In this month's Carbon Curious session, Nick Butcher, co-founder and CEO of CarbonCrop, dives into the newly released discussion document for Emissions Reduction Plan 2 (ERP2). He breaks down the key terms and timelines, explaining how they fit with international agreements like the Kyoto Protocol and the Paris Agreement. Walking us through New Zealand’s current and future emission targets, Nick highlights the importance of nationally determined contributions (NDCs). He sheds light on New Zealand’s strategies for reducing net emissions, especially the pivotal role of forestry, and stresses the importance of keeping market confidence high in the Emissions Trading Scheme (ETS). Finally, the discussion touches on the economic implications and underscores the need for both domestic efforts and international collaboration to achieve emission reduction goals.
Watch the video for more information, or read the transcript below.
TRANSCRIPT:
[00:00:00] Welcome to another Carbon Curious session. Today we're going to be talking about the Emissions Reduction Plan 2, which has just recently been released, or at least the discussion document for it has been released for consultation and feedback has been collected. I think the actual plan is due around about the end of the year.
[00:00:23] My name is Nick Butcher, I'm the CEO of CarbonCrop and I will be giving you a bunch of our thoughts on it today and some commentary around just what's yeah, that's me. Questions, as usual we had a lot of questions in advance of this one, so there'll be quite a lot to cover, but there is a Q& A function within Zoom, so if you have questions as we go through, please throw them in that box. little dialogue box. All right, straight into it.
[00:00:47] So the ERP, I thought it'd be useful to start off with a bit of sort of framing of the terminology and timing for a whole heap of these different mechanisms because there's a lot of terms and a lot of names and they all cover different dates and they all have different numbers next to them and, but they do all relate to each other.
[00:01:05] There is a method behind the madness. So one of the things which set some of the weird current date sort of weird idiosyncrasies, is the second phase of the Kyoto Protocol which ran from 2013 to 2020. I think this was possibly supposed to run from 2013 to 2018, and then another one running from 2018 to 2022, hence the timing of some of New Zealand's internal budgets, and perhaps it got changed when Paris was introduced, but either way, the Kyoto period ran to the end of 2020. and Kyoto is no longer a thing in effect that's now been replaced by the Paris Agreement. And the Paris Agreement took effect from, I think it actually took effect from like 2016, that was when it was agreed in 2015, came into the treaty signatories were, it came into effect in 2016, but the, the sort of, what it, And the other thing that was designated was that signatories had to come up with collections of targets that they would subscribe to.
[00:02:01] These were called nationally determined contributions, like how much you think you as a signatory to the Paris Treaty, being a state, should do. And you're supposed to sort of revisit these periodically. And increase the ambition of them over time. So that's sort of the idea being that you could start out, say, we'll do at least this much, and then every now and then, sort of, in some cases, it's annually, in some cases, a bit less than annually.
[00:02:25] There was, I think, was The idea was that there was sort of this roughly five year ratcheting period that people would come back and like present in front of all the other signatories the new amount that they were going to try and do to increase the ambition of their climate change mitigation activities.
[00:02:41] But the sort of the first concrete set of commitments around these were the NDC1 commitments. And I think some countries are doing these as a point year commitment, like they say where they will be by the end of 2030. For New Zealand, we've said that we will be by 2030 at a level of emissions, net emissions, which are 50 percent below our 2005 gross emissions.
[00:03:06] And I won't get into the debate over whether that's appropriate or not. That's, that's what the target is. But we've expressed that as a multi year budget and our budget covers the period from 2020, end of 2020 through to end of 2030. So a 10 year period. and it's 571 megatons of CO2 equivalent net.
[00:03:24] NDC2 will cover the next 10 year period, and importantly, we don't actually have a commitment yet, I don't think anybody else does either, but it's pretty soon that we're supposed to indicate that commitment, so I think around the end of this year ish, I mean, I think we're probably likely to be sometime early, early in 2025.
[00:03:41] But within, so this is what we've said to the international community we will do, the emissions budgets, These are what we are planning to have available, or the budget that we're trying to meet on a domestic level. So these are broken up slightly differently. I'm not sure why Emissions Budget 1 didn't start until the start of 2022, but for whatever reason it does.
[00:04:00] And that's why if you look at Emissions Budget 1 versus Emissions Budget 2, it might look a little bit like we're going in the wrong direction because Emissions Budget 1 is 290 megatons, Emissions Budget megatons, EB1 is for a shorter period. So the actual, the annual emissions, and again these are net emissions, are dropping over time like, and we've already set out to the end of Emissions Budget 3.
[00:04:25] So EB1, 72. 5 per year, EB2, 61 per year, EB3, 48 per year. And this is down from, I just looked earlier, our actual emissions as assessed by MFE for the 2021 year. for 77 megatons. Underneath this are the emissions reduction plans. So these are the plans for how we will achieve these budgets. We're coming to the end of the ERP1 period, and I think this is in accordance with the Climate Change Response Act, the, an ERP2 has to be released by no later than one year before the start of the period that the emissions reduction plan is for.
[00:05:07] So that's the end of 2024. So the document that's just come out is the discussion document on the consultation for what's proposed to be included in that emissions reduction plan 2. Which, to repeat myself, is the plan for how we will achieve the emissions budget 2. And these Emission Budget 1 plus Emission Budget 2 is sort of how we will achieve the domestic component of our nationally determined contribution, and they're not exactly the same thing, which is important, and I'll get to in a moment.
[00:05:35] Finally, if you're an ETS participant who has some forest, the numbers that you're probably mostly thinking about are the mandatory emissions reporting periods. These used to kind of be designed to line up with the Kyoto period boundaries, I think was the intention behind of it, and we, so the, the whole thing with the end of 2022, which many of you will be conscious of was an important date, was associated with the end of MERP3, and also important to note that we're currently in a short, MERP, which is colloquially called the Mini MIRP and that runs until the end of 2025, and the reason that that in short one has been introduced to try is to try and synchronize these sort of subsequent periods.
[00:06:12] It's possible that I haven't quite lined up the boundaries quite correctly here and the dates are a bit off, but EB3, ERP3, and MERP6 are all five years long. If that's not actually the case it's because when I was dragging these boxes around I got the alignment a little bit off. And then underneath all of this, two things.
[00:06:29] One is the, the international, what is it, UNFCCC and that's sort of the international group which underpins the International Panel on Climate Change, which is what developed the Paris Treaty, which we are a signatory to, and then we have the Climate Change Response Act, which is intended to get us to the UNFCCC.
[00:06:51] Net zero for long lived gasses by 2050 and a 24 to 47 percent reduction in methane. I think it's biogenic and waste sourced methane by 2050. So that's sort of the framework things, which all of this is directed towards trying to achieve. Reading the ERP2, you could be forgiven for thinking that the ER in it stands for everything.
[00:07:15] It is not just about forestry, it covers everything. Pretty much everything that there is that could contribute to New Zealand's emissions position, and also which might be impacted economically by actions that New Zealand takes to try and achieve its emissions goals. Most of the images throughout this presentation are direct screen captures from the ERP document, the discussion document.
[00:07:37] I've tried to note when they are and when they aren't. If it doesn't look like something that comes from the document, often it's our commentary. I make no concrete assurance over which or which, which is which. Please don't take me as speaking for the government on any of these topics. This is mostly our interpretation referencing their sources.
[00:07:53] At the very top level obviously, the current government has been sort of expressing their general policy objectives in terms of targets, and there is a target, Target 9, which is associated with these climate change mitigation activities. So it's to reduce net greenhouse gas emissions and it is the ninth of nine and it focuses on reducing net gas emissions to have us on track to meet our 2050 net zero climate change targets, which we have to do because, well, at least we have, the government has to do according to the current Climate Change Response Act, which is a law that you have to do this in New Zealand.
[00:08:26] And also to hit our emissions budgets for the next two years. Emissions budget periods being the one that we're in now, 2022 to 2025 of 290 megatons and the 305 megaton one from 2026 to 2030. So it remains government policy that we will try and hit that emissions budget. Here we get onto our budget versus our NDC.
[00:08:45] Our budget for the period covered by our NDC is 672 megatons, and that makes up a combination of our, our emissions budget two for the 2026 to 2030 period, our emissions budget one for the 2022 to 2025 period, and our actual emissions from 2020 which 2021 which we didn't have a budget for, but they're still included in the scope of the reporting.
[00:09:06] So that's 672 megatons, our nationally determined contribution, which is what we say we will achieve. Sort of the, the broader way, which includes New Zealand and whatever international collaboration it is involved with, is less than that, 571 megatons, meaning there's a 101 megaton gap between what our budget was and why we think we're going to get to.
[00:09:29] There are some additional policies in, I think it's in the ERP2 alone, which are expected to reduce the actual emissions versus our budgeted emissions to the tune of 9 megatons over, or 8 megatons over that period, but it still means that we've got a shortfall forecast under current policies of 93 million tonnes for the combination, for our NDC.
[00:09:54] And the way the NDCs work, at least in principle, is that to the extent that we don't achieve our NDC through national mitigation activities, we should partner internationally through various mechanisms to achieve the remaining. Mitigation activities that we were sort of missed by. So somehow we need to help someone else achieve 93 megatons worth of emissions reductions if we don't find a way to achieve some more of that ourselves.
[00:10:23] Often that help will come in the combination of both sort of perhaps some sort of technical support in various forms and partnerships, but usually dollars transferred as well. There have been a number of numbers thrown around I've seen estimates as high as 20 billion, I don't think those are particularly credible the range that I've got here, which is more in line with what I've seen sort of recently used, is at the 5 billion end, that's roughly the price of this mitigation within our current ETS, under current ETS price, a little bit higher, but sort of same ballpark.
[00:10:58] And it's also roughly the price that Switzerland, for example, who already has these partnerships in place for achieving international mitigations activity, has been paying for the sort of assignment of those mitigation outcomes to Switzerland, sort of 25 to 30 US dollars a ton. At the higher end of the spectrum, 12 billion dollars, that is the amount that we would have to pay At today's market price, if we bought 93 million tonnes worth of emissions, mitigations, or, units essentially, on the EU ETS.
[00:11:30] So, the EU has an emissions trading scheme, similar in many respects to New Zealand. One of the ways that New Zealand Rules, and I think the IPCC rules say that you can sort of achieve your NDC is by buying an equivalent quantity of emissions reductions that will lead to a reduction in overall emissions within another economy.
[00:11:47] So either way though, it's going to cost us a lot of money. You might ask why we're not budgeting to actually hit our commitment, like we're saying that our budget is to basically end up falling short by 93 million tons. So, our plan, our emissions reduction plan, and our emissions budget, the plan is what we do domestically to hit our budget.
[00:12:06] So we are aiming to come in within budget. But our NDC is what we, being the slightly broader we, we and whatever international collaborations we have in place, are looking to do internationally to hit our share. So, essentially, New Zealand's assessment is that doing our fair share, in terms of climate change mitigation, involves doing more than we can realistically do domestically over the first NDC period, which is, okay, sorry, I just repeated myself there.
[00:12:36] So you might think that this is great and like, yeah, go team, we're all one planet, etc, etc. It is, it is good that we are looking to be ambitious but it's not especially good that we are, you know, Coming in short domestically to the trend of 93 million tons because firstly it relies on these other countries actually doing more to the trend of 93 million tons and as sort of as you start to get sort of a bit closer to the Forgive the expression, but the coal face obviously we don't want a whole lot more coal But it's easy to be cynical about exactly what form Those international mitigation activities will take and just how credible they'll be.
[00:13:14] The government does have a policy that we will prioritise environmental integrity in any international project partnerships that we have. But when you look at some of the other ones that do exist internationally, I'd say that generally our domestic activity is of higher integrity than the average international mitigation activity at the moment.
[00:13:32] The other thing that it means for our economy is that there's going to be a whole lot of money flowing overseas like absent any other mechanisms that would be five billion dollars and that goes straight on to our current account deficit which is a lot of money for an economy the size of ours I think our our current account deficit is something on the order of I'm not actually sure I think it's around 30 billion dollars so it's it's a lot like You put, put that five billion in the context of what we earn annually from dairy exports if you want to get a sense of how much it means.
[00:14:00] Upshot of this is that we should be very actively trying to find ways to do more domestically for multiple different reasons. I would say that our current budgets are, I hesitate to say that they're insufficiently ambitious because it's not necessarily going to be trivial to hit them, but I think that we shouldn't be Doing the thing that it's trivial to do.
[00:14:16] We should be trying to find a way to be really ambitious and decarbonise really quickly. But obviously we need to align this with sort of the global, global level of ambition and make sure that we're not just sort of deliberately setting ourselves up for economic hardship. The government's commentary on this in the Emissions Reduction Plan was interesting.
[00:14:36] The, so, on top of current proposed policies, there's expected to still be this 93 megaton gap versus the 101 megatons that is versus the current budgets in the NDC. Key quote, the government is considering how to address this challenge and will make further announcements in due course. So one of those announcements could be we've procured 93 megatons of internationally transferable mitigation outcomes from these international partners.
[00:15:02] My great hope is that some of the announcements will be “We've found a way to increase our levels of emissions mitigation within the NDC1 period domestically, and we will need to secure less through our international partnerships.” Throughout the NDC document I'd say this is sort of like, you can see it's figure 1.3
[00:15:21] it was fairly early on, and I think it's a good summary of the general philosophy of The emissions or the, the budget attainment approach is a focus on net emissions rather than just gross emissions, although there are significant reductions in gross emissions anticipated and a focus on cost efficient mitigation.
[00:15:40] This is all pretty controversial. I generally think that it actually makes sense, but there's a lot of views that we should have a much stronger focus on reducing our gross emissions and that relying on carbon removals is risky, et cetera, et cetera. I generally think that as long as the removals are of high integrity and they're actually robust and you've got mechanisms to make sure that they're resilient and you don't kind of get your economy into a very difficult position where if your ability to create removals ran out you would sort of have a massive gross emissions profile that you couldn't reduce.
[00:16:13] I think it's a pretty good idea to take this approach like the thing that matters most from an atmospheric and climate perspective is the net position not the gross position. The example I keep using is that if we had a A machine with a solar panel on the top that spat out like thousands of tons worth of diamonds per hour that were made with atmospheric captured carbon then we should just, and it was free, then we should just turn it on and put a giant pile of diamonds somewhere and not worry so much about atmospheric CO2 concentration.
[00:16:42] The issue is that we don't have such a machine. We don't have anything even closely approximating such a machine. There is no way we realistically could or should look to scale carbon removals to the point that we don't care about gross emissions. So we're going to have to massively massively reduce our gross emissions by necessity to hit net zero.
[00:16:58] But that's not because carbon removals are bad. That's because carbon removals are scarce and expensive to scale. So usually it's cheaper to focus on gross emissions, at least in some contexts. But that is the whole point of the government's current policy. Cost efficient mitigation. Where it's cheaper to emit, reduce emissions, you do.
[00:17:16] Where it's cheaper to remove emissions, you do that instead. And the consequence is that you'll be doing both of them to a very large degree. I also, this was more just for fun than anything, and I'm not saying this is particularly representative, but Term frequency is always an interesting way to look at the, sort of, some of the philosophy behind how people are communicating things.
[00:17:36] So this is a simple phrase count across the ERP document. So the reason I included the top one is just so that you get a sense of calibration of roughly how often words occur, that aren't words like “if” or “the” in the whole document, so the word “climate” appears 281 times, which you'd expect for a document on achieving our climate change mitigation targets.
[00:17:57] The word, or the phrase “NZETS” appears 198 times, which is pretty consistent if you go through the document you will see that the words The ETS is heavily relied on as a mechanism for achieving the emissions budgets. “Market” appears 86 times. This is very much about market mechanisms to help achieve our emissions budgets and our emissions reduction goals.
[00:18:18] And this is where it's really interesting given a lot of the commentary around the ETS. “Confidence” 23 times. “Credible” 21 times. “Credible NZ ETS” specifically as a phrase 6 times. “Credible market” 9 times. And “market confidence” 3 times. So I think the document very much acknowledges some of the shakes to market confidence and ETS confidence over the last couple of years and there's at least a strongly expressed ambition to restore that confidence and I'll speak a little later over how that's going.
[00:18:48] As far as what's new, these are the policies that, key policies proposed for ERP2 and their associated projected abatement for both of the next two emissions budgets, so that's two and three, beyond what exists today. I haven't pulled any of these out particularly, although I think they're all interesting.
[00:19:03] None of them relate to forestry. You'll see agricultural mitigation technologies and emissions pricing in there. The key point there is that that's mitigation, so reductions, it's not about removals, those are covered separately. Activities that are possibly going to be, I think these were one, potential opportunities for improvement or possible policies, they're sort of a lower level of commitment.
[00:19:24] Here there is one, firstly there's a whole heap of stuff on additional agricultural emissions reductions and this is the first mention that Forestry gets in terms of a possible additional policy, which is that the, Government is looking at the afforestation potential for Crown land, so specifically 5, 000 hectares of indigenous in 2027, increasing to 7,500 hectares per year from 2028, and exotic, that's 10, 000 hectares, A year from 2027 onwards.
[00:19:53] This is, I probably won't get into the full detail of this given the time that we've got, but this is very interesting for the ETS because forestry on Crown land cannot currently be registered within the Emissions Trading Scheme, so this doesn't directly result in the government earning NZU's and being able to sell those, but it does count towards our NDC.
[00:20:12] It is recognised in our national carbon inventory, and it does potentially create removal units that the government could choose to use either to offset the emissions for a sector that's outside of the ETS, like agriculture, or to increase the sort of available auction budget within the ETS without messing with the overall unit balance and economics, like it would, it would still be consistent from a national budget perspective.
[00:20:36] I would say that the. The summary for forests within the document is basically preservation of the status quo and you can see the importance of forestry's contribution. So this is the projected reductions in second emissions for the second emission budget. It might look here like forestry is delivering 30 megatons of reductions across the period of removals.
[00:20:59] That's not actually the case. It's delivering 30 megatons of removal of net removals more than it delivered. over the 2018 to 2022 period on a net basis. I'd also just note, and I didn't realize this until putting the presentation together, this axis here is distorted. We, we are not, like the amount by which we're actually reducing is smaller than it looks.
[00:21:18] This starts here at 200. As you're glancing at the picture, do adjust for that. Looking at forestry's full contribution as projected and the growth in it, over the first emissions budget, which was the one that was sort of finishing up at the end of next year, net 5.9 megatons per year of removals.
[00:21:36] This is almost more than doubling in the second emissions budget period, and it's important to note that these are mostly trees that are already in the ground, and the shift is either because they're starting to grow more quickly and, or the rate of deforestation is dropping. There could be some changes in accounting mechanism in there, I haven't checked.
[00:21:53] And this is projected to steadily increase through the third emissions budget until finally by 2050. The projection is that we'll be, our forestry will be sequestering 21. 3 million tons of carbon dioxide equivalent per year. So I drew that down the bottom here as a big blob. This is actual zero to sort of give you some, some context of it versus our total emissions for the ERP2 budget.
[00:22:15] The amount of forestry removals projected for 2050 is almost a third of our total emissions across all sectors including agriculture today. So it's a very big part of the overall decarbonisation strategy. To enable this, we're going to need more forest than we have today. Here you have some projections from the ERP doc of how much more forest, and these are informed by two different surveys, which I think are run sort of, I think it's the University of Canterbury primarily who runs them, and they're sort of commissioned by, I think, Te Uru Rakau.
[00:22:45] This is the afforestation and deforestation intentions survey. So it's like, who's planning on cutting down on deforesting land? Who's planning on afforesting land? What's the net result of that change? In 2021, the estimate was that the balance would be 38, 000 hectares per year in favour of afforestation.
[00:23:06] By 2023, through a combination of the policy changes and sort of loss of confidence, etc, that net intention had dropped to 18, 000 hectares per year, so it had more than halved. The best I can see at the estimate that's used for the central projection forecast is about 28, 000 tonnes, sort of splitting the difference between those two.
[00:23:30] I would say that's probably optimistic under the current market conditions, mostly because if you do this, you end up with an oversupply of NZUs within the ETS, which will result in price collapse, which is what the Climate Change Commissioner and others have been talking about for a long time. And the prospective investors in these forests know this.
[00:23:50] They're not going to invest in an asset where they're concerned about the price dropping. They're going to find whatever the optimum is where the price is still high enough, based on scarcity of supply, that it's interesting for them to invest. And that's likely to be at less afforestation than is presented here.
[00:24:03] But, I mean, there's a lot of factors here. Don't take that as any sort of comprehensive statement on future forest planting activities. The government does say at a couple of points later on that they're looking at ways to increase that afforestation. This was the Comment from a press release from the NZ Institute of Forestry sort of generally praised the content of the ERP in terms of its sort of providing some level of clarity, did raise concerns about lack of clarity on what the restrictions could be on forestry eligibility for registration, specifically exotic forestry in the coming years, and particularly questioned the accuracy of the forecasted planted areas for 2024 and beyond.
[00:24:43] So I'll just read this out for those who are squinting at the screen. Our data suggests the actual planted areas are likely to be significantly lower than the government's projections. Specifically, we estimate the planted areas in 2024 will be approximately half of the forecasted figures, with a greater decline expected in 2025.
[00:25:02] If you look at this chart though, the 2024 expectation is around 61, 000 hectares. That's certainly, we are not hearing about anything remotely close to that, but 50 percent of that is around about what the 2025 projection is. So 30, 000 hectares and falling to 28. So it's not totally clear to me how big the gap is between forecast and actual intentions at the moment, but I would say that certainly the general market environment has shifted away from mass afforestation of non forest land.
[00:25:32] For better or worse. I've also mentioned this before, but one of the recurring themes is the gap in incentives. Basically, this, this gap down the bottom here, are those removals that will be needed to meet the net zero target, but are not incentivized through the ETS, and that's because The ETS doesn't cover this sector, so it's kind of a no brainer that they're not going to be incentivized by the ETS.
[00:25:54] They've sort of been deliberately excluded through the ETS design but if they're desired then they have to be created through some other mechanism, which could be the planting of trees on Crown land. So I'm now going to do a bit of a quick tour through the policies and an overview. I've highlighted the references to market confidence here, and I.
[00:26:12] I was kind of making fun of this earlier and, and now, but it's actually, I think, laudable and really good that the government is putting conscious effort into market confidence. It is very important. If we end up with a volatile ETS price and lack of willingness from investors to undertake activities within the ETS, that's extremely bad for pretty much everybody and is likely to just mean paralysis, lack of action, and then we miss our targets and we have to buy even more units from overseas.
[00:26:37] So higher or lower. Confidence around the price and stability of the price and predictability of the price is an extremely important thing and it's good that that's being prioritized. Hopefully that sort of follows through into the actual plan and the market really does regain confidence. Key points here, restore confidence in the ETS, give certainty to forestry, support continued investment in afforestation, but it also supports investment in decarbonization activities like you're much more likely to invest in an electric boiler or an electric furnace or electric heating.
[00:27:05] for listening. If you think that the future price of carbon is going to be stable and increasing, then if you think the whole thing is just going to fall over and everybody's going to give up and go home, in which case you can just continue with the status quo at no cost. As to the impact that this actually had, so the ERP2 plan was released, not sure if you guys can see my cursor, but hopefully, sort of late, late June was it late June?
[00:27:27] Early June? No, it was more recently, that was about the middle of July. The market didn't react much. There was sort of a brief increase of perhaps 10 percent or so. It's now, it's basically been trading within that range of 50 to 55 over the period, sort of a few weeks prior to, and a few weeks subsequent to the release of the ERP.
[00:27:47] You could argue that this was a failure of the discussion document to restore market confidence. But another way to look at it would be that the market is reasonably confident that things will remain as they currently are. And there's some frustration that that price isn't higher, certainly it's well below the targets that the Climate Change Commission has identified for sort of rapid, meaningful reductions in gross emissions.
[00:28:07] But it's, it's what the market and the way markets work is reasonably competent and the price will be for the near term future, having appropriately modified the price for the risks in both directions. I'd say a good thing is that the price didn't collapse again as it did sort of in the, was that early 2023?
[00:28:23] I think when I sort of dropped down to one point in the low 30s. A couple of key policies one is that there is the intention to limit exotic forest ETS registration through constraints. You can see the note here. The government expects to release more details on this work later in 2024. This was signalled in the National Party Policy in the election campaign, and I think the specifics were basically around limitations on the fraction of exotic registrations that could occur within a farm on land use classes within a certain band.
[00:28:56] So I can't remember the exact numbers. I think it was something like LUC5 or below. You couldn't have more than 25 percent of your LUC 5 or below forest within a farm registered in the ETS as exotic forest. It's not to say you couldn't necessarily plant it, though there are other restrictions on planting, but you couldn't register it.
[00:29:12] LUC 6 and above, I can't remember exactly where the threshold was, it might have been 5 and above. You know, fill your bids, you can register whatever you like. And for native forest, there was no restriction across any of the LUC classes. So that's working from memory. I may not have it exactly right.
[00:29:24] And that also may not be what the final actual legislation regulations restrictions are. But there's still a clear indication that it's moving in the direction of some restrictions. There was also this reference of, I mean, they didn't say this, but I couldn't resist the alliteration, so public private planting partnerships couple of points from that sort of summary, I'd encourage you to read the whole, whole section, but.
[00:29:49] Increased incentives for natives, improved diversity and exotics, which I think is actually an extremely important and admirable thing. A lot of the time when people complain about exotic forest, they're complaining about non-biodiverse exotic forest. If you can achieve biodiverse exotic forest, especially biodiverse forest with a native forest mix, then it sort of can be a way to split the difference between the benefits of natives and the benefits of exotics in a way that's actually economically viable and scalable.
[00:30:17] Crown land under afforestation, we mentioned before. And then at the end there's a note that the land that could be suitable is under assessment at the moment by MPI, LINZ and DOC, and that there will be some information released soon. I think. Non forestry removals were also given a mention.
[00:30:35] Interestingly, some of the non forestry removals are actually forestry removals, including the largest likely categories of. New activity in my view, aside from carbon capture and storage, which is an important one. So on farm vegetation, there remains a desire to recognise carbon removals in on farm vegetation, and specifically here, they're implicitly referring to on farm vegetation which can't be recognised under the existing ETS rules.
[00:31:02] There's a lot that can be recognised under the existing ETS rules, including some shelterbelts, it all comes down to geometry and tree species. Here they say the scientific data on how much carbon these types of vegetation can remove are uncertain. Overall, I would say that there's reasonable certainty that the riparian plantings, as they tend to exist today, won't remove a lot.
[00:31:23] And that's not necessarily because the trees don't sequester much carbon, but it's because the actual areas in question tend to be pretty small. I totally agree with recognition of the carbon removal in those areas of forest. I think that where they've been created, there should be credit given for them.
[00:31:36] They won't necessarily count towards our nationally determined commitments because of their geometry and our definition of forest, but it's still, if you're going to look at taxing farmers for their methane emissions it seems reasonable to recognise them and incentivise them for the carbon removals, regardless of the nature of those removals.
[00:31:53] I won't mention wetlands and peatlands, they're not something that we are significantly involved in or where I think I can add. much expertise likewise coastal vegetation, though we are involved in discussions around some mangroves but a key one that I think is really important and could create a lot of value very quickly is the recognition of ongoing carbon sequestration in forests that existed or were in the process of establishing prior to 1990.
[00:32:20] That could be through pest control, I think the more promising category is probably through changes in forest management other than pest control and particularly future harvest and management intentions. But either way, that's in there, it's part of the mix. My view is that that's probably where a lot of our progress towards that 93 megaton deficit is likely to come from.
[00:32:37] There are another sort of general key comments, which certainly would have helped with confidence for forestry and I think are generally good, like we want regulatory predictability. Two key things, no vintaging of NZUs, that might sound a little bit cryptic, but basically it means that if you get an NZU for some, carbon that your forest sequestered in 2022.
[00:32:57] It's not going to expire. You don't have to sell it. Nobody has to use it to to cancel out their emissions by 2027 or 2028. It's just a, you can use it in 2050 if you want to. At least that's the implication of this commitment. Also there was a commitment to no differential treatment of forestry NZUs in the ETS.
[00:33:14] You may recall the consultation which. I don't actually remember where it came out, the times, times moved oddly in the last decades, but I'm, I'm pretty sure this was the early 2023 one, which did lead to a price collapse, where there was a suggestion of potentially introducing a split market for forestry versus ETS obviously, Even talking about possibilities like that is very bad for forestry investor sentiment because they don't know what the future returns on their investment are going to be if they don't have a commitment from the market framework to treat it in a certain way.
[00:33:43] So this commitment from the government certainly helps in terms of investor confidence for forestry. And then there were a couple of other items here around just generally sending clear signals and generally retaining commitment to the existing purpose of the ETS and the role of the ETS in New Zealand's climate change strategy and the targets of New Zealand's climate change strategy.
[00:34:09] 10 minutes over, sorry. There was a lot to cover there and there's probably stuff that I've missed. I certainly encourage people to tell us things that they think are important, that they noticed, or flag questions. We'll get into questions in a moment to run through. We will also, are going to put together a submission in response somehow fit that in amongst everything else there is to do and we will share that once it's available.
[00:34:26] If you're particularly interested in getting a copy of that from us, or collaborating please do get in touch. Now on to the questions. So we had three come in. I will try and cover those. So first two, MPI seem very scrimpy on the calculations of hectares we have versus carbon crops. Could MPI possibly adjust their calculations to look more in line with what we are trying to achieve?
[00:34:50] I'm not totally sure of the core question there. It may be about the total of hectares going into forestry. I think the Projections are based on the latest data from the Forestry Intention Survey and seem to be aligned with what's being used for the National Inventory but I'm not totally sure. As for, there was a follow up question, does New Zealand make more from carbon credits than it does from exporting meat, i. e. trees versus stock?
[00:35:17]I wouldn't really say we make anything from carbon credits at the moment, it's sort of a domestic zero sum incentive market. I have looked though at the, I think the idea of New Zealand as a net exporter of high value carbon removals is a really interesting one, as I've said before.
[00:35:34] I don't think it would be as big as the red meat sector were we to become such, but it would be significant. It's going to be like a multi billion dollar export market, at least in principle, which is worth pursuing, in my view. A couple of questions also about the status of the proposed carbon lookup tables for hardwoods and poplars and proposals for management of permanent forests under the ETS.
[00:35:54] I don't have anything I can comment on there around the status of those tables. I think they've been communicated as still ongoing under consideration, but I'm not sure what the definitive status is. So the main intended message and request of carbon crop submission in order to ensure appropriate use of indigenous removals, I think the, The main message, I mean, it's sort of, we haven't written it yet, so I'll have to take this under under advisement, but in broad strokes, I think our position will be support of a net target versus a gross target, support of efforts to dramatically reduce gross emissions because we don't think that removals are going to be sufficient and support of appropriate land use.
[00:36:42] So we don't want to see high risk forestry propagating as it arguably has on inappropriate land classes in the past few years. We want to see appropriate forestry being used as a removal asset. And I guess certainly particular emphasis on permanent. Continuous canopy forestry but not to an absolute degree, like I think the timber industry is important it's a major export sector for New Zealand even rotational forestry, which is Clearfell, does do a very good job of sequestering carbon on average, and you wouldn't want to just like write it off and say that it shouldn't be included by any means.
[00:37:17] Okay oh and a final one there, what management changes do you think could happen to increase carbon sequestration in pre 1990 areas? Very briefly, but I will cover this in a lot more detail in a subsequent session. I think the two are either increased rotation length, which increased the average carbon stock, and the extreme version of increased rotation length is retirement of a pre 90 area from productive forestry, which means that its average is going to be close to its maximum over time.
[00:37:41] And that should be done, in my view, in combination with a plan to transition it to biodiverse and ultimately indigenous forest. A whole heap more to come there, I won't try and cover it all now. Alright where does the carbon the government sells and its auctions come from? Is it stolen from the carbon grown between 1990 and 2008?
[00:37:59] So, I can reasonably definitively say no, it's not. I'm sure there'll be lots of like, you know, it is a bit of a, people with pre 1990 forest, I think could reasonably feel fairly aggrieved about the liabilities that they have for harvest of that pre 1990, oh sorry, deforestation of that forest estate versus the amount of units that they were given as consideration, but in any event, the budgets, for the units available by auction in the ETS are based on the targets for the ETS and the emissions that occur inside the ETS and outside the ETS over a given period.
[00:38:31] So basically, while we are aiming towards net zero by 2050, we are not currently at net zero, nor are we aiming to be net zero by 2025 or 2030 or any of these emissions budget periods. And the extent to which we're not net zero, and we have net emissions. is covered by units supplied into the ETS that aren't backed by any removals.
[00:38:52] Some of these are sold through auction, some of them are made available through the allocations to the sort of industrial allocation is what it's usually called the Emissions Intensive Trade Exposed Sectors. They get free units to minimize their trade exposure and the risks of leakage. But it's important to note that those amounts are significantly reducing over the remainder of this decade.
[00:39:15] Like, the auctioned units will drop to a very small number, I think zero into 2030. How do I go about registering my new native planting areas? Easiest way, as I've said before, is basically get in touch and talk to us. As to whether it's worth registering it, there is definitely a cost benefit analysis to be done.
[00:39:30] The easiest way to look at that is the area you've got the yield that you can expect from it and the cost to register it. Especially in the case that you already are planning to plant the trees, because often the biggest cost is getting the trees in the ground, once you've got them in the ground, it's pretty simple to assess the economics of registering it, and it depends on your area.
[00:39:46] In general, I would say that with current cost structure, if you've got one hectare of native forest plantings, no, it's not worth your time to register them. If you have a lot more than that, it probably is worth your time to register them, and that's just based on the current yields, the current carbon prices, and the fixed cost of registration.
[00:40:01] Over and out. It's not actually 100 percent true, I'd say do the modelling, it's certainly less worthwhile than it is if you've got 20 hectares, or, well, 10 hectares actually, ironically there's a discontinuity around 10, but yeah, really, really, don't take my answer here as meaning anything at all go in and get in touch with us, we can help you model the opportunity, and then you can decide whether it's worth it for you, given your circumstance.
[00:40:25] What will or would strengthen ERP2 to increase appropriate indigenous sequestration on farm? That's a pretty big question. I think basically a higher carbon price generally helps incentivize indigenous sequestration on farm because it increases the returns for an on farm activity, but a more direct way to do it potentially is by direct incentives of some form for indigenous forestry restoration activities specifically, which is a way to avoid just sort of, yes, increasing carbon price increases returns from the sequestration.
[00:40:59] Native Forest, but it also disproportionately increases the opportunity cost of Native Forest versus Exotic Forest. So, you know, that that needs to be balanced in terms of the behavior that might result. Yeah, I think the items that we've already covered around Indigenous sequestration on time would help, but a key one for me actually is sort of a more flexible approach to the Eligibility of ongoing regenerating indigenous native forest, I'd say that's probably the biggest opportunity in New Zealand in terms of a sort of unrealized asset.
[00:41:30] And at the moment, the approach to registration of indigenous forest as 89, post 89 indigenous forest is fairly conservative with the result that a lot of our regenerating native forest is not eligible for incentives under the ETS, which puts it at various different risks. including, ironically, clearance and establishment in exotic forests.
[00:41:52] Okay, the government's emission reduction plan for agriculture seems to be focused on using new farming methods to reduce gasses and sequester carbon. With the exclusion of farming emissions from New Zealand ETS accounting, I understand that there will be excess NZU's available for other emitters.
[00:42:06] Resulting in suppressed NZU value. Can you foresee other factors which may rectify the supply or demand imbalance in the years ahead and create more competition for available NZUs? So I'd agree that there will be excess NZUs. Available versus if there was the entire ag sector suddenly appeared as demand within the ETS, but I don't think that was ever really expected to occur despite the fact that there was a legislative mechanism to allow it to occur.
[00:42:32] I think the assumption was always that there would be an alternative introduced and that remains the case. So the, the current NZ in the ETFs are those that were always expected to roughly be there, and that's resulting in the NZU price that will be there today, that we have today in the midterm. There is this forecast surplus of NZUs within the ETS, and I, that's where I think that the forecasts aren't sort of internally consistent.
[00:42:58] I think that the forestry sector is perfectly capable of analyzing that projected surplus and making investment decisions that will result in there not being a surplus to the extent that NZU's a critical part of the investment case because if, if, if there is really a surplus, it's likely to result in price collapse.
[00:43:14] If you're an investor and you're looking at a possible price collapse, you just won't invest, which means that there won't be a surplus, which means that the price won't collapse and you'll end up with some sort of price discovery function. as we see all over the place. In terms of additional supply and demand or imbalances, like the biggest one that I think is a really interesting opportunity for New Zealand is to turn carbon removals into a high value export sector.
[00:43:36] I think that, I think I've said before, this whole problem of, you know, A surplus of carbon removals is very much a domestic problem. It's not an international problem that everybody's going, Oh no, what can we do with all of these high quality carbon removals that's sloshing around the place? Usually companies, countries have the opposite problem, which is we can't remotely achieve our climate change mitigation targets.
[00:43:59] We don't have enough removals. I think we should view our carbon removal and forestry surplus in a similar way to how we view our dairy sector or our forestry surplus. Like, it's not a surplus, it's an export opportunity, and there's a lot to be unpacked there, but I think it's important work to happen, and it could be a valuable thing for the future.
[00:44:20] Why the ETS review option did not consider placing restrictions on the future planting of exotic forests beyond specific limits? I would say Or on certain types of land, i. e. less marginal interesting point, I'm not sure, I mean, the proposal of restricting the registration fraction is sort of an alternative way of doing this, but I suspect that it would still lead to potentially a very large amount of forest.
[00:44:42] I'm not sure why there isn't a hard limit. I think there's probably a whole bunch of considerations in having a hard limit, like who gets that quota how do you allocate it fairly, how do you ensure that those who are just sort of the furthest along and the most capable of capturing it don't just take it all to the detriment of everybody else I can see a lot of flaws in it, but yeah, it's an interesting possibility.
[00:45:03] Okay, cynical question, my favorite kind, if we fall out of line with the agreed emissions reduction targets outlined in our trade agreements. Do you see it as being likely that our trading partners will actually enforce sanctions? I don't actually know. I think the successive governments have rightly placed a very high priority on us.
[00:45:24] retaining our credibility as a partner that sticks to its obligations under international treaties. We have obligations under international treaties and in the case of the EU, I know that this is a factor in our, the free trade agreement there. I think it definitely would have consequences. I, I don't think that anybody wants to encourage an international environment where you just go, ah, we decided we couldn't be bothered abiding by our treaty obligations.
[00:45:51] And so, like, exactly what form the sanctions might have, I don't know, but I don't think that they would be trivial, and I think it's right for us to treat our obligations as being very serious and things that we should stick to.
[00:46:06] What steps will the government be taking to allow existing forest owners to add to existing forests in ecologically sensible chunks contiguous with existing forest versus the blanket rule of one hectare at a time? I'm not sure what steps they will be taking. I do know that it is something that we are actively advocating for.
[00:46:21] It's interesting to note that this is one area where the treatment under the ETS of forestry is different to the treatment under the ETS. of the forestry for our national inventory and our nationally determined commitments. So they both have the basic rules of one hectare minimum size 30 metres average width 30 percent canopy cover, but the way those geometries can be combined and extended are quite different to the detriment of forest owners who have progressively regenerating native forests from the boundaries, and I think the ETS rules should be changed.
[00:46:55] If the government follows through with its proposed plans regarding forestry's role in the ETS, looking into your crystal ball, can you pick a couple of winners and losers, industries, economic sectors, regions, etc. for us come 2030? Ah, not with any reliability my crystal ball is murky at best, but I would say that the most likely losers probably those sectors that where there was a prospective technology provider to a sector that was, wanted to do a certain class of intervention, but that intervention was only going to work and be viable at a carbon price above 100 or 150 or whatever it happens to be.
[00:47:32] There certainly are some of those, and I think that in the absence of a higher carbon price, they'll struggle to make the business case work, which means that they'll miss out on grants, and miss out on revenue opportunities, and you can certainly expect to hear them complaining a lot about it. I think there's a risk that it will lead to Sort of general caution around investment in decarbonisation technologies, if there's sort of a view that emissions may be very cheap in the future, but you can sort of see how the market's reacting at the moment.
[00:48:04] 50 a tonne is still not cheap by international standards. It's certainly a lot below the EU, but it's a lot above a lot of other countries. And I think it does help with things like The sort of marginal business case for an electric vehicle versus a petrol powered vehicle. Like a $50 carbon price is not enough to just make it a slam dunk in favour of electric at the moment, but electric is already winning the battle in my view as is solar, and that carbon price certainly helps with that.
[00:48:32] I guess people looking at doing Forestry removal projects will also be winners under this program compared to a counterexample where basically the forestry carbon might not have got any recognition at all. I don't think that was ever really on the cards given how central forest carbon removals are to achieving our overall targets.
[00:48:49] But the mechanism might have changed. But in that case, I think it's not just the forest carbon removal developers who, when it's actually the country in general, because as you saw earlier, if we don't achieve a very large level of forestry carbon removals, then we're going to be sending an enormous amount of money overseas, probably to other, perhaps lower integrity, forest carbon removal projects.
[00:49:09] And so we should do them domestically, in my view, where possible, and where sort of ecologically viable and aligned with other sort of environmental considerations. I don't just want like blanket monoculture everywhere. Is the ETS going to be a long term sustainable solution to bring down our emissions?
[00:49:26] Here I have a very clear and strong opinion which is Yes, to the extent that we allow it to be we shouldn't expect the ETS to do anything about our emissions in sectors that aren't part of the ETS, nor should we expect the ETS to incentivise activity for emissions that aren't part of that same ETS.
[00:49:43] But it's pretty obvious, given the way the ETS works, that if you set a cap within the ETS that was negative, then reasonably quickly, you're requiring all of the associated sectors to go negative, and to the extent that they don't, the carbon price will become very high, right? And they will. So I think the ETS works very well, and that much of the criticism it has is actually not criticism of the fundamental structure of the ETS, but rather criticism of a couple of the dials and where they've been set within the ETS.
[00:50:11] It's behaving in exactly the way I'd expect it to behave. How can I become a Vetted Offset Project? That's a question that sort of prompts a lot of other questions. If you want to be a If the question is how do I get registered with the ETS, come and talk to us. If the question is how do I generate carbon units that will be accepted by the ICBCM and will be purchased by entities in New Zealand that are looking to voluntarily offset their emissions, or entities internationally, then it's a much broader topic.
[00:50:40] It is one that we are working on with a number of partners, but it's not something where we can give any further certainty at the moment. And is it worth pursuing carbon credits on small lifestyle blocks? I'd basically come back to my earlier comment on you have to run the numbers for your specific case and decide if it's worth it, not in general, but to you.
[00:50:57] But we do have a lot of smaller lifestyle blocks who are registered in ETS and who are pretty happy to get a couple of thousand dollars every year out of it. How often are NZUs credited to my account? Good to be wrapping up or near to with an easy one. Annually, so once, once per year, you are allowed to file an emissions return.
[00:51:16] There are a couple of changes which also force you to file them outside of that cycle, but in general, every year from January to June, you can file a return, some years you have to, and the result of that return is credits in your account within about 20 days. Carbon credits for sequestration and timber buildings.
[00:51:31] It's a little bit outside our normal area of work. But I have been looking at it a little recently, and it's an interesting one. Under our national inventory, as best I can tell, we actually already make allowances for the carbon that is stored. After the harvest of a forest and the durable wood products that may result from that forest and it's based around the assessed half lives of the carbon storage and each of those products.
[00:51:57] So all of our National Inventory Accounting works on a global warming potential equivalent assessed over 100 years, I think some forms of timber are assessed as having a half life of one year. Some are assessed as having a half life of around 50 years, and that half life of the timber product is what determines how much sort of, how much creating a product out of timber has a positive benefit for New Zealand's net carbon position.
[00:52:23] Which makes sense to me, I think that's the way it should work. What's interesting is that none of this flows through into any incentive mechanism or timber. The value of carbon stored in timber versus the value of particularly engineered timber, which is going to have sort of the average longer life is pretty small, but I think it's something that's worth considering.
[00:52:42] And if we can create sort of robust incentives that mean that people are more likely to use timber in buildings, where it's appropriate to use economically and from an emissions perspective, then that's a good thing. Rumours coming out of Parliament. I wish I knew if I did have any that were secret then it wouldn't be something that I could really share on a webinar, but yeah, I don't have anything particularly exciting to share in that vein.
[00:53:07] And I think that's everything, which is also one minute before the end of question time. So thanks very much to everybody for your interest and your attendance. And yeah, enjoy the rest of your Tuesday. We'll be back in touch in another month or so. Cheers.
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