The slide in NZUs accelerated, with their value dropping about 40% in the past three weeks, to lows of about $35 at times due to the release of options to reform the ETS that included treating NZUs created from forests differently from government NZUs.

The review papers do not rule out these changes having a retrospective effect, and this, along with uncertainty about ETS settings in general, has caused many of those holding forestry NZUs to sell them into a market that has very few buyers.

When Shaw made the comments, NZUs were trading below $40 and remain stuck there, with a lack of buyers a dominating feature. EMS Tradepoint recently had just one bid for 500 units at $34.

Climate Forestry Association chief executive Andrew Cushen said if Shaw’s comments were going to reassure the market there would have been some movement, and this has not happened.

Other forestry interests said that while at least the slide had stopped for now, there is still a great deal of anger at the current loss in value and the future threat to their businesses.

Tāmata Hauhā’s chief executive, Blair Jamieson, said the attempt to soothe the market had not worked, and it remains crashed.

The comments had not ruled out changes to the ETS having a retrospective nature.

This included treating forestry-generated NZUs differently from government-created NZUs – including a separate market where the price for forestry NZUs was decided by cabinet. There was also the possibility of setting a limited life term on NZUs.

He said the only difference the high court ruling made was it “gives us confidence that even the courts recognise the government’s meddling and ineptitude is the cause of a lot of headaches in this space. They clearly don’t know best.”

Other foresters have said that the wiping out of $5 billion in value of existing NZUs has already brought planting to a standstill.

Jamieson’s company advises on forestry and counts among its clients many iwi and hapu interests.

While some are still planting, most are hesitating, and this stop in investment will  flow through to tree nurseries, forest workers and farmers.

There have already been reports of drops in land valuations and potential farm sales being cancelled due to this.

There is a great deal of anger from those who have already made investments directly encouraged by government policy, Jamieson said.

These encouragements included the policy priority to plant a billion trees, the push for carbon sequestration through forestry and the creation of the ETS based on a legislated set of principles.

He said legal action is possible in the future, particularly from Māori landowners.

Those who had received marginal land under settlements had been told it had value for forestry, and this included a carbon price.

This had offered many Māori a chance to uplift their lot. Without a carbon price, this would be reduced.

The land is only good for forestry, and after encouraging them to plant trees, the government is threatening to change the rules.

Other Māori forestry interests said the government’s moves have not only undermined confidence in the ETS but have also undermined the basis on which settlements have been made.

While treaty settlements had meant to wipe the slate clean on historical grievances, they did allow new grievances due to the government’s acts or omissions, which undermine the original settlement.

The review process has already faced a legal challenge, with Māori forestry interests failing to persuade the high court that the discussion document should not be released. Some of those involved in that challenge are taking their grievance to the United Nations Human Rights Commission in Geneva. 

The review papers suggest that Māori forestry planting could be exempt from changes. Jamieson said Māori landowners would probably take this, but it is “divisive”, and exemption from changes should be based on land use.

The government should take a step back, admit it has made a mistake and enter into a sensible discussion. Especially as any decisions will not happen until after the election.

“Everyone needs a breather,” Jamieson said.

He shared concerns about the current ETS creating a swath of permanent mono-pine forests, but these could be addressed through future changes to what is allowed under the permanent forestry category under the ETS.

This could include transitioning pine forests to native and allowing other exotics, such as long-lived Douglas firs.

Not all foresters agree with this, as some say pine forest remains the quickest and cheapest way to reduce emissions, which was meant to be the intent of the ETS and broader government policy.

Cushen said the whole review is based on data and assumptions that are both “heroic and ridiculous” in terms of future oversupply.

The government fears overplanting of pine forests would bring a glut of cheap NZUs into the market and a slump in carbon prices.

Cushen said while the review talks about a theoretical crash in prices in 2030, the government had managed to bring forward that price crash without the benefit of trees to absorb carbon and reduce NZ’s international obligations. 

Instead of getting foresters to reduce carbon emissions using their own capital, the government is now creating a scenario where taxpayers will have to pay those in countries to do the same thing.

The Treasury estimates that failing to meet Paris Agreement-mandated emissions reductions could mean NZ has to buy offshore credits costing anywhere between $3.5 billion and in excess of $20bn.

Cushen said the threat of retrospective action has wider implications.

Not only has it stopped many current investment plans for forestry, but it would have a wider “chilling effect” on broader investment throughout the economy.

If the government sends the signal that it could cane rules with retrospective effect in forestry and the ETS, it can do it anywhere.

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