Carbon Comment – June 2023

November 2021
Page 1
June 2023
Following the publication of New Zealand’s first emissions reduction plan in 2022, the New Zealand
Government has now released a discussion document seeking public feedback on four potential options for
the future of NZ’s Emissions Trading Scheme (ETS), alongside the status quo. There was a second discussion
document released relating to the permanent forest category in the ETS. The Government’s discussion
documents outline perceived concerns regarding the oversupply of New Zealand Units (NZUs) derived from
forests, the dominance of pine tree planting, the long-term instability of the NZU price if the ETS is left
untouched, and the need for continued efforts beyond 2050 to align with international goals.
[Source: Ministry for the Environment: Review of the New Zealand Emissions Trading Scheme. June 2023] Click here.
This consultation adds to the uncertainty created in the primary and secondary ETS markets following the
Government not accepting the Climate Change Commission’s budget and price setting advice for the 2023-
2025 years. The Commission’s latest advice on New Zealand’s second emissions reduction plan including the
2026-2030 emissions budget doubles down on its previous advice and reflects tighter changes to settings
and budgets to make up for the 2023-2025 years.
Government Proposed Four Options
to Evolve New Zealand’s Emissions
Trading Scheme

Page 2
Forest Planting and NZU Oversupply?
The discussion documents acknowledge the risk
of forest-removal NZUs creating an oversupply
and potentially causing a decline in NZU prices.
It explains how different prices could be needed
to force gross emissions down and another price
to incentivise removals by forestry. Option three
could potentially be used as a transition towards
option four, which involves differential pricing for
NZUs with forest-removal NZUs outside the ETS.
However, its forecast does not appear to include a
decline in forest planting as NZU prices decrease
and therefore it fails to address the potential
consequences of falling NZU prices on future forest
planting.
If you believe the optimistic assumptions on falling
gross emissions, New Zealand has potentially
already planted enough forests to reach its goals
by 2035. However, additional forest planting is
necessary to achieve net-zero emissions by 2050.
Beyond 2050, sustained efforts are required to
align with international standards, as limiting
global temperature increases to below +1.5 or
+2.0 degrees Celsius will necessitate countries
becoming net-negative emitters.
The discussion document is silent on the
issue of grandparenting existing forests and
offtake agreements within the current ETS.
This lack of clarity raises concerns about how
these aspects will be addressed and regulated
in future ETS arrangements. We expect any
changes implemented would likely include
“grandparenting”, as retrospective changes are
infrequent in governmental policies, but there is
potential that removals by forestry will not be able
to be used after 2024.
We expect there will be minimal trees planted
until the uncertainty is resolved which isn’t good
for encouraging emissions removals and will
potentially require a higher carbon price in the
future to suppress New Zealand’s gross emissions.
Climate Change Focus and the Political
Decision
In the discussion document, the Government
emphasised that a higher emissions price is critical
to decarbonisation and meeting New Zealand’s
climate goals. The four options discussed consider
different ways to encourage emission reductions,
alongside the existing ETS offsetting mechanism,
to attempt to have the greatest long-term chance
of climate change mitigation. However, the
challenge is the options that may utilise both levers
optimally are also more complex and will take time
to engage on and design to ensure the additions
are fit for purpose.
What was clear on the public zoom meeting held
on the 27th of June was the outcome of this
current consultation will not be communicated
prior to the election and it will be over to the
new Government to determine the outcome and
next steps. If the Government choses to move
to the more complex options 3 or 4 which will
require “multiyear implementation”, how much
uncertainty associated price suppression are they
prepared to allow in the meantime and what are
the consequences of the lower price in meeting
New Zealand’s Paris Agreement commitments?
Some commentators believed that New Zealand
was already on track to miss its Paris commitments
for the 2020 to 2030 period by over 100m tonnes
of emissions. At a nominal $50 per tonne to make
good on our commitment equates to a cost to the
taxpayer of $5.0 billion.

Implications for NZU Prices
Our research indicates that, on average, an NZU
price of over $40 would be required to generate
appropriate rate of return (IRR) on a new radiata
pine forest that was planted under a framing
timber regime and harvested at 27 years. The
economic implications of creating uncertainty in a
market that requires long term investment horizons

Page 3
Disclaimer: The information in this publication has been prepared from sources believed to be reliable and accurate at the time of preparation but Salt Investment
Funds Limited, its officers, directors, agents, and employees make no representation or warranty as to the accuracy, completeness, or currency of any of the information
contained within, and disclaim any liability for loss which may be incurred by any person relying on this publication. All analysis, opinions and views reflect a judgment at
the date of publication and are subject to change without notice. This publication is provided for general information purposes only. The information in this publication
should not be regarded as personalised advice and does not take into account an individual investor’s financial situation or goals. An individual investor should, before
making any investment decisions, seek professional advice. Past performance is not a reliable indicator of future performance and no representation or warranty, express
or implied, is made regarding future performance. Salt Investment Funds Limited is the issuer of units in the Carbon Fund and a Product Disclosure Statement can be
found at www.carbonfund.co.nz
SALT INVESTMENT FUNDS LIMITED
Level 3, The Imperial Buildings, 44 Queen Street | PO Box 106-587,
Auckland 1143 P: +64 9 967 7276 | E: info@carbonfund.co.nz |
www.carbonfund.co.nz
will be clearly demonstrated as investment in new
forests stops due to dwindling returns. We are also
hearing of offtake agreement negotiations being
put on hold and we would expect the lawyers for
emitters will be dusting off the existing offtake
agreements looking for ways to get out of them
(force majeure). All of this will have a significant
negative impact on further forestry planting. There
is major damage being done to the investment
profile of New Zealand forestry at a time when
it was already struggling with low log prices, the
impacts of climate change, and surging costs.
The failure of the first two NZU auctions in 2023
shows how the NZU market moved to fix the
Government’s decision to ignore the Climate
Change Commission advice to reduce the amount
of NZUs it was selling into the auctions. There will
be no pressure on emitters to buy in the auctions
for the next two years as they will likely to be able
to source and surrender forestry-removal NZUs at
a discounted price. Consequently, there is now
a high probability that the September 2023 and
December 2023 auctions will also not see any NZUs
sold by the Government resulting in a reduction
of 17.9m tonnes of NZUs that were forecast to be
available in 2023.
Conclusion
The New Zealand Government’s discussion
document presents four potential options for
the future of the ETS. While it highlights certain
concerns, such as oversupply and the dominance
of pine tree planting, it lacks detailed forecasts and
clarity on crucial aspects such as grandparenting
and offtake agreements.
To meet New Zealand’s NDC and emission reduction
goals to mitigate climate change, we need a much
higher carbon price than $40 to incentivise gross
emissions reductions and encourage removals by
forestry, and we need to plan for continued efforts
beyond 2050 to align with international targets.
The current slump in the NZU price due to the
uncertainty created by the release of vague review
options that will be decided by someone, sometime
in the future, will see the forestry industry react by
not planting more trees, and the pressure come off
emitters to reduce their gross emissions.
Industry commentators expect the market to
increasingly price forest-removal NZUs (“NZU_
FA” and “NZU_FE”) at a discount to other types
of NZUs. The manager of the Carbon Fund has
moved to protect the interests of unit holders
from this potential price dislocation and the Fund
no longer holds any forest-removal NZUs having
switched entirely into other NZUs. However,
the Manager is investigating opportunities this
potential dislocation of NZU pricing may present
for the Fund.
The final decision and its impact on climate change
mitigation efforts will ultimately be a political
one but it needs to be a priority for the next
Government.