CO2 - Carbon Fund units

[haewai]

Not all forestry is in the ETS, so don't use the emissions tracker to predict ETS supply and demand
The supply of emission units to ETS foresters is not part of calculating auction volume: https://environment.govt.nz/what-gov...in-the-nz-ets/
Interested in your evidence of hoarding. Here's the actual data: https://www.epa.govt.nz/industry-are...ly-held-units/ Sure, hedging is sensible for some participants, but not all. And there is clearly some investment holdings eg this CO2 fund

[Mya]

Do you have any idea how much of forestry is not generating credits in the ETS scheme? And why is that?

I didn't say they were used to calculate auction volume, but my point is once you factor in the amount of forestry credits being generated, there is less annual demand for NZU's than are being sold by auction (based on 2019 data) even excluding CCR.

Privately held NZUs: https://www.epa.govt.nz/industry-are...ly-held-units/

[haewai]

Do you have any idea how much of forestry is not generating credits in the ETS scheme? And why is that?

Participation is voluntary for foresters. Numbers are here: https://www.epa.govt.nz/industry-are...sions-returns/

[tommy_d]

Here are some random thoughts and stats. Welcome any corrections or criticisms.

* From 2019 data, non-agricultural emissions were 39.3 million tCO2e, forestry accounted for 27.4 mtCO2e, resulting in a net non-ag emissions of 11.9m tCO2e. https://emissionstracker.mfe.govt.nz/#NrAMBoEYF12TwCIByBTALo2wBM4eiQCc2AHEltEA

Incorrect choice of forestry data to consider, you should be looking at units transferred into the market for forestry, here might be a good start: https://www.epa.govt.nz/industry-are...unit-movement/


* ETS auctions non-CCR volume next year is 19.3m, so this is already higher than our annual emissions. Including CCR volume is 26.3m units, this represents 2.2 years worth of net emission units. https://www.etsauctions.govt.nz/
you should be comparing auction volumes with mandatory ETS surrender obligations = approximately 40 million units, e.g. see here: https://www.epa.govt.nz/assets/Uploa...ons-Report.pdf

* Non-CCR auction volume decreases each year, 18.6m in 2023, 17.2m in 2024, 15.5m in 2025.
you might want to check these numbers, subtract CCR from total available to be auctioned from the regs as they will be at 1 January 2022: https://www.legislation.govt.nz/regu...html#LMS548494

* NZ companies have already stockpiled a lot of NZUs, about 63m non-forestry units, or about 135m including forestry units. Some companies are hoarding many, many years of emissions to hedge future costs
it's easy to overstate stockpile hedge - from memory Nigel Brunel wrote a good piece on this, or might have been Lizzie from carbonmatch. Effectively, many units are held by foresters against future harvest obligations so are not available to market.

* CCR price is $70 next year and set to increase 12.5%pa every year to $110 by 2026, but this does not mean the carbon price will increase by this amount.
100% agree with you on this, so many people mis-understand what the CCR trigger price is...

* The CCC have a future projected carbon price path, but this is not necessarily what the carbon price should meet. By their own admission, they don't really know what price will trigger the required degree of change in the market to push to greener technologies. The intention is to provide a wide price range and the market can dictate what the price should be, while the CCR should theoretically be the ceiling each year.
again, 100% agree

* Current ETS scheme has a fixed quantity of units to auction from 2021 through to 2025 (~90m), after 2025 we have no idea what will happen, and especially how agriculture could be included.
spot on

* By 2025 agriculture is supposed to either join the ETS scheme or have their own scheme to incentive emissions reductions. Some punters have said they could absorb a 5% liability of their emissions via the ETS scheme, which would increase the market demand by ~2m based on 2019 data. Presumably their liability will increase each year which will increase demand.
I love to speculate on where agriculture will land with respect to the ETS, safe to say nobody has a clue

* Above data is from 2019, does not reflect company emission reductions schemes or increase in forestry over the last 2 years. In all likelihood company emissions will continue to go down (especially when NZU is $68 compared to $35 a year ago), while forestry units generated will continue to go up, therefore the net required number of NZUs should go down each year.
it will be interesting to see how price changes previously only hypothetical actually impact things

* Prior to May 2021, ETS units could be bought directly from the govt ($25/t increasing to $35/t in 2020). The introduction of the auction system in 2021, along with the reports of the CCC, exposure from COP26, etc, drove up the carbon price in 2021.
not quite "bought from the govt", rather, surrender obligations could be met by paying these dollar amounts to the govt, and units were transferred to meet the associated surrender obligations

* Most companies do not buy units directly, they buy via contract with a bank - so agree to buy future units at a future price, with the price profile dictated by the bank's carbon price projection models. Current models predict a ~$3 increase over the next 2 years compared to the last auction price at $68 (ie that is the premium paid by the retailer through the bank holding the contract).
interesting hypothesis... you might mean via a contract associated with a trading platform such as commtrade?
the carbon price for forward delivery is nothing to do with a prediction, but is instead entirely related to cost-of-carry (in effect, cost of access to capital and arb opportunity associated with that)

* In May companies are required to surrender their units for the previous year, if they have not purchased enough last year to cover their liability, the March auction could have a lot of action, as could the secondary market in April.
didn't you say above they're all hedged? agree, could be interesting. Look at the monthly trade volumes published by EPA to see the annual variation as that deadline approaches

* Carbon Fund currently trading at NTA thus current price is predicting no growth of this fund.
so, is the market right or wrong on future price of carbon? look at december 2020 CO2 instrument value

My interpretation:

Companies are stockpiling units in a big way. Net emissions volume is less than non-CCR ETS volume so CCR will only be triggered if companies still continue to stockpile, but even then, the CCR price next year is $70 compared to closing Dec auction cost of $68, so I don't see the price exploding next year.
would be really interesting to see your updated interpretation based on corrections above. My guess = a price fall to around $65, or at most up to $75 by mid-next year

Carbon price could continue to rise in the coming years but I don't think it will in a big way. The explosion of carbon price this year was related to the introduction of the Auction system, companies seeing the writing on the wall in terms of emissions liability, company board requirements to hedge future carbon prices and hold a number of year's worth of NZUs to appease shareholders, by the end of 2021 emissions budgets have been developed by many companies highlighting their need to stockpile units, and debt was also cheap this year so great time to stock up on credits compared to future years where interest rates will be higher.

Changes in legislation and which colour the govt is could vastly change the landscape and significantly impact the value of the carbon price and this fund. National could reverse or slow down some of the ETS, resulting in a reduction in carbon price. If Labour need to go into a coalition with Greens again, and Greens ever grow a pair and hold Labour to account, Labour could become more aggressive in the ETS scheme.

Conclusion: Don't buy.

the ETS is complicated, so it's not surprising that you've got a good mix of things correct and things incorrect above.... i've added notes in bold italics

[tommy_d]

Do you have any idea how much of forestry is not generating credits in the ETS scheme? And why is that?

I didn't say they were used to calculate auction volume, but my point is once you factor in the amount of forestry credits being generated, there is less annual demand for NZU's than are being sold by auction (based on 2019 data) even excluding CCR.

Privately held NZUs: https://www.epa.govt.nz/industry-are...ly-held-units/

post-1989 forestry involvement in the NZ ETS is optional. Can't remember the percentage of eligible forestry that is in the scheme - under half:
https://www.interest.co.nz/rural-new...-eligible-join
https://www.epa.govt.nz/assets/Uploa...nd-Figures.pdf

any move to allow averaging for previously registered post-1989 forestry could stir things up a bit

[kiora]

Ouch, this is really really nuts !
https://www.newshub.co.nz/home/new-z...2+January+2022

[Sideshow Bob]

Ouch, this is really really nuts !
https://www.newshub.co.nz/home/new-z...2+January+2022

Really is just nuts.......helping overseas companies meet their obligations.

Farm in Southland recently sold for the same thing. From what I understand, at least 4 other bidders at around $10m, but sold to an overseas company for around $17m.

Can't blame the vendors, but just crazy what it is doing to our environment and economy.

[ados_nz]

A little bit of misconception here as the overseas buyers are required to establish production forestry (as opposed to permanent carbon forestry) under their OIO requirements. These investors do receive carbon under the averaging accounting methodology (16 years of carbon for P. rad) but will be managing these forests as production forests that are harvested to provide log supply both domestically and export.

Also, interesting to note that we are only just approaching the same net stocked area of forestry that we had prior to the dairy boom. What we are seeing is not a rapid expansion of one industry(despite the current rhetoric). Instead this is actually a relocation of the forest resource from the lower LUC classes (I.e. high quality land that underwent dairy conversions) to the hill country (higher LUC classes) where forestry actually grows better. The land grab occurred in the conversion from forestry to dairy and the forestry industry is only just rebuilding its estate. This is actually a really nice example of an economic prioritisation of land use (from low earning farming land use to a higher earning forestry land use), an economic prioritisation that will be a net benefit to the NZ economy long-term. If only there was more domestic capital available to invest so we weren't so reliant in the big overseas funds.

[haewai]

Really is just nuts.......helping overseas companies meet their obligations.

The carbon units received by the offshore investors are not able to be used to meet their obligations. No emissions trading scheme allows people to meet obligations by buying or receiving emission units somewhere else in the world.

Different story with voluntary offsetting, though I doubt that's the intention of this particular investment.

Of more importance to the CO2 fund is the increase in emission unit prices today.

[Sideshow Bob]

The carbon units received by the offshore investors are not able to be used to meet their obligations. No emissions trading scheme allows people to meet obligations by buying or receiving emission units somewhere else in the world.

Different story with voluntary offsetting, though I doubt that's the intention of this particular investment.

Of more importance to the CO2 fund is the increase in emission unit prices today.

A little bit of misconception here as the overseas buyers are required to establish production forestry (as opposed to permanent carbon forestry) under their OIO requirements. These investors do receive carbon under the averaging accounting methodology (16 years of carbon for P. rad) but will be managing these forests as production forests that are harvested to provide log supply both domestically and export.

Agree, the emission unit price is most important, as the value and trading of carbon credits drives the value.

Interesting to understand the space, and appreciate the info/comment.

If they are being bought for timber, there is a clear mis-reporting, or not finding the real facts - and this has been commonly reported for similar land purchases and through different media channels.

While maybe not using the carbon credits, perhaps a hedge on carbon, and then sell and then can buy credits where they need to.

Some of the farms being bought aren't just hill country, but better performing sheep/beef units.