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FAQ on Carbon Credits

What is Global Warming and how does forestry become involved?
Global warming comes from atmospheric gases trapping light energy in the earths atmosphere creating the so called greenhouse effect. Forests remove carbon dioxide (C02) from the atmosphere by photosynthesis and create wood. C02 is the main gas causing Global Warming. Starting in 2008 C02 emissions are limited by the Kyoto Protocol an international treaty.

What is the History of the Worlds Response to Global Warming?
In 1990 under the auspices of the United Nations the worlds nations met in Buenos Aires to discuss climate change and the human influences. From this came the UNFCCC United Nations Framework Convention on Climate Change. It was decided that nations should cap their greenhouse gas emissions (GHG) at 1990 levels. Over the ensuing years, and with significant debate, the parties agreed to limit GHG emissions for 2008 -2012. Each developed country (so called annex B) receives a UN allocation equivalent to its 1990 GHG emissions levels depending on their individual circumstances ( an AAU or assigned amount unit). This is called the Kyoto Protocol and is named after the Japanese city where agreement was reached. New Zealands UN allocation is 310 million tonnes for the period 2008 – 2012 or 5 years of 1990 level emissions of greenhouse gases.
Each country is free to decide how it implements the Kyoto Protocol in its borders. Various options have been debated including emissions trading, a carbon tax, or strict regulation.
Emissions trading (so called Cap and Trade) has been widely chosen to allow a price for emitting GHG gases to emerge and for entities to be then able to respond to this cost by changing behaviour or introducing technologies. Such an approach is expected to create a tipping point   thereby significantly reducing GHG emissions.
At the end of 2012 countries have to account to the UN for their emissions and surrender AAUs and credits to match their total emissions or face significant financial penalties, and/or trade sanctions.

Why is Forestry involved?
Firstly 22% of global GHG emission is created from cutting down forest (deforestation). Growing forestry (afforestation) removes C02 from the atmosphere by photosynthesis. Part of the Kyoto Protocol acknowledges credit to be given for afforestation and the Government may issue credits to those who grow forests. Due to the 1990 start date of the UN initiatives this has been adopted as an arbitrary date as from when the tracking of the afforestation carbon credits starts. A forest planted post 31/12/1989 resulting in a change of use of the land to forestry is called a Kyoto Forest
and can attract carbon credits. Credits from growing forest are added to the limit agreed to with the UN and can be surrendered to the UN to offset emissions above the agreed cap and therefore have a value to those who emit in excess of the 1990 levels.

What is a carbon credit?
A so called carbon credit is the removal of or avoidance of the emission of one tonne of C02 from the atmosphere.

Is there a rule of thumb for how many credits I have?
Yes, in the case of Pinus Radiata it is accepted 7 -9 tonnes of carbon are removed (sequestered per hectare each year) this means that between 25 and 33 tonnes of C02 are removed from the atmosphere. At $15 per tonne this is around $550 per hectare and $40 around $1440 per hectare every year.
For example on a 50 ha Kyoto Forest

Are forest carbon credits real or just going to make some people rich and not do anything for climate change?
Over 22% of the worlds C02 emissions come from forests being clear felled and not replanted. Forest sinks are a viable source of reductions by removing C02 from the atmosphere. Trading a forest based carbon credit means someone who purchases the credit then emits into the atmosphere. It is the price that people pay to emit GHG gases that is expected to encourage them to change behaviour by justifying investment in technology to reduce emissions and therefore avoid the cost of carbon credits. To justify investment in technology that reduces emissions, emitters need to be confident of the long term price of emitting. It is expected forest carbon credits will play a significant role in ensuring market liquidity. It is this liquidity that will give rise to a functional market and a reliable price indicator.

What is the time frame for the problem of climate change to be solved?
Global warming is a generally acknowledged to be a real threat to humanity, and C02 emissions are increasing. The Kyoto Protocol will place a price on these emissions. From this pricing it is expected that within 40 years C02 levels in the atmosphere will be being reduced back to pre industrial revolution times. This will come from technological innovations such as C02 scrubbers. Such technology exists now at $45 USD per tonne pricing and when carbon credits near this level coal
fired stations will invest in the technology dramatically reducing their emissions rather than pay the cost of the credits. Using the example of SO2 (sulphur dioxide) in the US market prices will rapidly decline along with emissions. From this it is expected carbon credits will reduce in value to nearly zero during over the 40 years while at the same time emission reduce dramatically.

What is the PFSI and how does it fit into Carbon Trading?
The permanent forest sinks initiative was the forerunner of parts of the NZETS, whereby a MAF managed scheme granted Carbon Credits to those who permanently reforested marginal land via regeneration of native bush on their land. Initially this was required to be in perpetuity but the final regulations permit exiting of the scheme. With the NZETS the PFSI regulations changed to more closely reflect the structure of the NZETS, and essentially requires a 35 year plus permanent reforestation of land. Singularly the difference with plantation forestry is the expected rotation and selective harvest and managed carbon on site in comparison to the total deforestation expected with clear felling at harvest of a plantation forest.

What is a Carbon Pool?
A Carbon Pool is the process of a group of recipients of carbon credits grouping together to achieve economies of scale and/or to manage or offset liabilities. In its simplest of terms the pool is analogous to insurance where the participants collectively share a partys loss thereby reducing the likelihood of any one party having total loss of their assets. With the harvest liabilities of the Kyoto Protocol, government officials have suggested pooling is the only mechanism where the harvest liability can be managed to give carbon credit income while managing the future harvest liabilities.

Can I delay harvest?
Yes, the pool will have allocated credits for harvest on the timing you have requested. A delay can be advised   preferably with 12 months notice so further income can be derived for the pool. In practical terms harvesting can be delayed indefinitely in respect of the pool operations.

If I Opt Out   am I guaranteed the credits when I harvest?
No, officials have said this Government cannot bind future Governments. Prices may increase significantly in later commitment periods (post 2012) due to significant reductions in emissions being introduced. Prices may increase to a point where Government finds it too expensive to provide the credits free and therefore may charge for them. It is Environmental Intermediaries & Trading Group Limited view that all foresters should therefore opt in.

If I Opt In wont I get involved in big costs?
No, officials are suggesting that a simple lookup table may be used to estimate carbon in your forest. This will be deliberately conservative and underestimate the amount of carbon. Later on closer to harvest other measurements could be used. A look up table is negligible cost for the security of having the credits for harvest.

Why do we talk about Carbon when the credits are CO2?
Photosynthesis, the process of tree growth removes C02 from the atmosphere and in conjunction with sunlight and basic minerals creates cellulose and releases oxygen back into the atmosphere. The carbon left in the tree is what you measure, and when multiplied by a factor 3.67 give you the CO2 that was removed. A credit is then issued for this removal.

How does the Pool Ensure that I get my credits back at Harvest?
Grouping together lots of forest owners reduces lots of risks such as fire as the risk is spread over many locations. Also the different age classes mean some forests are still growing rapidly while others are being harvested. Its the getting together that in part covers the liability. The balance is the ability to effectively manage trading.

Who are the buyers of the credits and how many do they want?
Some 200 companies are expected to be the points of obligation and therefore need to buy credits in New Zealand alone. Many more are overseas in Europe and Japan. These emitters are the likes of Shell, BP or large industrial entities like NZ Steel or power stations like Huntly. Their appetite is millions of tonnes of C02 per annum. Pooling credits allows the ability to deal with the larger players extracting better prices and managing the commercial arrangements for the best return and least stress. The immediate parallel in forestry is exporting logs rather than taking the mill price or stumpage.

Why should I join the pool early and not wait?
Environmental Intermediaries & Trading Group Limited has committed to those joining the pool first to trade internationally. EU prices are over $40NZD per tonne (as of September 2007) There are Kyoto restrictions on how much New Zealand can trade overseas (90% of the 310mt must stay in NZ)
Treasury forecasts local NZU prices somewhat lower at $15.20NZD for credits including forest credits.

Why can I access the international markets?
As part of the pool we can apply to Government for off shore allocation of what are called AAU units or assigned amount units. These are sovereign backed credits and represent no risk to purchasers. Other credits such as CDM credits (created from the 3rd world) have heavy discounts on delivery risks.

Who is Environmental Intermediaries & Trading Group Limited?
Environmental Intermediaries & Trading Group Limited was established in 1995. EITG is an international consortium with strategic partners in the USA, South East Asia, Africa and Europe. EITG is involved in all aspects of climate change including biofuels, renewable energy and forest carbon sinks. EITG is a 100% New Zealand owned Company. EITG is an international authority in Emissions Trading and the Kyoto Protocol its principals are published authorities in this subject. EITG publishes the Carbon Monitor which has been distributed worldwide each month since 1995. Its web site is www.eitg.co.nz

If I transfer my credits to the pool what security do I have that I will get them back when I need them for deforestation or to opt out of the pool?
The pool is audited and operated in an independent structure isolated from all other commercial risks other than the pool activity. The auditor will ensure the pool has provisions for harvest at the end of each audit period. All proceeds of trading are held in a separate trust account.

Following from the above how will the pool be operated, e.g. will it operate ¢â‚¬Å“short¢â‚¬  of units with the realizations being held by the pool or distributed?
The pool will be operated so the combination of trading and future sequestration covers the planned harvest of the participants. Surpluses after the costs of administering and ensuring that the pools prime function, that is availability of credits for participants harvest plans, will be distributed quarterly direct to the participants bank accounts based on the pro rata contribution of credits to the pool for that period.

Will the pool be open ended or closed? i.e. can participants opt in and out.
You are expected to commit to the pool as it is the collective commitment that ensures the harvest liabilities can be met. There is an ability to opt out with notice, This opt out is on the basis the pool will purchase other credits to provide for the contribution the participant would otherwise be making. This would be at the party opting out cost.

Will there be sub pools, for example based on time of entry, or a conservative pool and an aggressive pool, perhaps pools by mates or districts?

Those entering early will be able to participate in international markets ahead of those entering later on. The purpose of the pool is to ensure harvest liabilities can be met while trading for profit. This means regional, national or international sub pools are not needed. Indeed regional pools or groups of people increase the pool risk in the sub group from fire and adverse events. This will increase costs to participants and is not desirable. What does exist is the option to take up different forms of trading from time to time. A conservative option may be to hold and not trade at all, any other form of trading will be based on covering for harvest liability before trading.

What will be the administration and transactional costs of the pool?
The administrative costs are those related to the registry charges (if any as it is electronic) and the measurement costs relating to establishing the carbon in each stand. EITG believes this charge will be minimal based on officials statements as at October 2007, but as yet the exact costs cannot be established. Needless to say costs will be minimized in a group of participants at all levels due to the pool. Any EITG fees are after the administration and transaction costs are paid to the external parties.

What are VERs and why dont I trade these?
VERs are voluntary emissions reductions and are outside of the Kyoto Protocol. Varied standards exist for these and the most recognized the Gold Standard does not focus on forestry. Most are traded on the Chicago Climate Exchange (CCX) and the prices are estimated around $2 USD per credit. Other markets exist in London as well. This approach is not recommended due to the low income and uncertainty over standards, costs and the risks associated with these.