|ETS Cost Recovery Announcement – Pay to Play|
In a topsy turvy ETS world where confidence has been waning and the politicians can’t seem to help themselves but keep tinkering with our primary tool to fight climate change, MPI have now announced that costs to forest owners for ETS participation are increasing while letting the entities that actually emit CO2 off Scot-free. These changes were lobbied against very hard from industry participants, but this seems to have fallen on deaf ears.
A new annual charge of $30.25 per hectare (regardless of forest type) and twenty-two new fees related to existing services will come into effect on 19 October 2023.
This annual charge invoice will be sent by MPI directly to each ETS participant for the part financial year (19 October to 30 June) in November and will be calculated based on the land registered in the ETS at the beginning of this period.
In subsequent years, invoices will be sent at the beginning of the financial year and cover the year ahead (1 July to 30 June).
The twenty-two new fees will be detailed on the MPI website on 19 October when they become available. A list of the upcoming changes can be found in the most recent Forestry ETS Alert #38.
This is a major disappointment to us and the wider industry, who we are working with to challenge. We believe that this cost recovery scheme is fundamentally unfair as the cost is placed solely on forest owners who have entered the scheme in good faith. These forests provide enormous benefit to New Zealand in terms of assisting in meeting our NDC under the Paris Accord, as well as a host of other positive outcomes. The fact that they are now effectively being penalised for providing a public good is a bitter pill to swallow.
This is emblematic of the continuously changing legislative and regulatory environment of the last two years that have resulted in forest owners having to read, digest and react to a series of policy changes that have enormous implications for their forests and the businesses that operate around them.
When coupled with a period of high interest rates and low commodity prices, many forest-owning farming businesses have been forced to generate cashflow through the sale of NZUs in a period where poorly considered cabinet decisions have artificially depressed the NZU price.
Please clearly read the following information, including the attached detail of the regulations to drive your actions going forward.
These cost increases carry implications for all ETS registered forest owners, but the annual fee is of greater significance for forests in the following categories:
Native forests are slow growing by nature and therefore generate fewer NZUs each year. This is particularly pronounced in the first 6 years of growth (which MPI have recognised and provided an exemption option for) but is also the case in forest areas older than 35 years. It is also important to note that native forest registrations over 100ha with Participant-Specific Tables will in many cases have even lower allocations.
Second rotation forests
Owners of second rotation forests will understand that carbon accrual essentially pauses for 8-10 years following harvest and replanting as the sequestration of the second rotation trees are more than offset by the residual decay from harvest residues over this period.
Effectively this means that no carbon income can be derived from forests in this category over this time, but the annual per hectare fee will still be charged by MPI.
Older forests in Averaging
Forests registered under averaging accounting will not be allocated any further NZUs once the average age is reached so cannot generate any additional income until they are harvested at maturity. These forests will not earn any NZUs during any subsequent rotation.
MPI are still undecided about how to treat the registration fee for these forests after they have reached the average age. Officials have verbally suggested that it wouldn’t appear fair to charge the full amount when there is essentially no demand on their services. Of course, expecting a government department to give up revenue might be like expecting a politician to tell the truth but let’s hope sanity prevails here.
Considerations for ETS registered forest owners:
Participation in the ETS is fundamentally a commercial investment decision for forest owners. This decision is made by assessing the investment costs against the projected financial returns ultimately driven by an expectation around future carbon prices.
The ability for a forest to produce NZUs at a value that provides an acceptable risk adjusted return is fundamental to a decision regarding ongoing participation in the scheme.
The difficulty here is forecasting NZU price – if this is high then costs are manageable and participation may make sense on a risk adjusted return basis. The other consideration is one of cashflow as costs and revenues generally are not matched so facing significant participation costs and accumulating NZU’s has all of a sudden become more challenging.
Some participants may find that these changes mean that part or all of their registration will be rendered financially unviable for a short period, or potentially in perpetuity. In these cases, they may wish to de-register part or all of their registration from the ETS.
A decision to exit the ETS prior to these charges coming into effect will remove the obligation to pay the annual fee.
MPI have left a very small window to complete partial removals or deregistration’s. It is important to note that deregistration of forest areas will result in the following:
Mandated surrender of all NZUs allocated to the forest areas in question.
Removal of option to use sawtooth carbon accounting should a forest re-enter the ETS in future.
Forest owners who have harvested in the 2018-2022 Compliance Period will have met their surrender obligations either through the surrender of NZUs or as cash with the Fixed Price Option (FPO).
If you believe that these newly enforced costs from MPI render ongoing ETS registration untenable, please reach out to us immediately to discuss your specific involvement with the ETS and new cost recovery regulations.