Carbon price cap and talk of export ban upset forestry

New forest planting has collapsed to less than 2000ha a year over the past five years, says Roger Dickie. Photo / Alan Gibson

Forest owners have expressed dismay at suggestions the Government is thinking of including a price cap and export ban among amendments to the emissions trading scheme.

There is speculation that a price cap could be adopted as a transitional "safety valve" in an amended ETS, as it is in a scheme which the Australian Government is struggling to get through the Senate.

A spokesman for Climate Change Minister Nick Smith said the Government was still awaiting the report of the select committee reviewing the scheme and no decision had been made.

Roger Dickie, spokesman for the Kyoto Forestry Association, said such a policy would be perverse, particularly as the 2020 emissions target the Government announced last week depended on a lot of new forest being planted.

"It seem the Government wants the forest industry to receive artificially low carbon returns and ... subsidise the power generators and oil companies."

The case against a price cap is that it could discourage investment that would reduce or offset emissions, for example afforestation, by limiting investors' upside.

Officials have warned that it could significantly impede the ability to link the New Zealand scheme with other, deeper carbon markets. There would have to be barriers to exporting units, to avoid the arbitrage opportunities implicit in having a domestic price lower than the international price.

And it could discourage the development of markets in financial instruments for managing price risk. It does not eliminate price risk but transfers it from emitters to taxpayers.

The ministerial review of the electricity sector delivered last week highlights the perverse effects of the price cap in the wholesale electricity market.

The case for a price cap is that it limits uncertainty about carbon prices which might otherwise deter much-needed investment.

It would also bring the scheme closer to the Australian model, which provides for a price cap of A$40 a tonne, rising by 5 per cent plus the rate of inflation, over a transition period of five years.

But the Australian scheme is a more insular, self-contained model. It incorporates a one-way valve in its international connectivity, permitting imports of carbon (with some limitations) but banning exports.

John Carnegie, Business New Zealand's manager energy, environment and infrastructure, said the organisation had an open mind on the matter.

"The issue is how to manage the transition phase of a significant bit of economic reform. There is a fine policy judgment to be made about how to allocate the benefits and costs among sectors."

A price cap should be debated as it was a legitimate potential tool. But forestry absolutely had a positive role to play, Carnegie said.

Dickie said new forest planting had averaged 65,000 hectares a year over an eight-year period in the 1990s but had collapsed to less than 2000ha a year over the past five years.

"Forestry investors and everyone else required to get planting under way are not going to respond to controlled prices and continuing government interference with the industry," he said.