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CarbonCurious Transcript: What's happening in the carbon market - key developments and changes to watch

CarbonCrop co-founder, CEO & CTO, Nick Butcher, dives into the New Zealand Carbon markets in this CarbonCurious session. So, if you're looking for a carbon market update to get to grips with what's been happening, and what to keep an eye on in the coming months make sure to check out the video or transcript.



Recent ETS auctions have faced hurdles and the secondary market price has fluctuated on the back of government announcements, continue reading below (or watch the video) to understand the state of the New Zealand carbon market as of June 2024.


 

CARBONCURIOUS TRANSCRIPT - JUNE 2024


All right, that's 12.32. I'll get started.


Thanks for joining today. So you're flying solo just with me presenting this afternoon and I'm going to be going through a bunch of the recent developments in the carbon markets, generally some of the background behind them and some of the implications. My name is Nick Butcher. I'm the co-founder and currently CEO and CTO of CarbonCop.


Yes, usual story, there's a Q&A function supported within the Zoom meeting tool. If you've got any questions that come up over the course of the presentation, please throw them in there, and we'll try and answer them either as, as we go or at the end.


And there's a whole heap of questions that we got submitted in advance. Hopefully we'll have a bit more time for that than we usually do because there are a lot of them. Okay So some of the things that have been happening recently in the carbon markets. We're going to run through some of the content and scope of the most recent ETS review, the recent ETS auction outcomes He Waka Eke Noa developments the ETS reserve price methodology and the implications there, and some of the CCC (Climate Change Commission) recommendations around option unit supply and price control settings.


And then finally, a happy announcement on the forestry ETS fees, at least for one financial year. A lot of this ties together. And a lot of it relates very closely to many of the questions we were asked around where we see the carbon price going and what the future of carbon markets might be. Usual upfront qualifier, this is all just our opinion, in large part my opinion.


We don't have any special insight or special access to information around what's going to happen with the carbon price. It could go up, down, sideways. It is highly sensitive to regulation. Everything we say here is just our perspective. Be very careful trading on any of this information or making a decision around registration or not on the basis of this information because it's in the end it's a regulated market and you're somewhat subject to how it develops.


So the ETS reviews, starting with that, there were sort of two reviews in one. One of them was around a number of general changes to ETS regulations. We didn't go through this in a great deal of detail because most of it was outside our domain expertise. There were things around the emissions factor multipliers for geothermal power plants, for example, which we don't really know anything in particular about or have an opinion on.


I would say that for the most part it seemed to be technical adjustments that would slightly reduce the Allocations or costs for certain activities, and so the implication here on forestry would mostly be through changes in the units available to emitters under certain industrial allocations or the demand from emitters based on their assessed emissions through their activities.


So a lot of it seemed fairly small changes and not something that we expected to. Impact the overall dynamics of the ETS as a whole. And it also seemed mostly reasonable, as best as we could tell without deep domain expertise. Where we did have some more specific opinions and made a submission was regarding the updates to New Zealand's Emissions Trading Scheme limits and price control settings.


There are a couple of key elements here. One of these was a proposal to reduce the allocation of units through the auction to increase the rate at which the surplus of units within the ETS was reduced. I'll cover that in some more detail later, but we thought that was an extremely good idea.


Another was a proposal to reduce the auction allocation of units to account for the impact of the, Emissions reductions activities funded through the Green Investment Fund, which is basically the allocation of some of the past auction proceeds from the ETS. For an example, the government funded a bunch of the work anticipated with NZ Steel to reduce the emissions associated with NZ Steel's steel smelting.


That's a really good idea. I have my views on whether it was a good idea or not a good idea, but it will result in reduced emissions. That reduction in emissions will result in a reduction of demand at the margin within the ETS. If you don't actually reduce the number of units available in the ETS, then the way the ETS cap and trade functions is that that Those units will just result in demand elsewhere within the ETS at the price point that the market finds, and you won't actually reduce emissions at all, you'll just move them around.


So the proposal from MFE (Ministry for the Environment) was to actually reduce the volume of units really auctioned out or made available within the ETS cap to mean that those project investments did actually reduce overall emissions. Net result of which is a reduction in the entitlement to emit within the ETS, which again, we think is a good idea.


And there were, there were a couple of other smaller details around accounting specifics, and then finally, part that we thought was a very bad idea, which was not so much the suggestion, but the suggestion of the possibility of reducing the cost trigger thresholds within the ETS. This is what was negatively interpreted by the market, essentially, is our view, and a fairly widely held view within the market, as a, a potential lack of seriousness on behalf of the government in terms of their commitment to the ETS as an emissions control mechanism.


For a concrete example of how that could have worked, and the proposal didn't have any numbers in place, but the reason that the most recent ETS auction failed is in part because there was an auction floor price of $64. So the, it is not possible to submit a bid at a price lower than $64. That meant that no units were sold and that reduces the supply of units available in the ETS at values less than $64.


If that price were lowered, then it would mean that the effective cost to emit was reduced and there will be more emissions within the ETS total available volume potentially. We thought that was a very bad idea so did many others who are interested in decarbonisation and we submitted to that effect.


This will not impact unit cost thresholds this year. I think the earliest date at which they might be impacted is next year. Okay auction update. So, those of you who are watching this closely will already be aware of the March auction, partially cleared, and that was viewed very negatively by the market, as it essentially means that there wasn't sufficient demand above the 64 price floor to consume even all of the base units available in the auction, let alone anything close to the cost containment reserve, which is up in the sort of high hundreds of dollars. At the time, the market interpretation was that the auction floor price was likely to become a cost ceiling price in the secondary market for the ETS over the remainder of the year. That, I mean, the price is heavily sentiment driven, so it's unsurprising, but that has been true over the three months since the March auction.


At no point has the price come particularly close to that $64 floor, and in the June auction, which was Wednesday last week, The auction failed to have any qualifying bids, and it might seem that that is sort of a, an extreme vote of no confidence by the market and the auction, but it's actually quite binary.


You can't make a bid at less than the auction floor price, which is a public price, and it's $64. The secondary market price last week was sort of around the $50 mark. It's not very surprising that nobody was willing to bid to buy units from the government for $64 when you can buy the same thing on the secondary market for 50. Looking ahead to the next auction in September, we have no idea whether the price is going to recover, certainly the floor price that will apply for that auction is still $64, there's nothing that's likely to change that between now and then within the what the legislation permits, and based on the current sentiment, the auction will fail as well.


What's interesting is that the government has reasonably clearly indicated that it is looking to restore confidence to the market and it is looking to receive revenue from those auctions. There's obviously a fair way to go. They need to get a significant pool of bidders prepared to pay at least $64. They definitely don't have them at the moment, but that'll be sort of what's interesting to watch the developments, especially in terms of policy communications over the next three months and what that, what that sort of results in.


And a key A key deliverable from the government, which I think is coming out in early July, is the updated Emissions Reductions Plan. So this is essentially how the government proposes to achieve the goals of New Zealand's climate change response. Part of this is the role that they expect the ETS to play within that response, and part of that will be the cost that they expect to have associated with emissions through the ETS, which will drive the response. Basically, if, if the ETS price is very low, there's not much of a commercial incentive to reduce emissions at the margin. If the ETS price is high, then people are more likely to reduce emissions. So there has to be an assumption around the ETS price in the emissions reduction plan.


Another update sort of confirmed at field days a couple of weeks ago, was that He Waka Eke Noa is essentially being disestablished. I'm not sure if that was exactly the term that was used. A bit of background on He Waka Eke Noa. It's been running a very, very long time. It or its predecessor started in around 2008, and it was intended as an alternative to the inclusion of agriculture within the Emissions Trading Scheme.


So, historically and currently, agriculture does not face any surrender obligations under the ETS in association with its emissions. The way the legislation was drafted, it was going to become a captured by the ETS from January 1st, 2025, unless an alternative was put in place. So there's actually two updates being made here.


The first is that He Waka Eke Noa or its outputs will not be the alternative that's being put in place. And the second thing is that the, I think specifically it was an alternative framework to put a price on agricultural emissions that was required. And the second thing is that legislation is being changed to exempt agriculture from the ETS even in the absence of an alternative emissions pricing mechanism.

One of the things that the government has announced is a sort of A new activity to help support agricultural emissions reductions is this group focused on the biogenic methane and interventions to reduce biogenic methane emissions. There's some funding being allocated to that. It's sort of too early to say concretely what the results there might be.


One comment that was made around all of this is that this is becoming very much a market led activity. very much. We certainly are seeing some really positive action at early stages from the market players, sort of on the, the processing and supply chain side around emissions reductions. But I think it'll be fair to say that these aren't yet at the scale, which they will like as they are today, achieve the emissions reduction targets within the sector that are aspired to by the Climate Change Response Act.


They, they will have to grow significantly. Our view remains that. Most likely in the long term, compliance markets are probably needed to achieve the necessary emissions reductions. It's a pretty big ask on the sector to voluntarily undertake all of these activities that would be necessary to achieve sufficient emissions reductions, unless there's an incentive framework in place to enable them to do so, and to sort of motivate them to do so. And all of this has had a sort of an ongoing impact on the unit price. So this is the sort of relatively recent unit trading volume from the emsTradePoint trade platform. If I have a look now, I think the price is still roughly consistent with us. So sort of around $52 is the spot price today on the, on the market.


If you want to kind of trace the timeline of changes over this period, I think that the This drop, now I'm guessing, this drop in sort of mid March was the failure of the first auction and I think the negative market response to the consultation around potentially reducing the auction price corridor led to this drop in sort of mid-May, which is now mostly recovered but I mean there's still clearly a lack of confidence within the market generally and that's what led to the most recent auction not clearing.


Okay, now getting into some of the details, like why is there this lack of confidence within the market, what is it that everybody's so concerned about, why is there the simultaneously the Climate Change Commissioner saying that we need the ETS price to sort of get to 100, 150, 200 dollars to achieve the necessary decarbonisation, yet the actual price within the ETS is around 50 dollars.


It's really two things, hardly surprising to anybody with a basic understanding of markets and economics is that there's anticipated to be a supply, demand and balance that results in price, price suppression, specifically there's a forecast increase in supply through forestry primarily and a forecast drop in demand primarily through ongoing emissions reduction activities, which is a good thing, but we do want emissions to be reduced.


That's, that's part of the purpose of the ETS. So I, it's been a long time since I actually have looked at this graph myself, I had a bit of trouble finding one, I ended up making the graph myself from data that MFE provide, and that's Ministry for Environment (MFE), so you can, you can find the source data for this from the URL there I am not saying, taking any position on the numbers themselves, and the credibility of them, I'm just saying what, MFE's forecasts are for New Zealand's greenhouse gas emissions trajectory over the next sort of 26 odd years to 2050.


A bit of explanation about this graph. So there's a, it's a stacked area graph, basically the lowest number here, the sort of blue line down the bottom. is the projections for the land use sector, which is, it's not strictly forest, but it's pretty much forest when you look at the carbon fluxes in the New Zealand context.

This number here is how much carbon the land use activities are expected to sequester per year. It's the main thing within New Zealand's emission budget, which is going to give a negative number, like it's removing carbon from the atmosphere. Everything else is stacked on top of that, so you can sort of eyeballing it here, saying that in 2020 the The energy sector excluding transport was about 20 megatons of annual emissions.


Transport sector was, again, that's pretty rough, 15 ish, it looks like. Industrial processes around five and waste around five. And then stacked on top of all of that, we've got what looks like about another, call it 40 megatons of emissions associated with agriculture. So roughly half of our total emissions, a little more.

And this is like, I mean, those numbers there are a little rough. Probably should have pulled exact values, but that's roughly what New Zealand's overall emissions footprint is. Only half of this is actually covered by the New Zealand's ETS, roughly, because everything that's agriculture associated, aside from a little bit of CO2, which is so, sorry, this is, this is all gases presented on a hundred year global warming potential equivalent basis, which is the basis on which New Zealand has to report internationally, and, and I think is a pretty good scheme.


Thank you. The. The majority of the agricultural stuff is nitrous oxide and methane, and it is not captured by the ETS, which means that the ETS cap is more in line with the top of this little blue line here. And so you can see that the, according to these forecasts, activities within the ETS, as they are today, are expected to end up in negative emissions by 2038.


At least that's how I interpret the numbers and I'm pretty sure it's correct. Again, this is actually a really good thing. We want to get to a carbon negative state. Ideally, we'd have this entire graph go below zero and ideally sooner rather than later, like the climate's already on a very bad trajectory.


We want lower numbers, not continued high numbers. But the issue is that as long as agriculture is outside the ETS, it's not, this essentially means that according to these forecasts, come 2038, there will be more forestry removals available than there is demand for emissions mitigation within, sorry, for rights to emit within the NZ ETS overall.


And that's before you consider any potential industrial allocations or auctioned units or similar. Looking at this a little bit more closely again using MFE data. This is from the forecasts accompanying the recent consultation. This is the forestry removal assumptions out to 2050. I've got a little dialogue on it.


So basically there's grey is the, I think, surrenders expected to be associated with forest harvest, you can see that around 2024 there's expected to be more surrenders than there are removals, which means that people are cutting down the trees and having to give back the carbon under the ETS rules, which is very relevant to anybody on this call who's got a forest and they're considering cutting it down, you need to be very conscious of your possible obligations. But you can see there's sort of, so sort of two lines here the forecast removals that have a potential harvest liability associated with them, and the forecast removals, the sort of fainter blue line, which is those forests that are expected not to have a harvest liability. And so what this chart says is essentially that the working assumption is that in the, into the sort of mid 25 million tons of removals per year that are not going to be held back from the market because they're anticipated to be associated with future harvest.


This is under a scenario of MFEs where they're anticipating 40, 000 hectares per year of planting, most of that radiated. And this leads to, over time, a change in the ETS stockpile. So the stockpile of units is essentially the number of units that are available within the ETS. Each of these are the right to emit.


And there's an estimate of the amount of those which is liquid, which is to say people could use them and sell them to someone looking to emit, versus the illiquid stockpile, which is, for example, units that are being held back by an emitter as hedging against the future, or units that are being held back by a forestry participant to allow for the fact that they plan to harvest the forest in the future and they don't want to sell the units.


And what you see from this chart is that we've got a significant stockpile at the moment, It's expected to be reduced over the next five years through activities which are, among other things, a reduction in the auctioned units to deliberately reduce the stockpile of units. And then it's expected to almost be in deficit through to about 2035, at which point it starts to grow more.


Continuously and you can obviously predict this into the future and it's going to become a very big number as all of these forestry removals come online and in one perspective, this might be good news for the environment because there's an awful lot of carbon being removed without a market and so it doesn't even match the surrender obligations.


Other possible perspectives, though, are that decarbonisation incentives will drop until this, these removals have a buyout, which means that you'd have to massively increase your gross emissions or that there's various different possibilities. But my take on it, well, sorry, I'll run through the CCC's activities first.

So. The stockpile, the CCC, as part of the recent consultations, this is the Climate Change Commission, which provides independent advice on these topics to government. They've increased their assessed size of the stockpile, so this is what they previously thought it was, this is what they think it is now 160.8 million units in total, so that's the right to emit 160.8 million tonnes of CO2 equivalent. And of that, They anticipate that 58 megatons of it is likely to be held back to meet future anticipated forest harvest liabilities. 28.3 megatons of it is being held by participants looking to hedge their future position.


I'm not really sure to what extent I agree that that qualifies as a non surplus because they're hedging against a future anticipated emission obligation. They do intend to use it at some point or to sell it. 6. 6 million tons of P90 units held long term. I see that as really just being an addition of people hedging against possible forest harvest liability.


I'm not sure why there's this distinction. But then finally, there's 68 million tons of surplus estimates. So that's, privately held units within the ETS registration base that could be used to meet emissions obligations. And to give you a sense of how big that is, that's roughly two years worth of emissions within the ETS.

So there's a lot of surplus in there. That's what, assuming that there were no units auctioned and no units made available through another mechanism. So this is actually a bad thing, this surplus. It means that there could end up being significantly more emissions than are anticipated within the ETS, which means that we'll miss our emissions reductions targets and it's bad for the climate.

To help address this, the CCC are proposing that the government reduce the number of units made available through auction over the next five years or so through to 2030, and they're proposing pretty substantial reductions. So the dark blue lines are what is currently proposed. going to be auctioned at least in principle every year, whether it is or isn't auctioned, depends on whether the market buys it.


Like, even though there's 14.2 million tonnes available in 2024, it could well be that the final sales are only the sort of million and a half or whatever it was that was sold in the first auction, might have been low two millions. But the total available over the coming years is being proposed to be cut by less than by more than 50 percent in most of those years.


And if you look over on the right hand side, you can see the sort of the rationale behind this in terms of surplus reduction. So we've got the, the auction volumes is dark blue, the industrial free allocation is orange. And then you want to, like, you need to get up to this blue line, which is the total surrender of, like, the emissions cap within the ETS, so the, the issued units needs to be less than that cap if you want to be within the cap for rough rough numbers.


What you can see in this curve is that there's a big gap between the issued units being the, the auction volumes plus the industrial free allocation to actually get to the cap on emissions, and that gap will be met by units from the surplus, and that will result in a reduction of the surplus. So by these numbers, you can see that the, I think this stuff was from CCC.


That they're proposing a change in the unit allocations that will result in aggregate reductions in the surplus of, I haven't actually run the numbers, but eyeballing it there, it's about 50 million tons over the next five years. And before we were just looking, their estimate of current surplus again is currently 68 million tonnes, so it still wouldn't get rid of the whole surplus.


My take on the whole thing is that I'm a little bit confused by some of the positions being taken by various entities, so I'll walk through why. I could be wrong of course, but it doesn't seem to me like the expectation is that the market will function like a market, and it is a market, so that's a bit odd.


The CCC's concerns that they've summarised are that we're going to have too many removals from the forestry sector, and that as a result of that, that's going to suppress the carbon price. I mean, that part makes sense. If you do have a large amount of supply, then at the margin, it will reduce the price in the market.

That will reduce the incentive for forestry. Certainly, we are seeing that to some degree at the moment, like there's some reluctance around forestry investment because people are concerned about what the future of the ETS might be. Like, there's also a lot of people who are still confident and investing a lot, but there is some uncertainty.


Where I find it strange is that they conclude that this will mean that we don't have enough removals in the future. Like, to me, that doesn't make sense in terms of how markets work. So, walking through it again, a large volume of forestry removals might suppress the price. If that happens, it's not a bad thing for New Zealand's climate change targets because we're still going to get to net zero because in terms of the Paris Agreement and any rational net emissions assessment framework, forestry removals neutralise emissions.


So, if we have a very large volume of forestry removals, then we achieve net zero, it just might be that we don't significantly reduce our gross emissions and we might also not give a particularly good commercial return to forests, potentially, but from a, from a climate impact perspective, it's still not a bad thing, assuming that the forestry removals are durable. Their concern though, is that there won't be enough of those removals because the incentives for forestry were suppressed. by the unit surplus, which leads to a reduction in the price. And as a result of that, the net removals will reduce, or they'll go negative. But if that, if that were to happen, then the price will start to rise again, because there'll be fewer removals to go around.


The emitters will have to pay a higher price to get the units that are available. The result of that will increase the incentives for reforestation, and you'll find a natural balance. And, like, this is not just, Hypothetical. This is the way that the ETS is already working today. This is the way that the ETS is supposed to work.


And it seems to me that at least the CCC are somewhat conflating their desire for gross emissions reductions, which they have clearly indicated that it's a very high priority that we reduce gross emissions, with their concerns around our net emissions targets. And I, my view is that there's a bit of a gap here.


There is definitely a possibility that New Zealand produces more carbon removals than it needs, especially while we keep agriculture outside the ETS, so agriculture sort of doesn't have to cover its emissions, that means there's less demand. I don't really see, short of kind of total market failure and incoherent market behaviour, that this will lead to us failing to achieve our emissions reduction targets.


Like for me that's a question of the ETS cap and the exceptions to that cap and what sort of gets a pass and isn't charged for its emissions. I've got another take on this, which is pretty early. Count yourself privileged or unfortunate, depending on how coherent this is. To hear about it first, but there's an opportunity here and it's summarised as follows, like what we can see from these charts is that like, we think that there is a possibility and by we I mean certainly including this MFE and the Climate Change Commission, but there is a possibility that the New Zealand primary sector will be so good at removing carbon that it will lead to a surplus of carbon removals in New Zealand, exempting agriculture again as I've said before that changes the number quite a bit.


This isn't. shouldn't be a particularly surprising thing. We're also extremely good at creating a big surplus of meat and wool and dairy and other primary sector activities. And a sort of concrete example of this I've been inviting people to consider is imagine what our dairy sector would look like if it was only allowed to serve the domestic market, because that's essentially what we're saying about our forest carbon removal sector is we're going to end up with a surplus of forest carbon removals because you're not allowed to sell those forest carbon removals outside New Zealand.


You have to find buyers for them within the New Zealand market. Now, this potential oversupply of carbon removals is very much a local problem, like, there are few countries in the world which are going, oh no, it's going to be a disaster, I hope we don't accidentally remove too much carbon from the atmosphere, like, stop what we're doing.


Usually the problem is the opposite, they're like, We're going massively in the wrong direction. How can we accelerate the rate of carbon removals? We desperately need to reduce the atmospheric CO2 concentration. How can we scale this up? So the global problem is a lack of I think I missed a word there.

A massive lack of carbon removals is the global forecast. So, It's pretty easy to run the numbers on this and say that we should be exploring forest carbon removals as an export opportunity for New Zealand, the same way as we export a whole bunch of other primary sector products. It's just this one's a little bit odd because it's somewhat more intangible.


You don't export it overseas, yet there are already many, many frameworks which are being utilised internationally for trade in carbon reduction and carbon removal activities. And it should be noted that this was actually one of the possible proposals that was introduced in the ETS review that was sort of started last year and led to a whole bunch of market uncertainty.


I'm not saying that the way it was proposed to be undertaken in that review was a good idea, or there was sort of Full ETS coupling but I think at least allowing New Zealand forest growers access to the international carbon market where they are interested in doing so as an idea worth exploring. Caveat to all of this, we don't want that to lead to unconstrained afforestation of the wrong kinds of forest across the country. I get that. nervous, as do many people probably every time I drive through, for example, the Mackenzie country and see wilding pines beginning to crop up all over the place again.


And even planted forests, you don't necessarily want them everywhere. So we still need controls in place. We still need to make sure that we get the right kind of forests in the place that we want them. But interestingly, that's also what many international buyers want. And to sort of run some very rough numbers on, is this something that's worth looking into from like a New Zealand Inc.


perspective and a New Zealand private sector opportunity perspective. If we had a million hectares of forest, which isn't a lot in terms of the land that's talking about being retired, or it's less than what MFE are anticipating being planted in connection with that scenario. I mentioned they're talking about 40, 000 hectares a year for sort of 26 years.


And it was removing 20 tons per hectare per year, which would be at the extreme low end of exotic forest and sort of around the high end of what you could get if you had sort of plantation densities of some native forests. And a hundred dollars a ton, which is sort of the mid to high range, but there are international buyers buying carbon in this range.


Then you get a two billion dollar per annum export. opportunity. And we still get domestically to keep all of the forest co benefits and, depending on how you manage it, the revenue from the timber. To put that in context, that's within the same ballpark as New Zealand's seafood export sector. So this is not just a little sideshow business.


This is a big commercial opportunity if we chose to pursue it. All right, and finally, finishing with a little bit of good news although I think that New Zealand becoming a, an exporter of high integrity carbon removals would be a really good thing. The forestry ETS fees have been waived for the 2024 financial year.


So, just to refresh on what those are, for those of you who've, like, happily forgotten about them, this was, I think it's 32.25 plus just a moment, 32.25. It was legislated last year and basically that would apply per year per hectare to forest registered within the ETS regardless of the status of that forest is regenerating or steady stationed.


We strongly oppose this. The fees are not symmetrically applied in our view, or rather they are symmetrically applied, which significantly disadvantages indigenous forest regeneration activities in particular, which isn't sensible from policy perspective in our view. And also the fees are just, in general terms, high in an absolute perspective.


Like it's, it's a lot of money to be paying for what they were deemed to be associated with. The industry response generally was extremely negative. There was a legal challenge and that led to an ongoing review. In connection with that, there's been an announcement that the fees are now cancelled and will not be invoiced for the July 2023 to June 2024 period.


No announcement yet as to what happens for the upcoming financial year and into the future. The review is ongoing and there will be some further feedback at some point. Question came in on what is holding back this carbon export opportunity right now. There's I'll mention the most obvious thing and it depends on the market that you need to access, but it's if you want to be able to export carbon and have that carbon export be recognised by both parties under the Paris Agreements, then you need to have associated with the carbon an internationally transferable mitigation outcome.


Those need to be issued by government and respected by government and there's not currently any mechanism in New Zealand that I'm aware of you. For those to be issued in connection with New Zealand forest whether or not they're required in connection with certain voluntary claims is a bit of an open question, but the general position is that it's conservatism of claims.


requires, for example, an international voluntary buyer of New Zealand carbon removals, would not be able to say that they have neutralised their emissions on the basis of those removals. They would instead have to say something along the lines of, has contributed to a project that results in the reduction of emission removals in the host country, for example.


Okay, into questions, and as I mentioned, we do have a huge number of questions, and we do have a bit of time to get through them. That's the end of the sort of body of the presentation. If you do have to dash off, I know it's now half an hour. They always seem to go longer than I expect them. Feel free to leave now, I won't take offence.


But we are recording this, I think, and it'll be up later if you do want to go a full listen through.


Okay I will first go from one that's come in live otherwise I forget to look back at them. So, we've seen the coalition government say one thing and do completely the other in relation to climate so far. It has been puzzling to see Simon Watts reference 2040 through scrutiny this week. Do I expect the coalition government's second emissions reduction plan due in December to buck this trend and materially restore market confidence?


So as I understand it, The draft of that second ERP is actually due out in July.


I could have that wrong, but I'm pretty sure that's the case. So, we'll see very shortly some of the direction that they're signalling. I actually somewhat do expect it to buck the trend, yes, exact, at least in terms of their ambition, like, I, I won't speak to the coalition partners necessarily my view is that National still does take climate change seriously, and climate change mitigation seriously, and they are in principle concerned about New Zealand's progress towards emissions reductions.


I will be interested to see, like, they've obviously also undertaken a number of programs which might, at least in the short term that progress.


And the question is what are they going to substitute it with?

Clearly the market is not confident at the moment, otherwise you'd be seeing much higher prices.The forecast in terms of NZ ETS option revenues suggest that the government thinks that those options will clear in the future.


So the big question for me is how are you going to achieve this?

I think if, if the ETS price is very low it will be difficult to motivate industry and sort of commerce generally to adopt emissions reduction incentives except where they happen to be cost effective anyway.


Something that's a real positive in my view is that we're quite quickly getting to the point that I mean, you know, a lot of people will differ with me on this, but I think that electric vehicles are going to become the most cost effective solution for transport, irrespective of the price on CO2 in the coming years, where we're getting quite close to that point already, and the forecast is that it will sort of tip over the line sometime in the second half of this decade.


When you look at the amount of our energy sort of sector that's associated with transport emissions, like, granted, this isn't just light EVs, trucks and everything, a whole different story, they'll take longer, but you, we may get some emissions reductions anyway, and perhaps the government is relying on that to an extent and another sort of success story, which is going to apply even to New Zealand with the gloomy winters that we have, it's, for anybody living in Christchurch, it's a pretty grey day here again today.


Solar PV is rapidly becoming the most cost effective electricity generation technology globally. I don't think we are going to particularly need a carbon price to drive emissions productions within our generating sector, but it certainly helps and it accelerates the change which is extremely important. I would love to see the government enable forest carbon exports. I think it is a great example of something which New Zealand can do really well. There's a lot of international interest here and it's not just because we're good at growing forests, it's also because we're, as a country, have high integrity, there's good rule of law, we can generally be trusted to keep the commitments that we make in the international framework and all of that helps with the strength of the carbon removal claims on the international market and therefore their value.


Whether that happens in the short term or not, I'm not sure. So I don't know in a nutshell. I expect it to be better than what the current market sentiment is though, because the current sentiment is pretty negative. Ties in with this, what's the long term looking like, what is predicted for carbon prices, where do I see the market going, what do I think the price of NZU's will be in two or five years time, what's future like, this is clearly a topic on everybody's mind. To a large degree, it's asking me to gaze into one of these things, which I don't even have, but so everything I say so far and say in the future is, very much speculation I say this on most, most of these sessions, but if I knew, I'd be making a lot of money on the ETS secondary market, and I'm not quite aside from the potential conflict of interest there it's going up and down exactly where it goes in the future, not sure.


Our general prediction is that it will increase. Because we think that it needs to increase for New Zealand's climate change targets to be met and general commitment that's somewhat bipartisan seems to be for those to still be met. But exactly how that happens and what changes might be associated with the market to achieve that, not really sure.


What I've shared with you today is the best, best indication I can give. On the voluntary carbon market, I would say there is progress here. Some of it is likely not very visible to those outside the primary sector, because most of it is being driven, at least within New Zealand, through collaboration between the supply chain partners.


So farmers who are able to remove carbon, and processors and downstream brands who are interested in reducing the emissions associated with their supply chain. It would be great if New Zealand were more able to participate generally, or New Zealand projects were more able to participate in the international voluntary carbon market, because that would increase the pool of available buyers, and I, I won't go through a full summary of everything that would be necessary to enable that to happen.


It doesn't necessarily require the government to make these corresponding adjustments and internationally transferable mitigation outcomes available, but that's an example of something that would help a lot.


Plowing on into that. Why didn't they set up the ETS so it could not be subject to political interference?


It's a good question and I understand the motivation behind it. I think you could ask the same of literally any bit of legislation. I would say that to a large degree they have tried to do that and have been somewhat successful in that the Climate Change Response Act was deliberately drafted as a bit of legislation that had bipartisan support to the extent that that support has been increased or withdrawn has been a change in the position of the parties and their advocacy around it.


But in addition, the, there was the Climate Change Commission established, which is supposed to be independent. Apolitical, bipartisan and it is making recommendations which are in a certain direction, so that it's up for the governments of the day to decide how much they change their position versus their past position, how much they do or don't listen to expert guidance from deliberately independent commissions.


I would say, as I said before, I'm still reasonably optimistic about the current government's, at least the sort of more centrist elements of it, attitude to the future of ETS, and I look forward to seeing what comes out in the Emissions Reduction Plan. But there does need to be some stronger signalling of commitment to emissions mitigation than there is today.


I think I've just answered this question as well, what's the outlook on evolution of government policies?


I've said as much as I really can say or know there.


This is a good one. Given that for now agriculture will not be entering the ETS, how will this affect demand for NZU's going forward? Should auction volumes be reduced accordingly?


The expectation was always that agriculture would not enter the ETS. I would say the main thing that's changed is that the substitute isn't yet clear. There, there hasn't been something presented that's an alternative for agriculture. So the, the current emissions cap within the ETS, anticipated agriculture not being within the ETS, and the current auction volumes anticipated agriculture not being in the ETS.

So the confirmation of its exclusion doesn't require a change. Almost quite the opposite. Had it been included, then the allocations would have had to increase enormously.


So here's two together.

Do we see the government changing the rules regarding forestry in the ETS? What's the future of exotics in the ETS?


Oh, I'll answer the first one. Yes, I do, primarily because that has been the norm over the past decade or so, is that there are regular refinements to the rules around the ETS and forestry within the ETS. The real question is how big they might be. The government signalled in the lead up to the election Intended changes at least around exotic forests, particularly radiata on certain classes of sort of high productivity farmland.


It's been relatively quiet on that, but I still sort of half expect that to be implemented. There are broader changes than that, I'm not sure. The future of exotics and the ETS, this is an open question I think one of the most chilling things for the market that was associated with a consultation from the government released early last year, so the previous government, which is one of the things that was sort of terminated by the current government in their ETS review, was the suggestion that existing forestry that was already registered in their ETS, and potentially even existing units issued to that forestry, might be relegated to some sort of independent market that couldn't access the dominant ETS.


I think that would be an absolutely terrible idea. in terms of maintenance of market confidence and future willingness to invest. If you provide a framework which encourages a long term investment within a certain demographic, I think it's potentially reasonable to change the rules around future access to that framework and, for example, say, look, we think we've got enough for us now these incentives are no longer accessible.


If you take the access to the incentives away, to the people who've already got forest in the ground and have already registered under the rules of your scheme. Good luck getting them to participate in any future scheme you come up with. I think it would be yeah, extremely damaging for them to do so.


And even more so for them to reclassify certain carbon removal unit types within the ETS. Like, you're basically telling potential speculative traders in the market, or, like, market participants hedging that, that they can't trust your market rules. and that they should be extremely cautious and wary of any market participation in the future, which I don't think is helpful.


This is always an interesting one. Do we see the government allowing native established forests in the scheme? And tied into the second one what credit is given for existing native forests?


So yes, I do see the government allowing native forests in the scheme because they already do. The question is always is around whether that forest was established.


It was deemed to have been established prior to or after 1990 and I mean there's a A whole bunch of rules and complexity around exactly what qualifies as post 89 forest, but there's a rough number. If your regenerating native forest was already regenerating in 31st of December 1989, then it's not allowed in the current ETS scheme, and obviously it's not allowed to be recognised with carbon removals.

Otherwise it can be.


And so on to the second one. NZUs are issued for regenerating native forest within the ETS if it was established after 1989, and it is still growing and it is registered in the ETS. It does not need to be covenanted. And the presence or absence of a covenant has no real impact on the carbon units awarded within the compliance market within the voluntary market including the sort of pseudo voluntary market which trades and NZUs it can be a positive thing because it improves sort of the, the brand value associated with those removal units, but it's not essential.


Interested in a, so we had a couple of questions like this actually, quite a bit of interest in sort of general forecasting. The, the best guidance I can give on this is that if you're interested in registering your forest or in assessing the potential yield from your forest, just get in touch with us.


Like, we've built a whole complicated software stack to help answer these questions and the team are happy to help. The, the details of what you might be eligible for and what the yield might be is extremely case specific, so that's why I can't give a generic answer, but I can show a couple of examples.


So here I've been considering converting pasture into native. Endless reviews are major deterrents. Fair enough to some extent, like there is reason to be cautious here, but there's also, there's downsides to lack of participation. I would say that there's, there has been reason for caution over the last, probably 10, 12, 14 years since the ETS was introduced, but in many cases it's those who engaged who realise most of the benefits, and I'd, I don't expect there to be massive downsides to engagement in the future, a little bit of a different question maybe if you were looking at financing from your own pocket the establishment of a new forest only for the persons with carbon, there, there you're taking slightly higher risks, and it's why it's worth looking at working with partner entities to, who understand the risks very well, to potentially co finance the forest with you.


But as for a rational way to calculate ETS returns for natives over a 50 year period I, here's a quick preview of our tooling, which we've shown sometimes before. Here, for example, is a 14 hectare of indigenous forest that's anticipated as being established on the 1st of January 2025. You can see there's actually already some existing regeneration on this site, so it's probably worth registering now.


But here's what the yield looks like. So we're talking about 14 hectares. And here we assume that in the long term, the carbon price for forestry stabilises around 100 New Zealand dollars a tonne, which is sort of the low, below the low range of the Climate Change Commission's forecast, but it's also twice what the price is today, so there's not nothing.


That forest would be generating on the order of a thousand dollars per hectare per year. In time. Obviously, you have to discount this from a net present value perspective and there's a whole heap of complexity, but this will depend on your site, the existing vegetation on the site, the history of the site, and that's why it's, it's really a very complicated question and the best thing I can really recommend is get in touch with us contact information's on our website and we can help you work through the, the scenario for your property.


That's an interesting one.


Are Tupu Ake able to make it?


FMA measurements of remote indigenous forest areas from aerial imagery. FMA, I understand in this context, probably means Field Measurement Approach. And so this is the measurements that you are obligated to make if you are a registrant with more than 100 hectares of forest registered in the ETS.


To my knowledge, MPI and Tupu Ake are not able to make any FMA measurements of forest, indigenous or otherwise. remotely from Area Elementary. They do extensively use Area Elementary, as does everybody else within the space. We've got a lot of this in our platform readily available for assessing the eligibility of forest registration and, and the potential liability for forest, for forest loss.


But that's a different thing to the field measurement approach, which is like a, I mean, there's, there's ongoing research in this space around the world of we do a lot of work with how do you estimate carbon stocks and carbon removals through remote sensing data, but I'm not aware of anything that's implemented within, anywhere within Te Uru Rakau and sort of in a production form for FMA measurement.


Another good question around general eligibility, how do you get areas of your farm that you are leaving to regrow back into native bush into the ETS?


I won't speak to whether there's a better way to earn money off this land, like, there's, there's all sorts of ways you can get revenue out of your property.


Some of them are compatible with the ETS, like honey growing, for example, or timber under certain regimes. But if you were just looking to leave some of the farm to regrow into native bush, the Way to get into the ETS is to register it. The way to assess whether you can register it into the ETS is to either learn the rules yourselves or more likely talk to somebody with expertise in the domain like you.

If you've got a forestry consultant already, have a chat to them. If you don't and you're looking for some more information or an alternative get in touch with us and we can help.


Can I sell directly to a company and would there be an advantage or not?


So I'm assuming that this is most likely in the context of the ETS and sale of NZU's.


So the, the two usual ways you can sell NZU's, or there's actually three ways you can use NZU's. One, which is the third one, I'll forget if I don't mention it now, is you use them yourself. There's nothing to stop you being a company which both has surrender obligations within the ETS and also has forestry holdings within the ETS, but there aren't many companies with surrender obligations on the ETS, and if you don't know if you are one, then it's safe to assume you aren't, because if you were and you didn't know about it, you'd be getting in a lot of trouble.


So usually, the way that you sell units if you earn them as a forest owner, you need to sell them who's got an emissions obligation to someone who has an emissions obligation, and you do that through a secondary market platform like emsTradpoint, or Jarden, or Carbon Match, or, or something along those lines.

That's where most of the volume occurs Although I shouldn't say most of the volume, I should say most of the trades, because there is an alternative where there can be very large volume trades, which is basically long term off take agreements, which can be negotiated outside of the market between, for example, a major forestry company and a major energy generation company, who knows that they're going to need a million tons a year for each of the next five years, and they can negotiate terms up front and agree the price.


If you're a small forestry operator. Essentially, none of those groups will want to have anything to do with you because the overheads in terms of the negotiation and the security and like, Terms, etc. are quite significant, and it's not really worth their while unless it's a large volume of carbon. Sometimes you can find an entity that's willing to trade with you directly.


There's nothing to stop you asking. It's just you'll often be told, no thanks, we've already got buying arrangements in place. Which means that the, the simplest way to trade, and you'll still get reasonably good terms, is just through the standard trading platforms.


Okay, this was a, an interesting question as well.


So the government's $65 limit base. So I think it's actually $64 at the moment. It doesn't mean that the government will top up any shortfall in sales. It means that the government is making units available to the market through an auction mechanism. It will not sell those units below the auction floor price.


So if the floor price is $64 and the market only thinks those units are worth $49, then the government just won't sell any units. And the result of that is that overall there's less units available within the ETS And that will start to drive up the price. So over time, the price at which units are available should converge with the price that they're actually traded for in the market.


But remember, the government isn't the only way that units become available. If somebody built a carbon machine that you could plug into the electric grid and it sucked carbon out of the air and turned it into, I don't know, blocks of diamond at the cost of 10 per ton, you'd expect the carbon price to drop to 10 per ton and stay there.


Oh, or actually possibly go massively negative because they could sell the diamonds, but anyway.


Wow, that's a, that's a big question.


Are we 2050 ready at all?

I would say no, disastrously no. We are miles off track. Not necessarily in terms of the ETS, as I mentioned before, like the ETS under our current target I think is actually likely to get us to where we need to, and the question is whether it does so in the way people would like.


I think the bigger issue is our overall progress in climate change mitigation and especially climate change resilience, given the apparent pace of climate change, is wildly insufficient. Like, we should be being a lot more ambitious and looking to move a lot more quickly than we are. Our current outlook for 2050 I think globally is pretty bleak.


And we need to be a hell of a lot more ambitious than we are. The only upside I'd say is that there are some bright points that I don't think people sufficiently acknowledge, which is the rate of progress in solar and the rate of progress in batteries. Some of these aren't included in forecasts and there's a really interesting chart which is basically how fast solar has improved over the last decade.


Or two decades compared to what the International Energy Agency, for example, was forecasting through the 2010s. Basically the forecasts were like that, and the actual progress was like that. So that technology can bring upsides, but I'd say relying on that would be wildly complacent. And a final comment on this, it's worth remembering that the climate is already very bad today.


Like, it's not like we're in a, we're in a good state and we just need to try and stop it getting too much worse by 2030. We already have a number of massive problems that are pretty obviously the consequence of climate change, and it's only getting worse, so we need to turn it around fast rather than sort of just gradually get to 2050.


How do I sell my credits?

Simplest answer is, log on to one of the platforms, emsTradepoint is one that we work with quite a bit because they have a relatively simple sign up process.


emsTradepoint, Jarden, CarbonMatch, they're all secondary market operators that will allow you to sell your units. But if you're a customer of ours, please get in touch with us and we'll help you through the process. This is kind of a big question. I won't get into it in all the detail because I can't give a comprehensive answer just in a short call, but I'd say you can do simple forecasting with the tooling that we make available and that can answer some of these questions for you. The small scale, I would say that being a very small scale carbon farmer is not generally economical.


The ETS won't allow you to register your forest unless there's at least a hectare of it, and whether or not you choose to register at that scale you have to have a reasonably close look at the future returns because they can be pretty unattractive after you consider the fixed cost.


And then there's a couple of more technical questions here.


I think I may have actually answered this one in the past, but I won't go into the details of a response to these. Anything that's highly technical, we really need to model it for you and then give you the answers. So if you're in this situation, get in touch with us. I do, however, so stand down period is an interesting general one, which there's been some rule changes recently.


You don't have a stand down period while the slash and stumps rot. You can register it before that stand down period expires. You just won't get carbon for the area as long as the, the total carbon change in a given year is assessed as being negative. And it takes 10 years for that to stop being the case.


So the, basically, if you cut down trees, it assumes that they use roughly half of the carbon immediately. and the remaining half in 5 percent per year over the next 10 years. This is rough numbers. There is a second rule that's been introduced though around second rotation forestry and its ability to be registered in the ETS under the new averaging category.


And I think the stand down period there to be allowed to re register as first rotation forest, so as though the land wasn't previous forested, is 14 years. after the forest was last harvested. So a very long time. I should note there's a different rule if the forest was harvested before I think 2020 or somewhere around that point where it's only four years.


And I unfortunately think we're going to have to leave it there. I'll answer this one last question and then I'll call it a stop because it's already 1.30.


We have some exotic hardwoods which will reach the end of the sequestration period soon. even though I expect them to keep growing a lot longer.There is considerable naturally established Indigenous understory, and I wonder if there is a process to transition to Indigenous permanent forest and continue generating credits. I actually think I may have answered this question before, and it's possibly one that slipped into the slides, but a couple of answers.


Firstly there has been a consultation out from MPI around possible changes to the exotic forest default tables, which are the thing that in your case is about to get to the end of their period. That is looking at being extended because I think it's currently 35 years and everyone's conscious that trees grow for longer than that, especially some exotic hardwoods.


The, however, yes, you could in principle. transition to the indigenous understory, it's just not necessarily going to be worth your while doing so depending on the implications for the overall change in carbon flux. So we would have to model this and my sort of intuitive response is that it's probably not going to be worth it and you'd be better off continuing to be recognised under the exotic category.


That's it for today, thanks everybody for joining and for listening and for all of the really interesting questions, and I look forward to being in touch next time, by which point we should be able to see the government's updated emissions response plan and see what it includes. Alright, cheers all.

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