There has been an explosion in Emissions Trading Scheme unit prices which is likely to mean higher petrol prices next year  and more farmland going into forestry.

An auction yesterday of ETS units by the Government saw the unit price go to $85.40 per unit.

That is up 25.6 per cent on the price at last December’s auction and is an indication of how the upwards momentum on the ETS price is now beginning to show.

That is because the Government is restricting the number of new units it is now releasing onto the market in a conscious effort to raise the price.

Though a higher ETS price should start to reinforce changes in the country’s emissions profile, it will also mean dramatic changes in everyday life for many people.

Yesterday’s auction shows those changes are about to begin.

ETS units and their purchase and sale are recorded in the ETS Register, which is administered by the Environmental Protection Authority and is like a bank ledger.

The Government has the ability to “print” units just as the Reserve Bank has been able to print money during its Covid Quantitative Easing programme.

ANZ economist Susan Kilsby said yesterday there had been a significant uplift in the ETS secondary market in late July when the Climate Change Commission (CCC) recommended the Government should reduce the volume of ETS units auctioned (from next year onwards).

The Commission also proposed raising the “trigger price”, which is an upper limit on market prices.

Advertisment

When it is released, the Government has extra ETS units in reserve, which it can release to stabilise market prices.

In 2022, the trigger price was set at $70, but the Commission has proposed it go to $171 next year.

If ETS unit prices were to reach that level, then that would have a massive impact on some consumer prices.

The Motor Trade Association says that when the ETS price was at $76, the ETS component of a litre of petrol was about 18 cents.

Based on that, a rise in the ETS price to $171 would push petrol prices up by another 23 cents a litre.

Even if the price did reach $171, the Government would not be able to do much to restrain it because it is also reducing the number of ETS units it will hold in reserve.

“If the Government decides to act on this advice (to set $171 as the trigger), the volume of ETS units allocated next year would be 38% lower than this year, assuming that pricing does not reach the trigger level ($171) and therefore additional units are not released from the CCR,” said Kilsby.

“If pricing exceeds $171, this will trigger the release of an extra 2.9m units, but total offer volumes would still be 27% lower.”

But though the increased price of ETS units will drive fossil fuel prices up, it also has the potential to have a major impact on rural New Zealand.

A high ETs price makes it more attractive for farmers to plant trees on their properties.

Rather than plant an entire farm in pines, farmers are now looking at patches of forestry on poorer land on their farms.

The Northland regional manager for the forestry management company, PF Olsen, has written to farmers in the north suggesting they consider that.

“Almost every farm has areas that are less suited for farming and would generate a greater return per hectare if planted with forestry,” he said.

Former Lincoln University academic and noted agribusiness commentator Keith Woodford headed a blog item he wrote last month: “Carbon farming rocket has taken off.”

He delivered a paper at the Carbon Forestry conference and said that if simple economics from a land-owner perspective was the criterion, then the answer was also very simple.

“On the sheep and beef lands of New Zealand, there is nothing that can touch the economics of carbon farming,” he said.

Woodford has also recently been interviewed by the New York Times on carbon farming.

“We’re talking about a land-use transformation beyond anything that we have seen probably in the last 100 years,” he said.

 “It is a big change in land use, and we just need to be sure that is what we want.”

An indication of the scale of the change comes from Te Uru Rākau – New Zealand Forest Service — which has estimated that between 1990 and 2019, 769,702 hectares of farmland were converted to forest.

The Ministry for Primary Industry’s most recent Afforestation and Deforestation Intentions Report estimated that exotic afforestation accounted for 33,600 hectares in new planting in 2020 and 45,300 hectares in 2021.

Of this, around 77 per cent was intended for production and 23 per cent intended for permanent forest.

Around 89 per cent of the registered forest in the ETS is exotic, mostly radiata pine.

The registered exotic forests are comprised of 255,000 ha of radiata pine and 57,000 ha of other exotic species.

In 2021, forests in the ETS sequestered 6.7 million tonnes of CO2, which is equivalent to the annual emissions from 2.5 million cars, according to the Ministry for the Environment.

Even so, Climate Change Commission Chair, Rod Carr, questions Woodford’s claim that the land use change is on a massive scale.

“New Zealand’s exotic forests are now only above what they were there in the early 1990s because we went through deforestation,” he told the recent National Party Blue Greens Forum, referring to bis conversions by entrepreneurs like Graham Hart of pine forest in the south Waikato to dairying.

“Now the reforestation is about 2.1 million hectares, which is about what it was back then.”

However, the Commission believes there is scope for more forestry, particularly indigenous forests.

“Estimates from recent studies suggest there is in the order of 1,200,000 to 1,400,000 ha of marginal land that could be converted to forests, 740,000 ha of which could revert to native forests naturally,” it said in its report last M<ay on New Zealand’s first three emissions budgets to cover the emissions reduction plan to 2025.

But the Commission has also been wary of encouraging too much forestry planting. Its goal, it says, is to reduce emissions.

In its 2021 recommendations, it suggested that the ETS might have to be amended to deal with excessive forest plantings.

An attempt earlier this year to do that had to be withdrawn by Forest Minister Stuart Nash and Climate Change Minister James Shaw after Maori objections.

Nothing in climate change policy is easy — and a rapidly rising ETS unit price will only make it more challenging and difficult.

.