Those that have sold NZU units from post 1989 forestry have a liability to surrender units in the event of a loss such as fire or at harvest.

This risk or so it was perceived ultimately has limited post 1989 forest owners entering the NZETS – on the basis the Government offered to guarantee to cover the carbon liability to those who did not opt in. Carbon Monitor has commented on this in past issues suggesting forest owners should opt in and retain the credits. This of course has been muddied somewhat by the Field Measurement requirements for forests over a certain area. This activity would introduce cost where in the event the foresters were simply retaining credits in ‘their bottom drawer’ there was no income.

Since the inception of the NZETS forest credits peaked around $23NZD for an NZU in early 2011. Arbitrage was created from fluctuations in NZD terms for CER credits. Emitters were reportedly swapping in and out of CER back to NZU picking up a tidy profit.

Recently we reported our ‘silly fool’ arbitraging his position and buying back NZU (or the CER equivalent) at some $13NZD and pocketing a nice sum whilst covering his harvest and other potential liabilities.

Now with the price of an NZU around $7 it seems there is a strong argument to do the same and purchase CER around $6 NZD for those post 1989 forest owners who have sold their credits previously.

Commentators have raised this as an issue to consider and no doubt stimulate some activity in the market. Taking a clear profit and covering absolutely a liability appears to make sense. However the type of CER one might purchase is now critical – see the following article.

People have commented – but how do we make sure the CER are acceptable and will work to cover the liability? One option may be to exit the NZETS entirely and surrender the CER?

The European Union Acts to Shore up Carbon Price

In a move designed to shore up sagging carbon markets, with both EUA and CER at their Phase II lows (phase II 2008-2012), the EU announced that it would withhold permits from the market adding that the expected EUA price would be around 30 Euro.

On the 20th December 2011 European MEP added weight to this voting by a narrow margin to withhold some 1.4bn EUA from the auction markets. Point carbon tweeted @pointcarbonnews that a further vote may dilute the wording to ‘substantial volumes’ rather than an absolute target.

Since early 2011 EUA and CER prices have fallen from around 15 Euro to 5-6 Euro. On top this is Deutsche Bank was reported as stating with the current economic downturn the existing EU target of 20% by 2020 would be met without the need to purchase CER units.

Point Carbon also tweeted that there is a solid prospect of a vote on a 30% target.

Both these factors will have an interesting effect on the forward pricing of CER in particular. Many brokerage houses have been caught ‘long’ in carbon with some rumoured to be attributing recent losses to their positions in the carbon market. Part of the rapid drop in price can be attributed to those with long positions being automatically sold out of the market by stop loss orders.

Pricescarbon @pricescarbon indicated an increase in EUA to Euro 8.81 or around 20% in response to the announcements.

Industrial Process CER Banned in NZET

The New Zealand Government announced that effective 23rdDecember 2011 CERs from HFC-23 and N2O industrial gas destruction projects will be banned from use in the NZ Emissions Trading Scheme.

Certified emissions reductions or CER are produced when a project that reduces GHG emissions that otherwise would not take place is undertaken in a developing country under the so called Clean Development Mechanism (CDM) of the Kyoto Protocol. Projects such as the industrial gas initiatives have been subject to significant criticism based on allegations that CER created are low cost (0.10 Euro)and that plants are being operated to produce CER and not the intended product in effect ‘gaming’ the CDM and creating credits that lack environmental integrity.

Forward contracts concluded prior to the 23rd December will be exempt from the ban until June 2013, and where such units are already held in a participant’s NZEUR account, these units may also be used.

To be eligible for the exemption a participant must provide a copy of the forward contract and sign a statutory declaration by the 10th February 2012.

While the headline appears to indicate that all projects from N2O destruction will be banned, the FAQs in the announcement state more specifically that CERs from the following will be covered under the ban:

• The destruction of HFC-23 (under approved methodology AM0001); and
• The destruction of N2O resulting from the production of adipic acid (under approved methodology AM0021)

An ETS Amendment Bill is also planned for 2012 and this is expected to address offsetting for pre-90 land and other issues from the ETS Review Panel’s report. It is not yet clear whether or not that could extend to consideration of a general supplementary limit, or whether this is off the table entirely as a policy option.

So why did the New Zealand Government ban industrial process CER? Simply the EU has outlawed these credits in the EUETS effective end of 2012. Some 64% of all CER issued to date have come from these type of projects and this has increased to some 82% recently in the face of the EU ban as companies rush to produce CER. Such CER if admitted to the ETS would quickly drive down the price due to the volume available and the lack of a supplementary limit as there is in the EUETS and the AUETS (50%)

Simply put emitters in the NZETS could have and we suspect would have purchased very cheap CER for all their compliance. The scheme as it stands does not require an emitter to purchase any NZU to meet their compliance targets.

So now with the limits in place will the price of an NZU increase? Carbon Match www.carbonmatch.co.nz are showing a premium for NZU. However there remains significant uncertainty in the EU market and this has lately driven down the price of a CER. So cheap CER from projects other than those banned appear to remain available and rumours suggest that emitters have ‘stocked up’ on cheap CER already.

Will the Australian Carbon Price tank at the Commencement of Trading in 2015?

Spot CERs were quoted at EUR 3.81 in January 2012.

The Australian carbon tax will commence at AUD $23 (approx EUR 15.00) in July 2012, rising at a marginal fixed percentage for the next three years, until 2015 when full trade commences. Up to 50% of Australian liabilities can be covered through CERs and other international offsets. So given the prevailing spot CER price will the Australian spot price crash severely to match the CER price?

It won’t as the price floor of $15 AUD will prevent that. Companies will still be able to meet 50% of their obligations with international instruments such as CER. However they will be liable to pay the Australian Government the difference between the purchase price and the floor price. There is a discussion paper out at present on exactly how this may be implemented.

The other issue is what will the international price for carbon in 2015? From reading reports from Barclays Capital it appears the price today is a consequence of oversupply emerging from two elements, the rush to issue industrial gas CER prior to the post 2012 EU ban and the NER 300 auctions of EUA by the EIB that resulted in the market going from long to short. The CDM pipeline from UN RISO suggests much less in the line of CER from post 2012 and the supply/demand situation in 2015 is far from clear.

Is the EUETS a Success or Failure?

Barclays and other analysts are praising the market saying it is working and suggesting the price drop is a function of oversupply. They argue an oversupplied market will see the price dropping.

That may be true, but what about the intent that created the market in the first place?

Phase I of the EUETS saw the price collapse from 30 Euro to cents towards the end of 2007. Analysts believe that the collapse was from misallocation of units in Phase I.

It seems that the same thing is happening towards the end of Phase II or the Kyoto Commitment period which ends this year.

What are the possible factors?

1. The EU in recession meaning that growth in emissions are less than expected as they follow economic growth generally

2. The NER 300 where a large scale auction of EUA was passed to the EIB to raise moneyfor CCS (carbon capture and storage) project

3. Unclear policy statements such as the renewable energy targets announced in April 2011, that needed urgent clarification that these were not a substitute for market instruments

4. Regulatory changes as to the EUETS access for CDM projects

1. Industrial process CER

2. Coal efficiency projects

3. Large Scale Hydro (>20mw)

Since the ban on industrial gas CER was announced the race to issue CER in these projects has seen them increase from 64% of the CER issued to over 80%. Volumes have skyrocketed and are expected to continue to increase.

However there is a limit to the volumes of CER able to be surrendered in the EUETS, compare this to the AUETS in 2015 allowing 50%, and the NZETS with no limits.

The EU parliament has responded to the collapse in EUA prices by first voting to set aside 1.4bn EUA from auction, which on a second vote was re worded to ‘large volumes’.

The set aside can only be temporary whilst the EU works on implementing a more stringent limit for 2020, down from the 20% of 1990 levels to 30%. Something they say could take 18 months.

Even the addition of Airlines into the ETS (see twitter @eitg) is being dealt with largely by grand parented allowances.

So what may happen next? After the market moved substantially from long on carbon with the announcement of the NER300 it is reportedly heavily short.

Options have remained pretty static indicating traders are not sure where the market will end up.

Common sense says that the market is intended to place a price on emitting. Everyone would agree the current price is not one that provides a clear message to emitters to change behaviour and certainly not one that would encourage them to make long term investments in reducing emissions. It’s too easy to wait stock up on cheap credits and ride out the market.

Time for the regulators to remind everyone why we have carbon trading. But when will they act?

Carbon Credit Leasing Offer  What are the Questions to Ask?

Recently TBK capital sent out a document entitled Carbon Credit Leasing Offer. The essential elements of the offer were summarised in their email as follows:

Summary

• Our client is seeking a limited area of established forests for long term lease.
• Rental of $200-$250 per hectare per annum (plus GST) paid annually in advance.*
• To qualify, forests must be first rotation radiata planted after 1989.
• Our client takes a registered lease of the owner’s forest and takes on all carbon credit liability.
• The owner retains ownership and possession of land, tree crop, and cutting rights.

Our Client

• Our client is a New Zealand owned and operated company that is in the business of Carbon Farming. They own, lease and plant forests for carbon credits.
• They supply bulk carbon credits direct to large energy companies and oil companies who need carbon credits to meet their legal obligations.
• They currently have 10,000 hectares of forestry under management.
• They have recently completed the largest sale of carbon credits in New Zealand history.
• Their team includes experts in carbon credits, forestry, finance and insurance.

In essence their client appears to want to take a registered forestry right that specifies the NZU issued from the forest growth accrues to them for an annual fee per ha.

 EITG was asked to look at this and we made the following observations:

1. The price of NZU on Carbon Match late January was around $7

2. At a lease price of $200 per ha (they claim the GST as an input) that is around $10 per credit on 20 credits per ha or $6.66 on 30 credits per ha

3. The international market, where there is no practical restriction on credits entering the NZETS is around Euro 3.81 or $6.14 (@0.62 exchange rate)

4. Whilst the international market prices remain at this level NZU according to commentators are expected to remain at low levels

5. Non binding advice on the issue of who is liable for surrendering the credits from MFe in a telephone conversation around July last year was

a. Whilst Mfe say the liability would be chased through the Lessee and the Directors of the Lessee in the event that company      failed

i. The liability could still ultimately attach to the land

b. There is no legal precedent that Mfe were aware of in this area

Questions that leap to mind are

1. Who is behind this offer?

2. What is their financial status?

3. What does the insurance provide, and is the Lessor an interested party in the policy?

4. What obligations does the Lessor have in the event of loss during the no harvest period?

5. What legal advice do they have that the Lessor is not ultimately liable?

6. Is any legal advice addressed to the Lessor?

7. What is the actual situation with liability if the lessee fails? Or cannot honour its obligation to surrender sufficient credits?

8. What about the obligation for field measurement in 2012?
It’s a simple scheme on the face of it. In a falling market probably not that profitable. At $20 per NZU it was of course highly profitable provided they had resolved the issue of the cost of credits at harvest and their attendant liability. At $7 per NZU we wonder if the same applies?

1. The EU is committed to its own ETS to 2020

at least, and will allow non industrial gas
CER post 2012 and new CDM from LDC
registered post 2012. There are no caps or
floor on price but limits to how many CER
can be used

2. The Australians have a carbon charge to 2015 and an ETS thereafter with 50% of compliance to be met by non industrial gas CER

3. The NZETS is likely to continue with a delayed introduction of agriculture (50% of GHG emissions) and a price cap. Long term the need to surrender permits for every tonne of GHG may move up from the current one for two to full matching of emissions will likely come into play. Post 2020 the ‘wall of wood’ resulting from the concentration of the age of NZ plantation forests maturing should create upwards of 40mt of emissions per annum

4. Japan is looking for an alternate to the CDM to allow project based credits

5. California and a number of other states have ETS or intend to create them, although Eastern states have recently moved away from an ETS, making the US ETS landscape diverse.

6. China is starting to implement its own regional based emissions trading schemes

Post 2012 the on going function of Kyoto in a new form appears dependent on India and China becoming part of the scheme in that they accept an emissions cap. These two countries in the past have been the source of the vast majority of the CER created under the CDM albeit most of these were industrial gas CER.

The global financial climate has certainly dampened emissions but also more importantly diminished the cash and the will to limit GHG whilst trading partners are seen to take jobs and create potential political problems in developed countries.

Notwithstanding that CM expects the EU to negotiate and trade off some of its position for a larger club of nations with a successor to Kyoto. The Chinese managed to delay agreement two years ago, and with their appearing unwillingness to bail out Europe financially will they see merit in bailing out Kyoto?

We can only wait and see.

Reader Questions NZETS Forestry Rules and the Carbon Markets

A Carbon Monitor reader provided us some feedback on their view of forestry in the NZETS and emissions trading. Their points and CM reply are below:Reader: Averaging would have been the best system from the start and should be applied now but I guess the resulting job losses at MAF etc will block it.  The air carbon problem & forestry are both very long term. Plantations which are reforestation, are rewarded for their one-off storage of carbon and so it is only the average amount stored in the long term that counts. Measuring them constantly as they grow and giving the owners credits all the way up to harvest is expensive in bureaucracy and management time and we have the silly concept that harvest is as sudden emission. It is not, and it is only the long term average carbon stored on a forest site that matters, so only that should be given to us. And of course only once. That average amount across the country will rise if more reforestation occurs, so that should be the priority in all policy affecting forestry. Averaging would certainly encourage planting, as you would have certainty:

Credits would be given for the first half (in carbon) of the first rotation, which would be sold to pay for it and the only rule needed would be the forest has to be replanted at harvest. Only one measurement would be required, to determine a reliable average.

CM Response: Forest averaging was looked at in the international negotiations. However the Kyoto Protocol dictates how the process must be applied and that is net carbon stock change over the commitment period, that is five yearly. VCS REDD however does use averaging and has a 20% insurance ‘reserve’ to cover losses across the portfolio of REDD projects such as fire.

VCS requires carbon stocks are measured regularly minimum every 5 years – even the NZETS is five yearly minimum.  Only the increase in carbon stocks are granted credits – simply giving a forest owner half the expected credits for their forest is not credible and will not contribute to a functioning market

Reader:  Under current rules many plantation owners are afraid to sell carbon at $13 in case they have to buy it back at $130 in 10-15 years time.

Unless we move to averaging, forest growers will get disillusioned with the ETS & reject it before long.

CM Response: Forest owners were afraid to sell at $20 as most did not understand the risks, and now with the publicity most do. I know a few who sold at $20 and have purchased credits back at $13.

We don’t see the cost of credits reaching $130 in the future – there are too many technology solutions to avoid emissions at around $45 USD. If the SO2 story is anything to go by once that level is reached the technology will intervene and prices drop significantly. This is the climate change end game, not reforestation or forest credits (as they exist to develop liquidity). Also bear in mind forest owners who don’t register are giving their credits to the government to use for NZ compliance free of charge, with a promise (a politicians promise) to provide the owners credits at harvest free of charge. With the wall of wood post 2020 the forest industry will arguably be the largest single sector for GHG emissions.

Averaging can be achieved by better methods than you suggest whilst still complying with the UN rules. Pooling is one idea publicly mooted.

Reader:  At the same time it looks like the ETS & all carbon trading is doomed anyway, now the greens of the world (and it will be the mainstream left next) have moved to oppose trading carbon. Plus Europe is entering a long period of economic trouble, and they will have a surplus of credits to dump on the market, thereby ruining it. Markets and their merits will be a political victim of crisis.

So trading carbon will die out as a ‘good idea’ quite soon and carbon taxes may then be sold as the replacement, by a new younger generation of politicians. China & the US will not trade carbon, but they may tax fossil fuels instead, selling the idea by saying they will recycle that money directly to the people, as well as spent some on research to replace fossil fuel & adapt to climate change.

CM Response: The EUETS does operate the same way as the NZETS. It revolves around a cap on companies in specific sectors. Permits are then auctioned for those emitting over their cap, or alternately credits such as CER can be purchased for compliance (within specified limits).

It is correct to say the NZETS market may be flooded with credits but in another way. The EU has banned post 2012 CER from industrial processes or some 65% of all CER issued. Unless the NZ Government also bans these they will be sold in NZ and the NZETS price will drop significantly. This is a risk whether the EUETS collapses or otherwise unless policy intervenes.

Seven regions in China and ten states in the USA already have cap and trade systems operating or in planning. California the worlds 8th largest economy has a cap and trade system and will include forestry. The Australian system is a fixed price ETS to 2015 when the price can float between a floor and a cap. It is an ETS in that participants can avoid a carbon charge by abatement or purchasing ACCU credits from its commencement in 2012.

In summary comments on forest averaging are technically correct, but in the context of the UN rules are not able to be applied. Moreover the opportunity for fraud without regular compliance and monitoring is incompatible with a trading scheme. Finally forest carbon credits in essence inject liquidity into the New Zealand ETS so a flow of credits is essential.  Unfortunately applying a forest only perspective to the scheme results in an incomplete analysis.

As to the conclusion that trading markets are at an end and Europe will flood the market with cheap credits, again the facts suggest the contrary. We agree if the EU collapses it would be a whole new game for carbon trading, but such a collapse would be unprecedented. Industrial gas CER are the biggest threat to non EU trading schemes and are being either excluded or intended to be excluded. Emissions trading is globally accepted as the only means to reduce emissions, the other policies have long been abandoned after many years of debate.

Is the Future of the EU Critical to Carbon Markets?

Carbon Match www.carbonmatch.co.nz recently provided this interesting update on the European situation What Would Breakup of the Single Currency Zone Mean for Carbon? Such a scenario appears to pose a small, but potentially catastrophic risk to the carbon market, which the EU ETS dominates to the tune of more than 85%.

To add to the woes of a market unnerved by the eurozone crisis and in any event already depressed by fundamental oversupply, the European Investment Bank has announced that it will push on regardless with the sale of the NER300 (New Entrant Reserve).

Many had expected that the EIB might defer the sale of these 300 million allowances onto the market, given how European allowances have fallen recently.

On a more positive note, there have been some louder voices joining the call for the EU to shift up a gear and adopt a 30% by 2020 target, given that they have almost reached the 20% by 2020 target with another 8 years still to run.

The hope is that the step-up could be championed afresh by environmentally ambitious Denmark, who take EU presidency in the first half of 2012.

Unfortunately it’s hard to imagine this idea gaining much momentum when European Leaders have other much more urgent issues to contend with.

New Leaders Hurry to Implement Reforms While Germany Holds Back from Agreeing to Further Assistance

Recent weeks have seen Greece’s Papandreou replaced with Papademos, Italy’s Berlusconi supplanted by Mario Monti and now a new centre-right government for Spain, to be led by Mariano Rajoy.

The question now is whether these three can hold onto the reigns of their distressed horses and guide them into more stable terrain.

Greece is a mere trifle compared to what Italian or Spanish defaults could mean for the much larger France, which is hugely exposed to both countries and whose credit rating is already at risk of being downgraded.

Italy alone is estimated to need up to a trillion euros of backstop financing and it’s unclear where this might come from.

Something Has to Give

Currently the European Central Bank is a central bank without legs. Some have suggested that what’s required is for the ECB to be allowed to be lender of last resort by being empowered to issue bonds in its own right and use the proceeds to secure potentially solvent but seriously ailing governments (Italy).

But as it stands, the ECB isn’t empowered to do this. To change this, core Europe, especially Germany, would have to agree.  Propping up peripheral Europe to avoid the collapse of the Euro is a tough sell.

The more palatable option would be for the ECB to print money and continue with bond buying in an effort to keep interest rates manageable.  But the risk of inflation is one that won’t appeal to the German public either.

Yet the alternative could be just as damaging. Were there to be a break up of the single currency, the harder currencies of the North would rapidly appreciate, making exports and manufacturing sectors less competitive, and running the risk of triggering contractionary cycles in those countries.  A deeper recession or even a depression could result.

Germany, in particular has been, and continues to be, the biggest beneficiary of the common currency.  It does seem that it’s in their interest to allow some kind of quantitative easing before another stalwart of the Euro zone, France, begins to come under attack as seriously as Italy has.

We can only wait to see what happens.  While still very unlikely, a break up of the single currency could spell catastrophe for the EU ETS, and the wider carbon market.

Australian Carbon Farming Initiative  will it Link to Other Markets?

The Australian CFI is a way of receiving carbon credits or ACCU (Australian carbon credit units) for certain activities. There are two classes of credits, those that fit the Kyoto requirements and voluntary credits. Burning land fill gas is accepted and creates Kyoto ACCU, whilst soil carbon creates voluntary ACCU.

There is a commitment and budget for the purchase of voluntary ACCU by the regulator.

Additionality is applied to all projects. This ensures a project would not have happened without the CFI that is it is not business as usual (BAU). There is a white list and black list of project types. Each project must be implemented using an ‘approved methodology’ There are a few of these in progress the most unique is the reported culling of feral camels.

Using the concepts of additionality, approved methodologies and other processes the CFI appears to be modelled from the United Nations clean development mechanism (CDM) and joint implementation (JI) – refer to our glossary the approved processes for generating credits from projects in countries outside the host country.

ACCU are defined as personal property to allow registration of interest against them and therefore the potential to raise finance.

ACCU and Kyoto units are defined under the Corporations Act and ASIC Act as financial products triggering the provisions relating to financial services and markets and product disclosure under the Corporations Act. The ASIC act will extend to cover dealings with ACCU and international carbon units.

ACCU are suggested to be fungible in the international carbon markets. It is suggested that with the provision of linkage with the EUETS and NZETS the ACCU will be tradable in these markets. Such linkage is likely to be limited in EITG view.

The international carbon markets the ACCU may link to immediately is the AAU market or the Kyoto market, as AAU are used for country level compliance. The Australian Government proposes to swap an ACCU for an Australian AAU. The experience in the NZETS is forest based AAU have once been sold in volume for reasonable prices (1mt and $20NZD) However recently the weakening euro and large volumes of AAU on the market suggest prices of around 5 Euro or less for an ACCU converted to an AAU.

There may be a valid argument that an ACCU has high environmental integrity and is therefore more valuable than a so called ‘hot air’ AAU.

However in the absence of transparent market data (there is very little of this in the AAU market) it is very difficult to accurately suggest a price for an ACCU converted into an AAU.

Australian Clean Energy Act Now Law

Australia took another major step towards a clean energy future on November 8 after the Senate passed legislation which will pave the way for one of the most important environmental and economic reforms in the nation’s history.

The passage of the Clean Energy Future legislative package will allow Australia to begin reducing emissions, developing and fostering new technologies in renewable energy, encouraging energy efficiency and creating opportunities in the land sector to cut pollution.

It will drive investment in clean energy and it will ensure that Australia plays its part internationally as a global citizen.A fixed carbon price of $23 a tonne will apply from 1 July, 2012, moving to a flexible price after three years.

The carbon price is a tax on pollution and will only be paid by Australia’s largest polluters. For most people, the Government’s comprehensive Household Assistance Package will cover, and in many cases exceed, any price rises.

In fact, nine out of 10 households will receive compensation from a combination of tax cuts and increases to family benefits.

http://www.cleanenergyfuture.gov.au/

Australian Business Clean Energy Law Checklist

Recent publications on the new Clean Energy Legislation suggest Australian business use the following check list when identifying if they are subject to the Legislation

Are emissions from my business covered?

Do facilities operated by my business emit directemissions that exceed the 25,000 t CO2-e threshold?

Do I have operational control of the facilities or is there another operator on-site which could have operational control?

Does my business involve a joint venture arrangement which might limit my liability for emissions?

If my businesses’ direct emissions are not above the threshold, do facilities my business operates nevertheless use large amounts of electricity, natural gas or other fuels?

As a supplier of goods and services can I pass the increased costs of compliance on in the cost of the goods I produce under my supply contracts?

If I am purchasing goods or services, can the supplier pass through its carbon costs under the supply contract?

Is the supplier entitled to free carbon units which would reduce its direct costs?

Can I take steps to reduce emissions at my facilities or reduce energy costs?

If I am a liable entity and have an obligation to purchase permits how do I purchase permits? Is there an opportunity to purchase from the Government at auction; can I purchase from third parties, other liable entities, brokers or project developers under the CFI? Will I be able to get a lower permit price that reduces my compliance costs?

Full details of the compliance obligations and various checklists can be found on our web site under the menu Australian Scheme

Is Australia the Next Market for CERs?

Point Carbon has identified the Australian Emissions Trading Market as a major consumer of project based Certified Emissions Reductions or CER units.  In the fixed price period of the carbon scheme, running for three years from July 1, 2012, Australian emitters will not have access to international credits such as CER. From mid-2015, when the ETS comes into force Certified Emissions Reductions (CERs) can be used to meet 50 percent of their surrender obligations.

Analysts at Thomson Reuters Point Carbon estimate that Australian firms will buy 350-400 million international offsets between 2015 and 2020. These credits will come from existing projects that are registered to produce CER units and projects registered post 2012. Currently projects creating CER registered post 2012 and not from least developed countries are not admitted to the EUETS. The

Australian ETS will provide demand for credits from this class of projects.  At an expected market price of A$17.80, Australian demand for carbon credits in dollar terms could exceed A$7.12 billion over the five years. Bloomberg New Energy Finance has plotted demand for CERs in 2020 at 90 million, slightly below expectations at the Australian Treasury.

Source: Point Carbon Australia New Zealand Carbon Market October 2011.

Australian Opposition Undermines Carbon Tax

 The Australian opposition leader Mr Abbot has come out warning companies not to take forward positions under the new carbon legislation. The legislation passed in the lower house earlier this month and is expected to pass the Senate before the end of the year. Mr Abbot is reported to have cautioned companies that they would not be compensated for expenses incurred if in the event he came to power he intended to axe the carbon tax.

Commentators see this move as a cynical attack at the carbon tax to try and undermine it. Given the oppositions support for some sort of ETS this is in the view of many people hypocritical. Australian television is saturated by sound bites from the rival political personalities and the attacks at the Governments policy are relentless and sometimes meaningless. As on commentator put it, when have you ever heard of an incoming party abolishing a tax?

The reality is however a proper market cannot kick start without an ability to set a forward price. Investment will not happen without a forward price, and in our estimates most of the projected 9bn per year investment in renewable energy will be at risk in this policy environment.

Emitters that choose to purchase CER units, eligible in both the EU and Australian markets could mitigate the policy risk by simply selling back into the EU or New Zealand markets in the event the Australian market ceases to exist.

Comments on the NZETS Review

The report on the NZETS is by way of a review and not policy. The commentary is therefore directed at the report itself and not on what policy in our view should be.

The review panel has taken into account and is following the proposed Australian scheme to allow integration at some future date. Progressive increasing of the price cap and the requirements to surrender 100% of emissions are all positive but in our view being implemented to slow given the Australia plan. The sudden phase out in 2012 is arguably too radical. However there have been some perverse outcomes of the cap. The reported charging at the cap by emitters and then purchasing at a lower rate has created unintended profit opportunities from the NZETS.

Whilst there is no specific evidence of this there are reports of second tier emitters becoming points of obligation to avoid paying $25. If we have an increasing cap the regulator should look carefully at what people are paying for costs that are attributed to the carbon charge.

I cannot see any relief from deforestation restrictions for pre 1990 forest owners as the report would recommend but notes is not possible due to the international rules.

One issue we are following which may change the landscape for forest owners is the classification of carbon credits as a financial product in Australia. The report considers linking to the Australian scheme and the question that is not addressed is how the New Zealand regulatory environment would need to change.

What flows from this is the current perception of risk by forest owners. The majority of advice has been from forest managers and this has failed to promote the awareness of risks. The panel recommends in its report this be addressed. The reality is this must in EITG view must be via proper advice from properly qualified people.

Choice to opt into the FMA with less than 100ha is a sensible recommendation. Increasing the threshold is not without risk and no empirical data has been supplied to argue increasing the threshold. Once data is available from 2012 measurements it may be this risk can be assessed and the threshold reviewed.

The pooling to create an insurance risk pool matching the Australian scheme whilst noble fails to consider the Australian scheme excludes plantation forest.  Forest owners have access to and can fund private insurance. This should tie into foresters receiving proper advice.

Exclusion of industrial gas CER from the NZETS has been raised but no real recommendation made on the impact of this on the costs of carbon and on the ETS. An urgent recommendation for review is therefore appropriate. We note the consultation process has commenced and results are expected shortly.

No comment real has been made on the operation of the ETS. The timing of allocation and surrender, currently on fixed dates, are in our view counterproductive and create potential distortions in the market. I cannot see recommendations on the structure and operation of the ETS. Adding 9000 farmers of points of obligation as the report suggests would put further significant pressure on the regulator all during one time period during the year.

On the operation of the EUR there is some suggestion that information be released so as to preserve commercial confidentiality in relation to specific transactions. Given the purpose of the ETS is provide a readily discoverable price of emissions we question this advice. The stock market is open and subject to disclosure rules to protect parties from people miss using information. The review panel suggests that commercial confidentially is above the need for transparency in the market. To date we believe one of the flaws in the ETS has been the lack of credible and reliable information to buyers and sellers.

The market is essentially bilateral trades which are unreported. Carbon Match offers a bid/ask service but this lacks depth and potential transparency. The concept of averaging for post 1989 forests to deal with liabilities at harvest is raised the proposal suggests the Government use a scheme to limit credit  issuance to the long term post 2008 average carbon stocks and in turn it supplies the credits to meet harvest liabilities. We don’t think this is practical as the majority of post 1989 forests will be harvested from 2020 onwards and the average carbon stock approach fails to address the fact that ALL units issued under the ETS will need to be surrendered at harvest. In our view averaging will only assist those with new plantations post 2008 of which there are few.

Submissions called for Removal of Industrial Gas CER from NZETS The New Zealand Government proposed to ban industrial gas CERs for NZ ETS compliance – see “Consultation on Proposed Regulations Restricting the Use of HFC-23 and N2O CERs in the NZ ETS” here.

This follows the NZ ETS review panel’s comments on industrial gas CERs in its recently released report. The Government is consulting on 2 timing options, namely to ban industrial gas CERs that enter the NZEUR from 1 January 2012 (option 1) or 1 January 2013 (option 2) from use to meet NZ ETS surrender obligations.

Both timing options are earlier than the 1 May 2013 effective start date of the EU ETS ban on industrial gas CERs. The ban would apply to industrial gas CERs that have already been purchased under existing forward contracts but that will not be delivered until after the regulations come into force. However, the Government is also consulting on whether there should be an exemption for such forward contracts. The ban would not apply to industrial gas CERs in the NZEUR at the time the regulations come into force.

Reported from Buddle Findlay

www.buddlefindlay.com

Authorised Financial Adviser available to Forest Owners

Royden Shotter joins EITG to provide the increasingly necessary advice to forest owners under the NZETS. Royden is an Authorised Financial Adviser (AFA) and Certified Financial Planner (CFPcm) practitioner. As a Financial Consultant he works primarily in two roles, conducting analysis for individuals and businesses, and portfolio management of assets and investments. Depending on the mandate financial analysis typically involves data construction techniques which can be used for trouble-shooting, sensitivity analysis, problem solving or simply to reach a given result that would otherwise be too difficult to determine. The results are then often used in strategic planning or project development.

Royden’s role at EITG is to provide specialised advice to clients who wish to have the benefit of financial advice before deciding what to do with their NZU units. He is separately retained by each client for this purpose. His interest in forestry was established early on, growing up in a rural environment, on his parent’s horticultural block.

Contact Details

Terry Quilty

p: 64 21 250 6789

f: 64 9 920 1093

skype terryquilty

e: terry.quilty@eitg.co.nz

Richard Hayes

p: 64 9 920 1092

m: 64 21 310 301

m: 61 452 230 232 (Australia)

f: 64 9 920 1093

skype richardshayes

e: richard.hayes@eitg.co.nz

Simon Baillieu

p: 27 82 558 9616

skype sbaillieu

e: simon.baillieu@eitg.co.nz

Martin Albrecht

m: 64 21 565 682

e: martin.albrecht@eitg.co.nz

skype goodground

Iain MacDonald

m: 64 27 438 2544

e: iain.macdonald@eitg.co.nz

Royden Shotter

m: 64 21 279 9898

e: royden.shotter@eitg.co.nz

In mid June 2011 the price of a CER (certified emission reduction created from reducing greenhouse gas emissions in developing countries using the CDM or clean development mechanism of the Kyoto protocol) was 13 Euro and the emissions markets were looking healthy. (CER units are acceptable in the EU ETS and NZETS) Then a matter of couple of weeks later a CER was fetching 9 euro. Why the rapid and precipitous meltdown in prices? Simply the market rapidly lost its liquidity after a series of events starting with renewed concern as to the sovereign debt of the so called PIGS Portugal, Ireland, Greece and Spain, and the likelihood of defaults. Soon after that the EC issued a directive on energy efficiency targets. Simple analysis of this meant that companies meeting these targets would not need as many CER to comply with the EUETS restrictions. Combining this with the German markets being on summer holidays the market reacted negatively. Soon brokers stop loss triggers started to intervene and the market flooded with CER as speculators dumped CER in the face of large losses. This overreaction cascaded into a slump that went below 9 euro. Then the EC announced any energy efficiency targets would be designed not to damage the carbon markets and the market according to sources bottomed. Since finding the bottom CER have traded in two tight ranges between 9-9.20 Euro and peaked at 10.50 Euro.

Further announcements of substantial CER issuances coming to the market have dampened demand.

December 2011 and December 2012 CER sit around 9.80 as of the 27th July 2011. The effect on the NZETS has been swift. Coupled with a strengthening dollar the NZETS has seen NZU prices fall to the low $16 range before recovering. CER have become very attractive to buyers as they can be purchased as an option for delivery in March 2012 thereby reducing holding costs. The down side of course is an exchange rate risk but this can be managed. Foresters expecting $20 or more are way out of the money. Should those post 1989 owners who sold for $22 be buying back and covering risk?

How are buyers and sellers reacting? And how are projects being held up in the face of slumping prices?

Whilst China has a floor price at which CER are not to be sold the floor changes depending on the type of CDM project, for instance biomass CER floor price is 10.50 Euro. Whilst the lowest floor of 8.50 Euro was not breached it would not in our opinion have mattered as the trading was triggered by stop loss orders and not any real rational response. Buyers that EITG and its consortium partners are working with continue to offer long term off take contracts. These contracts ameliorate risk by providing fixed floor prices of 7.50 and 8.50 euro with purchase at varying discounts to market in staged tranches. Project developers entering into these contracts can in effect fix their down side and keep the upside paying small premium to market. Project developers are slow to take up such offers as they appear focused on maximising the CER income with no regard to risk. This of course tests the fundamental concept of whether their projects are actually additional? Would the project have happened without the carbon credit income? If the developers can take all the price risk of the CER price you have to ask the question in EITG opinion.

Realistically smart project developers, including those working with EITG are using our expertise in structuring and managing risk with our consortium partners, are entering into this type of fixed off take contracts. In certain cases as a further inducement buyers are reimbursing project development costs when certain milestones are achieved. This further reduces project developer risk.

As a world leader in managing risk from plantation forestry carbon credits via its carbon pool system EITG has been extending this philosophy to its ever expanding CDM portfolio on 3 continents.

Field Measurement Regulations in the NZETS Effective 1st September

In New Zealand under the NZETS if you have 100 hectares or more of forest land registered in the ETS, or the PFSI, you will be required to use the Field Measurement Approach (FMA) to determine the change in carbon stocks in your forests. It comes into force on 1 September 2011, for the mandatory emissions return covering the commitment period 2008 to 2012. From 1 September 2011 participants will be able to request their sample plot locations.

If you have 100 hectares or more and are thinking about registering in the ETS or PFSI, be sure you get your application in quickly. It will take time to prepare and process the application, and for you to complete the additional requirements of the FMA, in time for the mandatory emission return. If you are looking at adding or removing land, MAF recommend doing this prior to requesting your FMA sample plots. www.bit.ly/maf-fma

Commentary

We have discussed the risks associated with the new FMA particularly for those forest owners that have already sold NZU on the market based on the regional look up tables. There is a real risk that credits will need to be repurchased and surrendered if a participant’s forest is storing less carbon than the look up tables construed. Remember also that the PSP sample plots will be provided by MAF and not those already selected and used for standing timber calculations. The customised look up tables will be interesting to compare and contrast the forest owner’s expectation of standing timber from their own sample plots using the 300 index.

Those that have opted into the NZETS to receive credits but not sell them and therefore preserve their right to harvest in the future (free of the Government’s guarantee to cover credits at harvest) are in our view faced with unfair cost. However the obligation to use the FMA is once every 5 years, and if suitable the PSP used by forest owners presently could be changed to the same MAF PSP to minimise the extra costs of measuring two lots of sample plots.

To those foresters with timber growing at seriously goods rates in excess of the norm in the region, EITG members being some of these, are up for a bonus of potentially 50% more credits issued to their accounts.

New Zealand ETS review Part Summary

Forestry allocations have been much, much lower than expected – only 25% of the 76.1 million forestry NZUs expected by the end of 2012 have been allocated to date. Similarly, the annual allocation to Emissions Intensive and Trade Exposed industries is 25% less than was expected – at 3.5 million units per annum rather than 4.7 million.

However, in aggregate, physical emissions from the industrial, electricity and transport sectors (over the first 6 month period ending 31 Dec 2010) were also much lower than projected, at 16.3m tonnes, rather than 18.86m tonnes. This appears to be mainly due to lower than expected emissions from the electricity sector. Emissions reported from Transport were actually higher than expected at 8.039m (cf 6.84m as previously estimated).

Of the approx 8.3 million units surrendered on 31 May 2011 to cover emissions from 1 July – 31 December 2010, only 133,150 were imported CERs. Finally, Minister for Environment Nick Smith has requested a further update from the ETS Review Panel before publishing their Review report. This is in order to allow them to take into consideration the announcements made more recently by Australia, including the exposure draft legislation released recently. That report from the Panel and more detail from Government on the future direction of the NZ ETS are expected any time now. Commentary courtesy of www.carbonmatch.com

What are the Potential Risks in Land Transfer under the NZETS

It appears that if a party purchases land that is involved in the NZETS, something that can be established from a search of the land title, there is no independent search that can be performed to establish the position of the land in terms of the NZU units issued, surrendered or sold. According to the NZEUR www.eur.govt.nz the registry where all carbon credit transfers are recorded, such information is confidential to the participant and is not publicly available.

The question is, if this is the case where does a purchaser’s legal advisor go to establish the adjustments or indeed a reasonable price, when settling or negotiating a land transaction? Accepting the current land owner’s representations appears not to be a reasonable approach. Even before settling a piece of land the price needs to be established when entering into an initial contract for sale and purchase, and this cannot be done without full knowledge of the status of any NZU or AAU units issued. Provision could be made in the contract for a

formula to adjust the price at settlement (as is the case with rates, and bodies corporate) but where can the data for the calculation be sourced from?

Perhaps one could write to the NZEUR on settlement date with a waiver from the current land owner to disclose the EUR transactions for that piece of land?

Questions on the NZETS from Forest Owners

After meetings in South Waikato a rural Bank Manager wrote to us with a few questions on the NZETS and forestry:

Q. Owners with more than 100ha must use the field measurement approach (FMA). I’ve heard this method often calculates more carbon units/ha than the published default look-up tables? I have friends with about 95ha. Their question is how strictly do MAF(Ministry of Agriculture and Forestry) adhere to the requirement that any forest(s) totalling less than 100ha cannot use the field measurement approach?

A. The rule is quite clear – you must have more than the 100ha. MAF also decide the total area when you apply. With the FMA the associated persons rules DO NOT apply, that is if you are a beneficiary say of a trust with 10ha and own 95ha then you are not included in the FMA even though the total holding is 105ha. Similarly you can have 95ha in the PFSI and 95ha in the NZETS and are not included in the FMA. Given this is a specialist legal test we recommend you seek independent legal advice on this and any other points. One final issue is the FMA may in some cases provide LESS credits than the old look up tables, the risks are significant to those already selling credits. We cover this in recent carbon monitors. The potential for increased NZU from the FMA is just that, and given the PSP (permanent sample plots) are MAF selected I would be cautious.

Q. For a forest owner sells some or all of their carbon units, are the sale funds taxable? If so, when they harvest their forest and have to buy units back again, is the cost of these units tax deductible?

A. Post 1989 forest owners are liable for income tax on their NZU or AAU unit sales and similarly can deduct the costs of purchasing units for surrender at harvest or to cover some other loss like fire. There is no GST. Income and expenditure are assessable in the year they occur. Again this is a specialist area and specialist advice should be sought. Units are outside of the trading stock regime, that is they are not taxable when created, but only when sold or transferred. Again the definition of ‘sold’ is wide and transfers of any kind may trigger a tax liability if not handled correctly.

Q. A farm has say 20ha of forest on it. If the farmer sells all or part of the carbon units earned, then sells the farm, how does the prospective purchaser verify if the forest is (a) part of the ETS and (b) how many units may have been sold? A purchaser needs to know this to compare farms they may be considering to purchase.

A. (a) When registering for the ETS the property title is updated noting the ETS registration. Buyers are alerted to the registration but not the status; that is whether credits have been issued or sold.

A. (b) The NZEUR is a register with all transactions logged. The name on the EUR has to be the same as the name on the title. A buyer should be able to search the NZEUR to find the transactions i.e. the credits issued, surrendered and sold thereby giving them an ability to quantify liability or for that matter assets. This facility is NOT available in the current EUR. Apparently MAF will issue a statement to the registered owner as to any outstanding liability. This of course is not sufficient to establish both the asset and liability position of a given forest block. EITG has made enquiries as to how MAF and the EUR propose to handle the sale of land. We intend to report on their replies at a later date. The preliminary position is that the regulator would pursue the participant at the time of any issue arising before pursuing a land owner.

Given this the ultimate liability is attached to the land (albeit some parties attempting to lease carbon credits via a forestry right say they have legal advice to the contrary) Any ETS liability appears to rank ahead of any mortgage security. Buyers therefore need to be wary of what happens to their deposits on unconditional date as banks often won’t agree to removal of a mortgage without payment in full. An issue relating to carbon credits could cause withholding of proceeds of a sale to meet this liability for instance. Again this is a technical area requiring specialist legal advice. A further complicating factor is the emergence of the FMA and the retrospective adjustment in the form of a reduction in NZU previously issued (and sold) when field measurements are used in 2012.

Q. Most forests are insured against fire. How does one get that cover extended to the loss of the carbon units that would be lost if the forest burned down. I have asked my insurance company (NZI) who have advised they will not cover carbon units?

A. There are new schemes including www.nzcarboninsurance.co.nz that provide ways to potentially address this risk. Large insurers are not currently offering carbon insurance as we understand it. Please note: these questions and answers are indicative only and are prepared as examples and should not be relied upon as professional advice. These are complex areas untested in the Courts. You are advised to seek your own professional advice from appropriate specialists. Full terms of use of any information provided are on our web site www.eitg.co.nz

Assistance for pre 1990 ForestOwners in Southland

Those wishing to receive their free allocation of NZU units as compensation for loss of ability to change land use must apply before 30th November 2011. Paul Cox of Forest Tech Services in Mataura is offering to assist forest owners. He can be contacted on 0274514 196 or 03 2033014 email fts_pmcox@ispnz.co.nz

Australian Carbon Farming Initiative

For a project to be approved under the proposed legislation it will have to pass the Additionality test. This test is one of whether the project would have in fact occurred without the CFI in place, a so called business as usual test (BAU) The concept of additionality has been in place for a long time as a key component of whether a project in a developing country would receive CER credits under the CDM. The CDM includes a financial additionality test. Financial additionality is not a requirement of the CFI. Rather common practice will be the key arbiter of additionality, the question being ‘is the proposed project common practice in the region in which it is proposed?’ Answer no, and the additionality hurdle can be met.

Approved methodologies will be issued, and parties may submit methodologies to be approved. Use of an approved methodology will be key to achieving registration. A proposed 1-5 year audit cycle allows issuance of ACCU (Australian carbon credit units) after submission of each audit that must be completed by a Registered Greenhouse & Energy Auditor. A proposed positive and negative list will be published with positive list projects able to be approved and negative list either not approved or requiring much more detailed environmental, social and economic impact data to be approved.

Examples in consultation of positive list include capture of land fill methane, and negative list monoculture plantation forestry or changing the management of existing monoculture away from wood fibre to carbon farming. Those who moved early in anticipation of the CFI will not be disadvantaged and projects post 1st July 2010 will be eligible once the methodologies and scheme are approved.

Our “Silly Fool” Closes his liability and Nets $65k

Back in March 2011 a carbon monitor reader, the self characterised ‘silly fool’, wrote suggesting it was time to take the money for his post 1989 forest carbon credits and run, forgetting the potential liability as the returns from the carbon credit sales made up for that risk.

Recently he wrote to us saying he has replaced the 10,000 NZU units he sold at over $20NZD with a similar number of CER units at $13.50 and collected a tidy $65,000 whilst at the same time covering his future harvest liabilities.

Back in late 2010 the NZU price was effectively capped by the price of Certified Emissions Reductions or CER from projects in developing countries. These units were purchased by emitters to cover their NZETS obligations. An arbitrage opportunity arose when the price of a CER climbed above that of an NZU in early 2011 creating a windfall for emitters who sold CER and purchased NZU in effect swapping their compliance units.

CER can be used for compliance in the EUETS as well as the NZETS

Again the price of a CER has dropped to NZD$19 according to Carbon Match, the new platform for selling and buying NZU units www.carbonmatch.co.nz.

CER prices dropped with market uncertainty as to future demand from the energy sector the main drivers of the EUETS where CER are regularly traded.

Look for this and the exchange fluctuations to create further opportunity for New Zealand emitters and perhaps the occasional forest owner to drive a margin between the two compliance unit prices.

European Markets Buoyant then in Freefall

European carbon markets have been strong as the fall out from the Japanese nuclear accidents have resulted in Germany committing to shut down its nuclear stations. Projections for summer electricity peak use (based on air conditioners) suggest that wind and solar can take up the slack as needed.

In France the pressure to import electricity is driven by the ability to use river water to cool nuclear reactors. A drought will curtail nuclear output and result in a requirement to import electricity.

Meantime the Italians voted to reject nuclear power.

Recently the Greek crisis along with a number of other factors resulted in a significant drop in EUA prices from 16 Euro down to 12 in a week. With CER falling only 2 Euro reducing the EUA CER spread.

NZETS Forest Measurement Regime Regulations Announced

In keeping with the consultation the final regulations have been issued for the compulsory field measurement for post 1989 forests .

These regulations apply to participants with more than 100ha of post 1989 forest. The definition of participant follows the associated persons rules modelled on the tax legislation.

That means an aggregate 100ha triggers the obligation to undertake compulsory field measurements once ever commitment period, and in this case before 2012.

MAF supplies details of the sample plots and the forest owner is required at their cost to supply the data. MAF then supplies a set of site specific look up tables to be used in calculating the NZU units for the forest.

Commentary

Post 1989 forest owners with over 100ha face significant risks, that the customised look up tables provides fewer NZU than those from the standard tables.

Had the forest owners sold their NZU allocation based on the standard tables from 2008-2011 they will be required to make an adjustment at their 2012 emissions return.

If the forest is patchy and not well managed the random sample plots allocated by MAF may significantly reduce the actual NZU issued requiring the forest owner to potentially purchase units on the market.

Public Opinion against Australian Carbon Tax, Mentions of Trans Tasman Trading

Reports of Trans Tasman Emission trading raise the spectre of a revived CPRS

In a meeting between the Prime Ministers of New Zealand and Australia it has been reported that both prefer a trans tasman exchange of carbon credits.

Public opinion in Australia is against the proposed carbon tax mainly due to the excessive costs perceived by families. The understanding of the process and emissions trading per se was illustrated on television where the commentators questioned how a carbon charge would be imposed on running motor vehicles.

Clearly there is no understanding or appreciation as to where a charge may be applied and the practicalities of implementation of a scheme. It may be the public is thinking of how they can reduce emissions and see the need for being somehow personally accountable.

In the NZETS the carbon obligations are placed up stream with oil companies simply increasing the cost of fuel to reflect the cost of carbon. This would be the same for either the CPRS or a carbon tax. The proposed carbon tax however appears to focus on power generation only

New Zealand advised that its NZETS is on track for an annual cost of about $150 per family. This is substantially lower that Australian estimates of a carbon tax, albeit that the level of the tax has yet to be set but in any event is above that of the NZETS NZU price.

One wonders if the Carbon Tax has simply been a ruse to push acceptance of the CPRS and it will after these revelations be looked at again.

Following those statements a tax relief package was announced for families with incomes under $150,000 AUD per annum to reduce the impact of the expected $500 per annum in carbon taxes. The figure was calculated at $20 AUD per tonne of CO2

Meanwhile both New Zealand and Australia at a sovereign level are reportedly able to comply with their 2008-2012 commitments with no domestic response or need to purchase off shore credits.

New Zealand is reportedly on track for its forest credits having issued some 57 million NZU to represent forest carbon sequestration. Australia, whose Kyoto cap is 1990 + 7% which was successfully argued on the basis of the then extensive deforestation, has since almost curtailed deforestation and hence benefits from that extra 7% per year.

Camels Sacrificed for Carbon Credits

Meantime it has been reported that a camel cull of wild camels in northern Australia has been put forward under the carbon farming initiative.

Shooting wild camels from helicopters using licensed sharpshooters will reduce methane emissions whilst supplying the pet food markets with camel meat.

Australia is a signatory party to the United Nations Convention on Biological Diversity (www.cbd.int). This was founded out of the same meeting the Kyoto Protocol came from; that is, the Rio Earth Summit in 1992.

Under its obligations to this agreement, Australia has committed to enacting the Convention. This includes the requirements of Article 8, In-situ Conservation, Paragraph (h) which states: “(…contracting parties are required to…) Prevent the introduction of, control or eradicate those alien species which threaten ecosystems, habitats or species”. Feral Camel meets the requirements for control as an alien species under the CBD. http://www.cbd.int/convention/articles/?a=cbd-08

Feral camels are having a massive impact on rare and endangered plants and animal species in the incredibly fragile Australian rangelands. Left unmanaged, the feral came populations will double, with a doubling of all impacts by 2020, including rate of loss of endangered desert species and greenhouse gas emissions. http://feralscan.org.au/camelscan/default.aspx

Apparently carbon credits will mean that using the camel meat becomes a more viable proposition for processing plants.

EU Moves to Close Registry Loopholes and Prevent Fraud

The EU Climate Change Committee backed proposals to enhance the integrity and the security of the EU ETS registry system submitted earlier by the European Commission. Support for the proposals is key to the security of the carbon market, which has become a priority as a result of the fraud with emission allowances and cyber attacks on registry accounts.

For a webinar on the subject go to www.environmental-finance.com/events

What is the Price of a Carbon Credit?

Several different markets exist: Kyoto Credits, Cap and Trade markets that are in come cases country implementations of the Kyoto Protocol that may permit Kyoto Credits as part of the compliance market, and Voluntary credits that generally are for marketing or ‘greening’ purposes by Corporations.

Prices and volumes vary based on the market and the markets are generally not linked and therefore it is difficult to see them as linked at all other than the Kyoto compliance markets.

The N.Z. Government has enacted legislation to create an Emissions Trading Scheme (E.T.S.). This is set against a background of climate change and the world’s efforts to reduce the amount of carbon being emitted into the atmosphere. The United Nations is at the centre of co-ordinating this initiative. Forestry is a key sector from a climate change perspective. As trees grow they absorb carbon dioxide from the atmosphere and convert and lock it up as wood. The NZETS is a mechanism to encourage emitters to change their behaviour by finding better or different technologies.

Measurement

Under the new legislation you (if planted post 31 Dec 1989) forest will “officially” start absorbing carbon the 1^st January 2008. This carbon is able to be measured. As a rough guide one hectare of Pinus Radiata will absorb about 33 tonnes of carbon dioxide per annum.

What’s it worth?

The government has set a capped price of $25 per tonne

(1 tonne = 1NZU (New Zealand Unit) = 1 carbon credit – $25 cap)

The approximate carbon absorption per annum per hectare in your forest could be worth around $500 – $1000 per annum per hectare depending on age and price of N.Z.U

What are the Options?

1. You may decide to do nothing and not register entry into the N.Z.E.T.S. If this option is taken the credits will default to the Government.
2. You may decide to apply to enter the E.T.S. Joining the scheme will mean a cost to measure the carbon in the forest and an administration cost to register with the administration agency (A department set up under M.A.F knows as the New Zealand Emissions Unit Registry).

What are the Obligations?

Once in the scheme you will receive annual N.Z units. The tree owner would also be liable for emissions at harvest. Continuing planting of your forests will see continuing units paid to the owner. However if you harvest the trees you will be responsible for any harvest emissions liabilities.

The legislation states that you will never have to surrender more NZU than you have gained.

Other Options

The credits can be “saved” and not used or they can be sold and traded. It is almost certain that co-operative pools will be created to facilitate trading because of the large amounts of credits that buyers (such as energy companies) will need to purchase. Co-operative pools will also give a degree of risk mitigation to the forest owner

There is a compliance period of two years (ending 31 Dec 2012) for you to opt in to the first emissions return period of the E.T.S.

Various commentators have suggested that there is an advantage by opting in early and joining a co-operative pool and thereby having the opportunity to take advantage of the higher international carbon price.

For more information you may wish to look at www.goodground.com and click on Forests

Martin Albrecht

Continued stability in the NZU means prices sub $20.50 after two short weeks. Trading conditions have been relatively liquid, occurring between $20.10 and $20.50 on a spot basis.

There has been a slight increase in market activity as demand for NZUs leading into the May surrender date seem to be slightly out-stripping the current volumes of NZUs being made available for sale.

This has also taken place against a backdrop of higher CER prices (in NZ$). A swift drop in the NZD/EUR exchange rate ( 0.5510 to 0.5410) has seen CER prices move further north to around NZ$ 24.20 – a level which not only makes them a less attractive option for liable entities, but also closer to levels which have previously attracted more international interest for NZUs.

With just one month remaining until the first obligation date for liable entities, the key factors that could drive the NZU price;

• emitters need to purchase for surrender in May-2011

• the CER price in New Zealand dollar terms

• on going issue of NZU into the market for pre 1990 and post 1989 forest owners

• the extent to which holders of allocations are willing or compelled to sell

source: Westpac Institutional Bank

Carbon Credit Insurance Announced

Underwriter Parhelion has launched what is says is the first insurance policy protecting the value of carbon credits should the projects generating them be deemed ineligible by regulatory bodies.

Parhelion said that the product was created in response to its clients increasing worries over regulatory risk in the carbon market, and is the latest in a flurry of green insurance policies following offerings from Munich Re and Aviva.

Under the UN’s Clean Development Mechanism (CDM) and the EU’s Emissions Trading Scheme, countries and companies can buy credits known as Certified Emission Reductions (CERs) to offset their own emissions and contribute to meeting reduction targets. Institutional investors also purchase credits to sell on at a higher rate.

These credits are generated by emission reduction or renewable energy schemes approved by the CDM executive board under the Kyoto Protocol.

But Parhelion said that investors were unnerved by the EU’s decision to outlaw credits from projects destroying industrial gases like HFC23 and the subsequent drop in value of those CERs.

The company said there was a significant risk that other credits could become ineligible as a result of decisions made by the EU, which damaged investor willingness to participate in this market.

Its new product, developed with insurance and reinsurance underwriting group Kiln, protects the value of the credits in these circumstances, which Julian Richardson, chief executive of Parhelion, said would improve market liquidity

“This important new product … was developed following requests from a number of clients concerned about this risk,” he said. “Since the carbon market is entirely dependent on regulation, the ability to manage and transfer regulatory risk is key to participants’ success.”

Alice Chapple, director of sustainable financial markets at think-tank Forum for the Future, added that mitigating the risk of regulatory changes would encourage more participants in the market and therefore increase rates of emissions reduction

“Policy uncertainty is one of the main barriers to investment in carbon emissions reductions. By reducing the policy risk, an innovative insurance product of this kind will give confidence to the buyers of CERs and support projects that are critical to the fight against climate change,” she sai

“It is a great example of how imaginative approaches in the private sector can help to make carbon emissions reductions happen further and faster

Clean Jet Engines Receive Carbon Credits under the

In recognition of the fact that dirty jet engines are less efficient and burn more fuel Pratt and Whitney the engine manufacturer has recently submitted a standard for cleaning engines that receives credits under the verified carbon standard or VCS.

Aviation emissions are set to enter the EUETS shortly and are already subject to the NZETS.

Aviation operators willing to meet the standards of the VCS will be rewarded with VCU units. Those already operating in an ETS environment will benefit from reduced fuel use and therefore lower carbon charges.

It is not immediately clear the extent to which this cleaning affects airline operational issues. However with the spiralling increase in fuel cost it may be a way of reducing these costs whilst reducing their GHG emissions.

This methodology was developed to calculate the emission reductions generated by washing jet engines. All engines become contaminated through normal operation leading to restricted airflow, higher exhaust gas temperature, and increased fuel consumption. By eliminating engine contamination, engine washings improve propulsive efficiency measured as a decrease in thrust specific fuel consumption or TSFC, resulting in decreased emissions of carbon dioxide (CO2).

It is anticipated that the methodology will be used by airline owners of jet engines who wish to utilize on-wing jet engine washing as a means of increasing engine thrust efficiency and reducing CO2 emissions. Jet engine washing technology service providers might also use the methodology to assist airline customers in overall engine emissions reduction measurement.

Figure 1 illustrates the general process of washing a jet engine. Once an engine is washed, it starts a wash cycle defined as the interval between two consecutive washes. As a result of the washing, engines will experience improved propulsive efficiency while in operation; the operation of an engine between one takeoff and one subsequent landing is called an engine cycle. As the number of engine cycles increase, the engine will become re-contaminated and the efficiency improvement realized by the washing will decline until the engine is washed again. The change in the efficiency improvement during the first washing cycle is tracked in red in Figure 1. This second washing terminates the first cycle and begins the subsequent cycle. The change in efficiency during the second wash cycle is tracked in blue in Figure 1. As demonstrated in Figure 1, washing cycles may not contain the same number of engine cycles for a variety of reasons, including:

Safety procedures – Some maintenance procedures prevent all engines on an aircraft from being washed at the same time. This reduces the risk that the same mistake made on one engine will be repeated on all engines of an aircraft, thus reducing the chance that all engines will fail at the same time.

Scheduling – Due to time constraints, it may not be feasible to wash all engines on an aircraft at once. Also, as engines are routinely switched between airplanes, the optimal wash interval for one engine may be different from that of the other engine on the same plane.

Since the number of engine cycles is directly correlated to the change in efficiency following a washing, the average efficiency improvement realized during the washing cycle will differ. Taking into account the average efficiency benefit realized during the wash cycle and the amount of fuel consumed by each engine cycle in a wash cycle, the fuel savings can be calculated and converted to emission reductions. As an additional environmental benefit, the methodology uses a closed-loop system for the collection, filtration and reuse of water used to wash the engine. This both saves water (of particular importance in water constrained areas of the world where engines may be washed) and eliminates the potential contamination of soil and groundwater associated with non closed-loop engine washing.

Australia to Push Through Carbon Tax

It is widely reported the Australian Carbon Tax will be pushed through to commence in July 2012.

Public support according to polls is a low 30% whilst some 60% oppose the carbon charge. This in stark contrast to the 72% support in the past for the proposed emissions trading scheme called the CPRS.

GA Group and EITG in 250mw China Biomass CDM Project

The global financial services organisation held by GA GROUP (ASIA) Limited in the Isle of Man – has been appointed lead manager to China‟s Shenzhen based Hanyuan Green Energy Co. for a major capital raising for a China-based biomass energy enterprise venture. GA Group will collaborate with EITG. With the aim of raising USD30-100 million, GA GROUP will be responsible for exploring all market options – whether public or private – for raising the target capital and EITG will manage the associated carbon credit business surrounding the venture with the subsequent value integrated into the deal. EITG has commenced the steps necessary to register the project under the Clean Development Mechanism of the United Nations Kyoto Protocol, selling the resulting Certified Emissions Reductions to its European Clients.

“This is an incredibly dynamic project for GA GROUP and is a total vote of confidence in New Zealand‟s ability to lead the global pathway in the challenging field of renewable energy and UN compliant carbon credits,” said Tim Munro-Keene, Executive Chair, GA GROUP.

“We set a mandate at launch that we would actively pursue socially responsible finance for climate change

as part of our business ethos and strategy. It is rewarding to partner with fellow New Zealanders, EITG, to guide this innovative project to market and pave the way for new models of renewable energy financial services across the Asia Pacific.”

Based in China, the biomass energy enterprise venture is a scalable project designed to utilize waste agriculture biomass to produce electricity in the Shandong Province. Five power stations each producing 50 megawatts are to be built. The project has a social responsibility perspective as local farmers will be able to increase their earnings from the sale of otherwise discarded material.

Field Measurement Approach Creates Substantial Risks for Forest Owners

The New Zealand Ministry for Agriculture and Forestry (MAF) Sustainable forestry bulletin issue 25 confirms Cabinet has approved the drafting of the regulations for the Field Measurement Approach (FMA). First mentioned in the Carbon Monitor in November 2010 volume 15 issue 10 these regulations cover post 1989 forest of 100ha or more.

The 100ha threshold relates to the total forest holding of one participant. Participant includes all associated parties as defined in the Act. The Act definition of Associated Parties is wide ranging so those with small forests can unwittingly be dragged into the FMA regime due to the aggregation of smaller holdings to exceed 100ha.

Of significant concern is the requirement for the final emission return for the First Commitment Period 2008-2012. This must be carried out using participant specific look up tables that are created from MAF specified sample plot locations on the participant‟s forest(s).

Meantime, that is at least from 2008-2011 participants are required to use the standard regional look up

tables. The tables are acknowledged to in „some‟ cases specify more the issue of more NZU units than there is C02 removed from the atmosphere by a given forest. Simplistically, some forest owners may have received more NZU than they should have for their forest in each of the last 3 years 2008-2010.

Changing to participant specific look up tables in 2011/2012 those forest owners may find that they receive significantly less NZU with these tables than the standard tables they used in the first 3 years. In the emissions return for 2008-2012 foresters may have to surrender the over allocation in 2008-2010 using NZU issued in 2011 and 2012. For those with patchy forest or lower than expected site indexes there may be a surprise in store and a reduction in NZU income due to the change in tables to forest specific tables. Add the costs of the field measurements for the FMA and some forest owners may be in for significant cost.

Japan Crisis Drives European Market Upwards

Recent developments with the disaster in Japan placed focus on the future of low carbon nuclear energy sources in Europe. Germany reportedly placed under review decisions on a number of its reactors in response to the devastation

A corresponding jump in prices of emissions units resulted in EUA up to 17.22 up 2.23 and CER units up to 13.12 up 1.62. CER were reported as trading above the $25NZD the cap for the NZETS. Since CER dominated the NZETS market in late 2010 there has been a scramble for those emitters who purchased units to sell at a substantial profit. The flow on effect is reported NZU sales over $21NZD up 1.90 this in March.

Reader Posses the Question?

Peter Ann, a Carbon Monitor reader sent us his thoughts on selling forest based NZU for post 1989 forests. He writes: So…… we sell our NZU’s and they are taxed in the year of income. Lets assume a 400ha forest of 10 years age, 10,000 units at $20… could be around $60,000 tax. $140,000 to invest someplace else, say a 2.5 million dollar building in the city, complete with 20 year mortgage leveraged against rental and the income from more sales of NZU’s…..

The rough guide for returns of commercial property is equal to inflation over a long period (60 years to 1989)….

Onwards 20 years and the forest now has a liability of surrendering the units sold by that “silly fool” who sold them all, against all advice from every forest person he talked to ever.

The question is will his building now be worth the balance between surrender value of his units plus his

log harvest less the residue units or “free units” as in forestry jargon. Historically forestry had a 3% above inflation

compared to -3% for dry stock farming return for the 60 years (share market in NZ was 7% for the curious) preceding the 1989 article the writer read and made the decision to invest in forestry when he could.

At harvest the logs should return more dollars than the NZU that have to be surrendered. If not the prudent forest owner will leave the trees growing…. until they are. Just look at the turnaround in the last 3 years from doom and gloom to the highest log prices since the 1991 spike. Trees don’t mind being 33 years old! However the building is now freehold and available for sale at capital gain….

The large surrender value of 20 years of sales of NZU is fully tax deductible expense, just as the harvest cost is deductible. 260,000 * 30% residue – =182,000 units to be surrendered at say $70 $1,274,000 remember the

tax deduction against income Who among you followers of forestry are prepared to do the numbers and stop suggesting and advising forest owners with one age class to plant more forest to offset liability. how many eggs do you put in one basket?

Commentary

Peter raises some very good points. In a past issue of the CM we shared the use of Land Expectation Value put forward by the University of Canterbury school of Forestry as a way of modelling the potential income and liability of participation in the NZETS. Interestingly a 5% increase in the price of an NZU over each of 10 years showed little impact on the LEV as a metric.

However if as Peter says an NZU is $70 who would bother to harvest? Income of over $2000 per ha would be hard to beat with money in the bank from harvest yielding less than 5% in interest. The problem is that no one knows the price of an NZU 10 or 20 years out and not managing this risk is as Peter puts it creates a „silly fool‟

The next emerging issue appears to be the Banks have realised the sale of the NZU units potentially creates a liability that ranks ahead of a mortgage security. When a forest is sold any buyer would factor in the cost of surrendering NZU units when calculating a purchase price.

Forest Carbon Insurance Update

For an update on the New Zealand insurance scene for carbon forestry insurance, we asked Geoff Manks, managing director NZ Carbon Insurance (a division of Sage Partners Ltd). NZ Carbon Insurance has been active in the area of carbon credit insurance and lead the market offering specialist solutions for forest owners. Geoff claims to be the only insurer in Australasia actually having written policies for this type of cover. He reports:

In the last 4 weeks we have had a noticeable lift in enquiries from forest owners, large & small, from around NZ seeking advice on insuring their forests. Presumably this is a direct result from carbon credit returns being filed with MAF and growers then considering trading options, or trades having already being recently concluded.

However there clearly remains a lack of appreciation by some growers as to their contingent liabilities, and therefore what insurable value to attach to their forest. What is apparent, from the insurance programmes we have reviewed, is those who have traded their credits and are already insured under a traditional forest model, likely have an insurance programme which does not reflect their position. In particular post 1 April 2011 where the contingent liability values accrue. One area we spend most time with clients on is helping them understand how to establish an appropriate insurance value for their forest. This generally differs between each forest but is based around our unique model from which clients then select the option they feel comfortable with.

Insurance capacity in NZ remains limited with insurers still shy about providing limits in some regions for wind, earthquake, landslip etc. However premium rates remain competitive with carbon forest insurance programmes generally priced at similar levels to traditional timber insurance. We are likely to see the entry of another insurer into the NZ market in the near future capable of accepting carbon forest business. The incumbent, NZI, still have a stated position of not insuring carbon. What this exactly means is not entirely clear, however without further definition or a more flexible model for covering perils or establishing insured values, we still have concerns about their suitability for carbon forestry.

Whether for Silviculture, ETS registration, Filing returns, Measurement or Trading credits, getting sound advice is critical forest owners. Insurance is not the sole answer to growers as not all events are insured against. However forest owners must understand the manageable and non-negotiable consequences, of a loss to an ETS/PFSI entered forest and are prepared to accept these or take steps to mitigate the risk.

United Nations Publishes Radio Broadcasts on the CDM

The Clean Development Mechanism of the Kyoto Protocol allows the creation of projects in developing countries that would not otherwise go ahead (business as usual) to receive credits called Certified Emissions Reductions or CER.

CER can be used in the main emissions trading schemes and are permitted in the NZETS and EUETS. The UNFCCC secretariat has produced five „broadcast-ready‟ radio stories for dissemination to radio stations in Africa. These stories are meant to make the Clean Development Mechanism of the Kyoto Protocol understandable and accessible to a broad audience, including community stakeholders, potential project participants and policy makers They are available at http://bit.ly/cdmstories

Technological Solutions for Coal Fired Stations move Closer to Reality

Two new patented sorbents used for carbon dioxide (CO2) capture from coal-based power plants have moved closer to commercialization as a result of a licensing agreement between the Office of Fossil Energy’s (FE) National Energy Technology Laboratory (NETL) and ADA Environmental Solutions (ADA-ES).

The nonexclusive agreement facilitates negotiations on intellectual property rights, protects proprietary information, and grants non-exclusive licensing of the new technology. Under federal regulations, NETL is authorized to obtain, maintain, and own patent protection for its inventions, including those funded through collaborative agreements. By granting a commercial license for these sorbents, NETL can now convey and control the right to make, use, and sell the products and services claimed in the patent, thereby assuring strategic commercialization throughout the coal-fired power plant industry. CO2 capture is an important component of carbon capture and storage (CCS) technology, viewed by many experts as an integral part of a portfolio strategy (including increased use of renewable and nuclear energy, and greater efficiencies) for confronting increasing atmospheric carbon dioxide emissions and potential climate change. Coal-based power and industrial plants are essential to U.S. energy production and are projected in many forecasts to remain so for the foreseeable future. But they are also among the most carbon-intensive energy sources.

FE‟s comprehensive CCS research includes developing new materials that can capture and release CO2 at reasonable energy and operating costs. Traditional solvent-based systems consume too much energy, either in operation or during regeneration of the solvents. So FE is developing and testing a wide range of approaches.

A promising solution for affordable CO2 capture is “dry scrubbing” or chemical absorption of CO2 using a solid regenerable sorbent. The most important advantage of solid sorbents is the potential to significantly reduce the amount of energy required to capture and release CO2. These range from alkaline earth metal oxides or hydroxides that can absorb CO2 at temperatures that typically range from about 100— 300 °C to impregnating a porous substrate with one of the liquid solvents. In all of these, the sorbent can be regenerated in a subsequent step, after the CO2 is removed. The efficiencies of these processes are highly dependent on the optimum temperature and pressure conditions at which absorption and regeneration are performed. In the case of high performance sorbents, both of these mechanistic steps occur with the lowest possible energetic and operational costs.

goodGround is please to announce its new service to ensure you benefit from the Scheme.

1. We now have the expertise to make your forest registration and mapping process easy.
2. Our proven method saves you time and gives you results.

Volume 15 Issue 11 December 2010

NZETS thin trading, Prices over $20NZD, CER Not an Option for Compliance?

Reports from Westpac and OM Financial have NZU units firming to around the mid $20NZD mark. Trading remains light with few sellers but one or two notable trades.

Another option for compliance in the NZETS has emerged as the international markets are forecasting potential oversupply of so called CER units or certified emissions reductions.

These units are issued to projects commenced in developing countries that do not have an emissions cap under the Kyoto Protocol.

The Clean Development Mechanism Executive Board (CDM-EB) on Monday 29th November issued 17.8 million CERs. This issuance of CERs (about 10% of annual issued volume) to eleven HFC projects which had been under review by the CDM-EB was unexpected by the market. Subsequently, CER prices have fallen by over 3% resulting in a closing price below the last traded NZU price.

However the latest spot CER price is around 13.43 Euro which at the current exchange rage of 0.57 results in an NZD price of $23.56 or at least $2.50 over the best NZU price.

It appears from reports large volumes are attracting better prices meaning aggregators are still making up to 5% on the spread between buy and sell. All the risk remains with the forest owner vendors. We think that is too much. Those forest owners who have sold for $17 on the advice of forest managers must be questioning the advice received. MAF Update on the NZETS

The New Zealand Ministry for Agriculture and Forestry issued is regular update on the New Zealand Emissions Trading Scheme. It states if post 1989 forest owners wish to claim the NZYU for 2008-2010 need to get their applications into MAF now. Last year there were significant delays from late applications meaning many forest owners missed receiving their NZU allocation.

Also in the news is the mapping system for pre 1990 allocations has been released and this time includes a žtutorialIt is not clear whether or not a play area will be included to allow foresters to experiment to learn how to operate the system before actually entering data. This was a flaw in the post 1989 mapping system.

Consultation and submission for the field measurement approach closed mid last month and there were a good number of useful submissions.

NZETS Facts and Figures

Given the expected oversupply of NZU units from forestry traders are interested in how many units have been allocated and what percentage of the potential units have registered.

Some 16mt of pre 1990 allocation is on the way albeit the market feedback is these units are not yet coming into the market.

MAF has now allocated more than 5.1 million NZUs to 585 post-1989 forest owners covering over 125,000 hectares. This means around 20% of the potential forest eligible by area has registered in the NZETS.

For pre-1990 forest land owners, MAF has made final determinations on 39 applications, allocating just under 750 000 NZUs for both commitment periods. This represents about 13 500 hectares of pre-1990 forest. A preliminary determination has been made for a further 84 applications (38 000 hectares). The allocation so far represents an average 57.6 units per ha with allocations being either 60, 39 and 18 units per ha depending on the ownership of the land on certain dates.

Overall therefore for the period to end of 2012 at 23 units per ha would result in some 300,000 units coming on the market by 2012. Adding the further 38,000 ha presuming a similar make up, a total of approximately 1.1m NZU would come to the market prior to 2012. This is only 7.5% of the potential amount to be issued.

It looks that to date the expected oversupply at the market level is unlikely to occur. The New Zealand Government however has no such issue as those forest owners who do not opt in automatically allow the Government to use their NZU to comply with the Kyoto limits from 2008-2012. In return the Government according to existing law indemnifies the forest owner by surrendering the same credits on the land owners behalf at harvest.

Given the wall of wood post 2020 looks to turn the forest industry from the source of NZU to the largest single emitting sector it is an interesting question as to whether the taxpayer will foot the bill. Is this a case of ignoring the future to deal with short term imperatives?

Are Forest Managers Financial Service Providers?

A person, business, or organisation providing financial services in or from New Zealand must be registered on the Financial Service Providers Register (FSPR) before 1 December 2010 (except for financial advisers who have until 31 March 2011 to be registered.)

Financial services range across consumer loans and credit, money management and investment advice, bank services, broking services, currency exchange and money transfers, insurance – the list goes on. If you deal with money or investments, you probably need to register.

There are a range of exemptions for providing such advice in the normal course of business, an area which is still quite gray. Real Estate agents who sell businesses are seeking clarification of the Act.

Whether a forest manager who brokers a sale of carbon credits is covered is not clear in the Act.

EU Price Update

CER prices softened towards the end of November spot prices were Euro 13.43 with December 2011 at Euro 12.85 EUA remained between 15 and 16 Euro. EUA for 2013 remained strong over 17.50 Euro.

We apologise not being able to provide a monthly trend graph this month.

Source: www.cantorco2e.com

CDM PIN Announced

EITG in conjunction with Delta projects has issued a PIN or project information note on a biomass power facility in the Pacific Islands. The project is projected to create some 40,000 Certified Emissions Reductions (CER) per annum from 2011 under the Clean Development Mechanism of the Kyoto Protocol (CDM)

The CDM is administered by the United Nations and issues carbon credits for emissions reductions that would not otherwise occur. The project is an excellent use of agricultural waste and avoids methane emissions when the waste is simply left to rot. The power generated will be fed into the national grid and displace diesel powered generation.

The PIN has been issued to attract bids for pCER units that are to be issued. Offers to purchase the units once issued or sCER will also be entertained. EITG has issued the PIN to a range selected trading houses and emitters and has interest from Europe and Japan. At this stage only year 1 credits are on offer. A strip sale could be concluded. The last strip sale on a project with EITG involvement achieved 17.50 Euro per CER at year 4.

Dumping Ground for Second Rate Carbon Credits

A recent report suggests New Zealand could become a dumping ground for second rate credits from the Clean Development Mechanism or CDM. IdeaCarbon wrote in its report, the recent decisions from both the Clean Development Mechanism Executive Board (CDM EB) and the European Commission (EC) on industrial gas CDM projects involving reductions of hydrofluorocarbon-23 (HFC- 23) and nitrous oxide (N2O) from adipic acid plants are set to radically reconfigure the global market for offsets. The effects of these decisions are far-reaching and could potentially have implications for the New Zealand Emissions Trading Scheme (NZ ETS).

The NZ ETS could be a major source of demand for these homeless CERs. Due to a lack of restrictions on the use of CERs for compliance, NZ ETS credits (termed New Zealand Units  NZUs) could be vulnerable to downward price pressure as industrial gas CERs seek out other markets.

Under the European Union Emissions Trading Scheme (EU ETS), companies can meet a part of their emission reduction obligations by purchasing costâ effective offset credits (CERs or Emission Reduction Units from Joint Implementation offset projects) under the UN approved flexible mechanisms. Offsetting can include credit origination from projects involving the destruction of HFC-23 and N2O industrial gases.

There are four problems with industrial gas reduction projects.

First, they’re extremely cheap to carry out. For example, it is estimated that the destruction of HFC-23 can be carried out at 0.171 per ton of CO2 equivalent. But when these CERs are issued they currently command a price of 12.00 seventy times more than it costs to destroy the gas.

Second, the cost effectiveness of these projects has created unintended perversities; HFC-23 CERs are so valuable they exceed the value of the primary gas (HCFC-22) by as much as five times, which has led to the widespread accusation that host countries are ramping up HCFC-22 output primarily to profit from CER revenue.

Third, the current incentives for HFC-23 destruction undermine attempts under the Montreal Protocol to phase out HCFC-22 production.

Fourth, the dominance of industrial gas has distorted the geographical distribution of projects under the CDM in favour of China and India. The EC has proposed a ban to come into force from January 1st 2013. The proposal is due to be discussed by a committee of member states before going to the European Parliament to be scrutinised, with a decision expected in three months.

The CDM EBs Methodologies Panel has recommended that the AM0001 methodology which governs the generation of CERs from HFC-23 reduction projects should be revised. According to a paper delivered to the EB at this weeks meeting, it is likely that emissions reductions could be overestimated, since there is no incentive to reduce the w-factor, referring to the ration of HFC-23 emitted by a plant producing HCFC-22 refrigerant gas.

There is currently no indication as to by how much an amended methodology would cut CER yield.

The CDM EB has decided to revise the AM0001 methodology, which will then be applied to each project as it reaches the end of its current crediting period. With the largest number of HFC-23 projects coming to the end of their first crediting period between 2012 and 2014, this means that CER yield could drop significantly thereafter. Industrial gases currently comprise 75% of CER output to date. With regulated entities within the NZ ETS being allowed virtually unlimited use of CERs to meet their compliance, these industrial gas CERs could soon overshadow the New Zealand market.

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EITG develops, facilitates and engineers Carbon Mitigation projects and strategies.

EITG corporate advisory provides high-level briefings and advice on building robust responses to emerging regulatory structures.

EITG Carbon Pool provides forest owners with a robust platform to access local and international markets while dealing with harvest and other liabilities.

EITG provides trading platforms and strategies based on extensive mitigation and avoidance platforms under JI and CDM, with matched offset packages for emitters.

EITG is part of an international consortium with representation in Asia/Pacific, UK, Europe, USA and South Africa