More on the Emissions Trading Scheme

Latest submission round 

At the end of April we made a submission on the second (and last) stage of the 2015-16 review of the NZ Emissions Trading scheme.

Some of the points in our submission:

• That significantly higher carbon prices will have a significant impact on South Island growers, likely making some operations uneconomic;
• That there are currently no options for alternative fuel sources for those South Island greenhouse growers;
• Free allocations should be retained at least until potential competitors are facing the same carbon costs as NZ growers;
• A price ceiling should be retained (currently $25) for NZU’s, to provide certainty and prevent price spikes;

 

Price certainty is important to producers so that rational business decisions can be made.

The full submission can be accessed on the TomatoesNZ website www.tomatoesnz.co.nz under “Hot Topics”.

 

Figure 1. ETS carbon costs per hectare of heated greenhouse will have a significant impact on growers costs as the carbon price increases.

Why are the “free allocations” of NZU’s based on my yield, rather than on my actual costs for emissions?

All fresh tomato, capsicum and cucumber growers are entitled to claim the “free allocation”, even if they pay little (or nothing) in the way of “emissions costs” on their fuel.  

The scheme was designed that way to reward those who are more energy efficient.  The intention is to drive behaviour towards low carbon production, while also offsetting some of the ETS costs imposed on trade exposed industries such as fresh vegetable production.  

Table 1: The impact of higher carbon prices and removing the 1 for 2 obligation for a 1 hectare greenhouse operation.

 

	Carbon emissions (tCO2/ha)	Low price ($10/t)	Medium price ($25/t)	High price ($50/t)
North Island	630	$6,300	$15,750	$31,500
South Island	1,450	$14,500	$36,250	$72,500
NZ average	960	$9,600	$24,000	$48,000
Industrial Allocation*	450 t tom./ha	$7,000	$17,600	$35,100

* Based on tomatoes, but it is similar for other crops

Table 1 shows that North Island gas fired heating has most, if not all, its carbon costs covered by the free allocation. South Island coal fired businesses have less than half their carbon costs covered by the free allocation, further driving up their costs relative to others in the industry. Rightly or wrongly the scheme was designed to do exactly that, make low energy intensity production even more financially viable, so they expand while others contract (that is, exit the industry).

All the industries that receive “free allocations” under the industrial allocations scheme receive units on the basis of output (production) rather than emissions. Those industries include manufacturers of industrial goods such as chemicals, cement, metals and lime, and processors of wood, meat and milk.   

What to do with your NZU’s?

Fifty two tomato businesses have New Zealand Emissions Unit Register (NZEUR) accounts. In 2013 this covered approximately 66ha, approximately 10 of which were over 1 ha and 7 under 1,000m². Since 2010 72,000 tonnes of carbon has been allocated, which at $25/t is valued at $1.8 million. While prices have been around $5/t ($360k), growers may have been put off from doing anything. However just like shares their value with increase with the rising cost of carbon.

A question that is vexing some growers is what to dowith the units that you have received, that are now sitting in your NZEUR account.

There are several options:

1. Sell them directly to people or organisations.

This could be emitters who have obligations under the ETS, or who are actively participating in carbon trading. 

For example, it could be someone who owns an eco-friendly business, who wants to offset their carbon emissions and increase their green credentials by buying NZU’s.

It is perfectly legal to sell NZU’s in the same way you might sell any other good, for example by listing them on Trade Me – although currently there is no category on Trade Me for this purpose (and no units for sale)!

The only proviso is that the buyer must have a holding account in the Emissions Unit Register (NZEUR).

2. Transfer them to your fuel supplier as part-payment.

A variation on option 1, you may be able to negotiate with your coal or gas supplier to transfer your units back to them to directly offset some of the fuel cost. It would pay to check the conditions on offer, and to investigate the NZU price being offered by other purchasers or traders. 

3. Sell them via a carbon market trader

There are traders who specialise in buying and selling New Zealand Units. These include:

•  OM Financial Limited;  www.omf.co.nz
• Carbon Market Solutions; www.carbonmarketsolutions.com
• The Westpac Bank have a carbon marketplace, however their minimum trade is 15,000 units (even the largest businesses would take a few years to accumulate this many).
• Carbon Match www.carbonmatch.co.nz, which is an online platform for trading units.

4. Retain them in your NZ EUR account

New Zealand Units do not expire, so you could choose to hold onto the units, especially since the price has been steadily rising since the NZ market was closed to international units last year (see the accompanying graph).  The price at time of writing had reached over $13 per unit, compared to just under $10 at the start of this year, and around $3 two years ago (see the accompanying price graph).

Acknowledgment: Andrew Barber, Agrilink, assisted in the preparation of this article.