Carbon Monitor Newsletter November 2010

This issue contains the released draft document from the New Zealand Ministry of

Agriculture and Forestry  outlining a proposed Field Measurement Approach for the NZETS.

Volume 15 Issue 10

NZETS thin trading, Japanese Interest, CER an Option for Compliance?

Reports from Westpac and OM Financial have NZU units firming to around the $20NZD mark. Trading remains light with few sellers. Sellers expected to flood the market with NZU units allocated to compensate for at risk sectors or the pre 1990 forest NZU have yet to materialise in the market. Meantime Carbon News reports a Japanese bank is in the market for AAU units. EITG has received approaches by Japanese Trading Houses for AAU units.

Another option for compliance in the NZETS has emerged as the international markets are forecasting potential oversupply of so called CER units or certified emissions reductions. These units are issued to projects commenced in developing countries that do not have an emissions cap under the Kyoto Protocol. Projects that would not other wise occur (those that would proceed without credits are termed business as usual or BAU) are granted CER credits for emissions reductions after exhaustive review by the UN. Projects can theoretically include aforestation and reforestation but in practice so called tCER and lCER issued from these are excluded from most established ETS schemes. Dominant projects include removing more potent greenhouse gases (GHG) such a HFC, SF6, nitrogen oxides and methane where each metric tonne of the gas can reduce GHG by between 30,000 and 21 tonnes depending on the gas involved.

Reports of holding back of CER issued from HFC projects in China had some two months ago caused fears of significantly less CER being issued. These concerns appear to have faded. The weakness of the Euro against the NZD and around a 10% drop in CER prices in the European market make these CER units at $23-24NZD potentially attractive to compliance buyers in the NZETS and an alternate to purchasing NZU or paying the $25 cap. Forward delivery contracts for CER are available reducing the impact of holding costs. There are two CER markets, primary CER and secondary CER. The later is a CER after it has been issued by the UN. A primary CER is in effect an option to purchase a CER once issued. These trade at a significant discount to the secondary CER and significantly cheaper than an NZU at around 6Euro.

If one could assess the risk of delivery, one could purchase pCER and save further in costs of reducing emissions. Volumes of CER available are significant in terms of the NZETS and any further drop in CER prices would in effect place downward pressure on the price of an NZU.

Voluntary Market Update

Worldwide, VER (voluntary emissions reductions) transaction volume is light and Tullet Prebon reports Voluntary Carbon Standard (VCS) credits for renewable energy ex-China bid at €2.50 per tonne of CO2e and offered at €3 in 2009/10 vintages. Forward VERs are bid at €3.10. Gold Standard VERs are bid at €6 and offered at €8 for 2009/10 vintages but up to €2 lower in the forwards.

In forestry, despite great interest in REDD credits for avoided deforestation, the market is yet to take off beyond a few forward transactions. Lack of firm supply is a key factor. But that may be about to change following the first issuance of REDD credits under the VCS from the Unchindille-Mapanda project in Tanzania and the believed imminent issuance of credits from the Rimba Raya project in Indonesia before the end of 2010.

Pontis says large parcels of 100,000 credits or more will hit the market from Rimba Raya with prices currently attracting bids of €5 a tonne and sellers offering at €7 in both the 2010 vintage and for forward delivery.

Another bright spot in the market appears to be in forestry VERs from New Zealand. Project developer and credit aggregator Permanent Forests International reports 250,000 high-integrity reforestation VERs have found European and North American buyers recently, at prices on a par with VCS credits. The credits are generated under New Zealand‟s domestic forest sinks programme, come with a government backed permanence covenant and are packaged for the international voluntary market.

Clarification on Voluntary Market Trade in New Zealand

In a recent edition we mentioned a trading involving voluntary carbon credits based on New Zealand forestry. The transaction was completed in conjunction with Permanent Forests International of Christchurch. Whilst we cannot disclose price similar units on the international market sell for around $3.5 USD per tonne.

The reference to $6-8 USD was referring 2009-2010 vintage Gold Standard VCS credits which differ from earlier vintage credits involved in this transaction. This raises a key point that differentiates the voluntary and a compliance market such as the NZETS, that is with all the vintages and standards it is sometimes confusing to compare prices whereas in the compliance market we are all talking about the same units and therefore price comparisons are potentially much more valid.

Of course there are several layers of compliance markets such as the UN compliance market which is governed by the Kyoto Protocol the currency being Assigned Amount Units or AAU, then the sovereign implementations such as the EUETS which permits EUA, ERU and CER credits but NOT AAU units.

With the NZETS compliance credits are NZU and CER units and AAU can be exported from the NZETS but generally not permitted to be brought into the NZETS. The laws of supply and demand and the ability to deliver and discover market price from liquidity all create a myriad of prices for these compliance credits.

The lesson is to understand the markets, the liquidity of the instrument that you hold or are seeking and find similar trades before establishing a view on price. Of course in an emerging market such as the NZETS it can be difficult to find comparable data. Discovering the value of an AAU remains even more challenging.

MAF Releases Forest Field Measurement Draft for NZETS

The New Zealand Ministry of Agriculture and Forestry has released a draft document outlining a proposed Field Measurement Approach for the NZETS http://www.maf.govt.nz/mafnet/consultation.htm

Highlights of the proposal include:

• Indigenous and Exotic categories both requiring permanent sample plots
• A threshold of 100ha per Participant (as opposed to forest – a participants total forest area is added to establish the threshold)
• Sub 100ha must use a look up table they cannot opt for measurement
• The sample plots are to be measured at least once every 5 year commitment period with the first measurement required before the end of 2012
• The number of plots ranges from 30 to 200 on a sliding scale for 100ha to 10,000ha and above respectively
• The methodology and measurements for each plot are specified. The resultant data is sent to MAF along with details of the silviculture regime.
• MAF provides each forest owner with customised look up tables at no charge, one table for growth and the other for harvest residues The forest owner uses these tables for an emissions return
• Costs are estimated at least $200 per plot to carry out the work. MAF recommend using a registered forestry consultant and is considering creating a list of accredited parties
• The sample plots are located from a grid the baseline from a random GPS coordinate in the forest.
• How CAA and the plots interact appears complex Plots that are located in areas not practical to measure may be relocated by permission of MAF Chief Executive for instance one on the edge of a cliff
• Refusing to complete a return will result in MAF making the measurements at the participants cost Records are to be kept for 20 years in line with the existing legislation

Time table is regulations in mid 2011 and the ability to lodge data and receive your own look up tables by September 2012 with a deadline for the first return of Q1 2013.

Commentary

The expected threshold was 50ha so it is gratifying that the number is 100ha. However given the total is by participant this does create significant potential issues with say 5x20ha forests – where are the 30 plots located and whether the objectives in that case would be met using the method suggested. The cost may be significant to those simply opting in to the ETS to preserve their rights. The silvicultural regime employed is key to the forming of the participants tables and it is a requirement to advise and re measure of the regime changes for any reason.

It could be argued with relatively few participants to date that these costs would discourage more participation from the forest sector. The negative is the risk of not opting in, the benefit to existing forest owners is reducing the NZU supply. Locating plots on a random basis with no regard to access or health and safety issues seems naïve but the waiver provisions would presumably be exercised with discretion. MAF approach to date with the ETS would indicate a common sense approach will prevail.  Comment is made to the „adverse events‟ that may affect a plot and an inference is made in the discussion document on page 16 that the modelling will cater for „natural mortality‟ and adverse events (for example fire and windthrow). It is not clear if the tables are to be discounted for such events. Nothing is mentioned as to what happens if one completes the measurements and finds out that there is less carbon than with existing look up tables and the participant has already sold the credits issued based on the look up tables. Perhaps because the carbon balance is for the 5 year commitment period and emissions returns are only mandatory once every 5 years a participant would not file another return until that showed a positive balance. Otherwise they would have to go to the market to surrender credits. Yet another reason to have not taken the early advice from self interested forest managers to have the credits issued and sell them immediately.

EU Price Update

CER prices softened towards the end of October. EUA remained between 15 and 16 Euro. EUA for 2013 remained strong over 17.50 Euro.

Assigned Amount Unit Prices Soften

According to IDEACarbon Polish Prime Minister Donald Tusk says Poland is in talks with Japan over a sale of AAUs, and that Japan has offered an “attractive price”. The size of the deal is understood to be relatively small however, compared with recent AAU deals. Point Carbon reports the value of the deal would be around €13 million. The World Bank recently indicated that it would be interested in buying AAUs at prices of around €7.50- €8.30. Given Tusk‟s comments and the fact that Japan is the most active buyer of AAUs, we could expect a price of €8.00-€9.00 for this deal. Poland, Ukraine, the Czech Republic and Russia have all announced plans to sell large volumes of AAUs this year but it is unlikely that the markets exists yet to buy up all that supply. In comparison with NZU prices in the NZETS sales of AAU units are becoming increasingly less attractive and off shore sales once the „darling‟ of the carbon market are looking increasingly unlikely.

First Australian AAU Sale Announced

Point Carbon News reported a sale of forest based AAU units from Australian forests at $16 AUD The price of $16 AUD or $20.60 NZD appears unusual given the state of the AAU market as reported in the item above.

The issue of AAU is on the back of the Australian Government Carbon Farming Initiative timed to be operational by December 2011 with crediting back dated to July 2010. In a joint press release Perenia Carbon purchased credits from developer Carbon Conscious. The transaction is based on 50,000 – 70,000 Eucalyptus planted on marginal western Australian land.

Commentary

Using the New Zealand MAF lookup tables and assuming say 500 stems per ha the plantation is a relatively small area of 140ha which in real terms would mean in the first five years some 26 AAU per ha would be issued if these trees were grown in New Zealand. Given the harsh climate of Western Australia one would surmise that the growth would be less. In essence the trade appears to be a very small volume being 140 times 26 or 3500 AAU units. The buyer has not been disclosed. Historically before the New Zealand market had emerged parties reported „trades‟ to get themselves publicity in the hope that buyers and sellers would contact them.

We would certainly caution against this transaction being used to establish a carbon price for Australian AAU units. Given the potential mortality rate of new plantings in WA we would again question that the transaction will take place until the trees are actually established.

Biogas VCS Credits Available

Some 140,000 VCS voluntary credits from a biogas project will be available shortly. These VCS credits are pre issued prior to the project approval under the CDM after which CER‟s will become available. These high quality voluntary credits will be listed with MarkIT. Purchasers can request a PIN by contacting EITG.