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Cooper Aitken Seminar 30 June 2010 Morrinsville. NZ Forest Carbon and the Carbon Markets. The NZ Emission Trading Scheme Fact or Fiction. Wayne King, Director Carbon Market Solutions Ltd Auckland. Outline Introduction Global Carbon Markets NZ Emission Trading Scheme (ETS)

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NZ Forest Carbon and the Carbon Markets


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    1. Cooper Aitken Seminar 30 June 2010 Morrinsville NZ Forest Carbon and the Carbon Markets The NZ Emission Trading Scheme Fact or Fiction Wayne King, Director Carbon Market Solutions Ltd Auckland

    2. Outline • Introduction • Global Carbon Markets • NZ Emission Trading Scheme (ETS) • Forestry and the ETS • Agriculture and the ETS • Opportunities and Risks • The Future of the Carbon Markets

    3. CMS is a New Zealand advisory & brokerage company with a successful track record in carrying out carbon deals domestically and internationally 2005–2007: Sale of up to 1 .0 million ERU from NZ projects to European buyers under the former JI policy scheme, Projects to Reduce Emissions. Wind Farm and LFG 2009 – Largest forestry carbon credit sale in the World, 530,000, Ernslaw One to European Govt buyer 2010- Aggregated sale of NZ forest carbon to European Buyer 2010- Second large scale sale of 500,000 AAU from Ernslaw One to European Govt buyer 2010 – 2nd large aggregated sale (200,000) of NZ forest carbon to European buyer 2010 – 1st carbon deal with a NZ processor for NZU under ETS.

    4. World Carbon Transactions Source: World Bank

    5. World Carbon Prices for 2008-2009 Source: World Bank

    6. How is a carbon credit valued? • The carbon markets are based upon RISK, the less the risk, the better the price which in turn affects demand and supply • There are all types of risks in a carbon market, such as: financial risk, policy risk, project risks, etc • A buyer will take all these into consideration when they look at a possible carbon sale. • Two of the most common buyer questions we get is: Who owns the carbon and how much do you have • The onus is on the owner to ensure that all risks are minimised and/or mitigated

    7. Why all the confusing Acronyms? Acronyms are used widely in the UN and under the Kyoto Protocol Mainly relates to type of units (AAU, NZU, ERU, CER, etc) and where they are sourced (wind farm, landfill, forestry) The key is to understand that each type of carbon unit is valued differently and is assigned an amount of risk by prospective buyers

    8. What about international carbon markets are they interested in NZ forest carbon? Simple answer – yes, with increasing interest. Only very small number of buyers at present, one or two in Europe and same possible number in Japan. Primary issues relate to: price for AAU’s, lack of understanding around NZ forests, risks, and ETS uncertainties

    9. The New Zealand Emission Trading Scheme 2008-2012 • Developed since 2002 when Govt signed to the Kyoto Protocol • Labour Govt took a “hard line” where polluter paid 100% of their own emissions • ETS enacted in Oct 2008, Labour lost the election • National won the election, kept the ETS but modified it by: • “softening” the polluter pays principle by reducing by 50% all emissions from emitting sectors, and giving free allocations up to 90% to trade exposed industries • Forming a transition period from 2010-2012 where emitters are protected from the volatility of a carbon price, where after that period emission reductions can be made at 1.3% annually.

    10. The New Zealand Emission Trading Scheme 2008-2012 Supply: 1. Approx 4 million NZU available annually from forest owners 2008-2012 2. Free allocations to trade exposed emitters upon entry on 1st July 2010 of up to 90% of annual liability, total is uncertain but can be up to 5 million annually, cannot be sold offshore Demand: NZ trade exposed emitters from 1 July 2010 – approx 10% of original volume = approx 2 million Other emitters liability in region of approx 5 million

    11. Is the ETS actually running? Feb 2009 – allocation of approx 700,000 NZU to forest owners, with approx, 90% transacted, of which 75% went offshore, 8% sold in NZ, balance held in accounts. Jan/Feb 2010 – allocation of approx 2 million NZU. Approx 80% sold or available to be sold. March 2010- Govt allocates 7 million AAU for transfer of into Holding Account, mainly to be distributed to Pre-1990 forest owners, fisheries sector, and possibly some EITE participants under ETS 1 July 2010 – Govt confirms entry for Stationery Energy, Transport, and Industrial Processes sectors, with 31 May 2011 surrender date

    12. NZU Sales

    13. Prices for NZ forest carbon: Benchmark is the Secondary CER price – 12.83 euro with NZ carbon discounted up to 20%. Europe: 9.5 – 10.5 euro – cannot use for compliance just yet Japan: 6.0 – 7.5 euro – can buy cheaper EE AAU over 2 euro cheaper, large industrials happy to buy cheaper AAU, next tier down aware of problems amongst consumer perceptions New Zealand: NZ$16-21.00 – no large buying in the market at present, trend towards initial pilot type transactions, with relationship building an integral part. Some looking for longer term supply.

    14. NZ Forestry and the ETS • 2 types of categories, forests planted before 1990 and forests planted after 1990. • Those planted pre-1990 will receive a free allocation from Govt as compensation for loss of land value when ETS enacted. No liability if harvested forest to be replanted or regen in native • Those planted post 1990 are able to receive an allocation based upon application and due diligence by MaF. These owners carry a liability if harvested.

    15. NZ Forestry and the ETS • Over 600 registered forest owners to date on the Govt register at www.eur.govt.nz • A number will not sell because of impending liability, ie, own older trees, eg, over 20 years • Some large forest owners will acquire land if affordable but Govt signals thus far still not enough • Planting rates for last, this and next year not following recent observations, not enough incentives.

    16. Agriculture and the ETS • Unless Govt is persuaded to delay entry of Agriculture sector, its due for entry on 1 Jan 2013. Makes up over 49% of NZ’s total emissions • In 2011 Govt will seek interest for voluntary reporting of agricultural emissions • In 2012 reporting of agricultural emissions will become mandatory, prior to entry • Farming sector will receive up to 90% free allocation based upon emissions intensity

    17. Agriculture and the ETS • Farming sector, while mostly negative for dairy, has opportunity under ETS through forestry, eg, marginal lands • Dairying will also have opportunity over time in context of energy generation from sludge use through biodigestion and other technologies • Will require a different type of business approach as that used traditionally, • Farming sector entry will have processors, as point of obligation initially.

    18. Are there Opportunities under the ETS? • To identify an opportunity, one needs to clearly understand there own businesses from a carbon context • To identify an opportunity, one also needs to understand what one can or cannot do, ie, what are the laws and rules around obtaining the opportunity ( in this case a carbon revenue, or a benefit from reducing the carbon emission) • One also needs to know the cost and risks around seeking an opportunity

    19. Are there Opportunities under the ETS? • To identify an opportunity, one needs to clearly understand there own businesses from a carbon context • To identify an opportunity, one also needs to understand what one can or cannot do, ie, what are the laws and rules around obtaining the opportunity ( in this case a carbon revenue, or a benefit from reducing the carbon emission) • One also needs to know the cost and risks around seeking an opportunity

    20. Are there Risks under the ETS? • At an ETS level, there are a number of risks such as political, financial, and environmental risks. If the ETS continues with wider uncertainties Govt runs a risk of disincentives • At a sector level, eg, forestry or farming, there are another set of the same risks. Eg, if the forestry incentives are reduced • Finally, at the individual and business level, a further tier of risks exist. If you make a decision around the ETS what are the implications to you and your business.

    21. What are the costs to us under the ETS? • Will be felt most at the fuel pump and when paying for our power bill. • While numbers are ever changing recent treasury reports have petrol/diesel costs rising by up to 0.03c/litre, and power by up to $10 per month • Costs are always going to be passed down to the consumer although there are a number of industrials who cannot do this and bear the burden of cost off their bottom lines.

    22. Will the ETS survive? Both major Parties confirm the ETS is enacted in law and will remain for the long term. Govt has however a tight rope to walk in terms of ensuring the right rules and incentives are in place around our primary products exported offshore in a reduced emissions context There is a review scheduled for 2011 on the ETS where we believe a number of sectors including farming will attempt to delay entry further. One scenario is for the transition period to be extended to 2015 from 2013. The transition period is where the National Govt softened its stance around large industrial emitters by giving them dispensation on their total emissions by a 50% reduction. The 50% not covered will be paid by the taxpayer.

    23. Thank You www.carbonmarketsolutions.com