Carbon credits are no different from NZ-wide price increase

One NZU equates to one metric tonne of carbon dioxide or other equivalent greenhouse gasses and companies buy carbon credits to offset their carbon emissions as part of the New Zealand Government’s Emissions Trading Scheme (ETS). The ETS is created through the Climate Change Response Act 2002.

The Act was passed to recognize New Zealand’s obligations within the Kyoto Protocol – which sets binding emissions reduction targets for 37 industrialised countries, economies in transition, the European Union – and obligations under the Paris Agreement.

The ETS was set up in 2008, making it one of the first schemes set up to counter the effect of climate change and is New Zealand’s key tool to combat carbon emissions. Auctions for NZU’s are run quarterly and companies that carry out activity stipulated in the NZ ETS are required to buy one NZU for every one tonne of carbon dioxide or equivalent emissions they produce. NZUs can also be traded through secondary markets, and participants can buy and sell units from each other.

Why has the price of carbon credits increased so quickly?

The emissions trading market is growing fast globally and the dramatic rise in carbon credits reflects market demand and speculation.

As part of the ETS the New Zealand Government has a ‘cost containment’ reserve of 7 million NZUs per year, which at a ‘trigger price’ (which was in the past financial year $50 NZU) gets released in order slow down a sudden carbon credit price increase. The goal of a cap is to ensure that prices don’t escalate too quickly, leading to dramatic price rises being passed onto consumers. However it could be argued that the NZU was too low to begin with making it too easy for industry to simply offset their carbon emissions through NZU investment rather than investment into more environmentally friendly processes.

Earlier this year the cap was $25 per NZU and was raised to $50 NZU in August 2021. The Government had budgeted 7 million NZUs per year to release into the auction market. However, due to increased demand and trader speculation, the entire 7 million cost containment fund had to be released into the market to maintain the $50 market cap. With the cost containment fund exhausted, the price increased within two months to $65 NZU.

The new $65 price has moved into a new financial year and the government have another $7 million NZU in the cost containment coffers and have raised the cap to $70 per NZU. However, speculators see the price of carbon credits surpassing this number in a matter of months.

Up until last year, the price of carbon credit, also known as NZUs, was at $25 per unit, but from August this year went to $65 per (NZU)

How has the increased carbon credit price impacted forestry sales?

The Kyoto Protocol was established in 1990, and any forest areas formed before 1989 are considered part of New Zealand’s baseline emissions. They cannot be included as additional carbon storage in the ETS. Forests established post-1989 can be regarded as new ‘carbon sinks’ and registered by companies in the ETS to earn units for that carbon storage.

The new NZU price is changing the way we see investment in New Zealand forestry. A recent sale of a block of near mature wood was sold in the Whanganui region, and we expected it to be harvested due to its healthy, well-pruned trees with good access. However, with the investor established the block as a carbon sink to generate NZUs which were more valuable than the profit from wood.

What does the new carbon credit price mean for me as a seller?

The value of carbon credits is an opportunity for sellers to have a significant spike in investment interest for both forestry blocks and greenfields – bare land that can become a forestry and generate NZUs for several years.

The increased price directly correlates with increased land value. For farmers looking to exit the industry and retire, they now have more opportunities to leave the farm with the increased land value and stronger investor interest.

What does it mean for investors?

The increase in NZU price now makes forestry sales a competitive option for land-based investment. Previously forestry hasn’t been able to compete with farmland in terms of returns.

There is an increasing amount of farm land where the most profitable use of that land is forestry.