KEY POINTS:
International linkages will be what drive prices in the New Zealand emissions market, the Government says.
Stuart Frazer of carbon brokers NZCX agrees.
But he says design details of the New Zealand emissions trading scheme which have yet to be decided will determine whether local emitters will be able to tap the lower-cost but higher-risk end of the international market, as the Government seems to be assuming.
Greenhouse Policy Coalition chief executive Catherine Beard said: "New Zealand's just relying on there being a lot of cheap credits out there and that's going to make the whole thing affordable - but that could be a heroic assumption."
Much like commercial fishermen have to hold quota, companies which are required to take part in the emissions trading system will have to acquire enough units - tradeable permits to emit greenhouse gases - to cover their emissions.
One source will be the forest sector in New Zealand, now that the Government has decided to devolve units to Kyoto foresters. They are people who planted forests from 1990 on, on land not previously forested. The Kyoto Protocol's accounting rules allow them to be used to offset emissions.
But the Kyoto foresters will also get the corresponding liabilities on harvest. So the supply of units from the forest sector will depend on how many of them decide in the end to get into the carbon market.
Another possible group of sellers would be large industrial emitters which have managed to reduce their emissions by more than 10 per cent from 2005 levels and so have an excess to sell.
Setting 2005 as the "grandparenting" year means firms like Rio Tinto Aluminium and New Zealand Steel get no benefit from early action they undertook under voluntary agreements in the past to increase efficiency and reduce emissions.
Even with units equivalent to 90 per cent of 2005 emissions allocated free, the regime would be costly to New Zealand Steel, president Ross Murray said, and would potentially impact on investment decisions.
So excess units for sale from the smokestack sector might be scarce.
The Government might auction units. But because it needs to cover the agriculture sector's emissions (until 2013) and plans to allocate units free to pre-1990 foresters and large industrial emitters, the supply left will be limited.
That leaves the international Kyoto market, which emitters will be able to source units from.
The most liquid part of it is the market in certified emission reductions (CERs).
These are units, authorised by a United Nations body set up for the purpose, which arise from climate-friendly projects in developing countries that meet certain criteria.
The Government says the price of New Zealand units, the instruments traded in the local market, is likely to be heavily influenced by international price trends, because emitters can use Kyoto-compliant units instead to discharge their obligations. It acknowledges uncertainties around both the supply and demand sides of the market for CERs.
But it cites the annual World Bank report on the carbon market, which reported a wide rage of CER prices last year, between US$6.80 ($9) and US$24.75, with an average of slightly less than US$12.
Frazer said the low end of the range would be for units generated early in the life of an eligible project, and therefore subject to a greater risk of non-delivery.
That was fine if the buyer could afford to take the risk of being caught short.
But when buyers needed greater certainty, because of high penalties for non-compliance and restrictions on the ability to bank or borrow units between one compliance period and another, they were likely to need to draw on the market for guaranteed units.
Prices at that end of the market are within the gravitational pull of the internal European emissions trading scheme and are presently around €16 ($30) or €17 compared with an internal European price of €21.
The Government said that in the short term, linkages between the New Zealand emissions trading scheme and those of other countries would occur indirectly via the international market in Kyoto units.
The potential for direct bilateral linkages between the New Zealand and other similar schemes - where there is full mutual recognition of each other's units - before 2012 are limited, it said. The only other mandatory scheme up and running is the European one, but "certain differences in design are likely to make direct bilateral linking challenging in the short term" - a reference to Europe's ban on forestry-based units.
Australia also has plans for an emissions trading scheme with a target start-date of 2011.
Farmers to reap $1.56b from concession: Economist
The decision to exclude agriculture in the emissions trading scheme until 2013 is a concession worth some $1.56 billion, economist Simon Terry says.
Terry, who is executive director of the Sustainability Council, arrives at the figure like this:
* The Government's "most like estimate" of the extent to which gross emissions of greenhouse gases will exceed its Kyoto target between 2008 and 2012 is 124 million tonnes of CO2 equivalent.
* The forestry sector will offset another 58 million tonnes under rules which acknowledge the carbon removed by a net increase in the area forested.
* But the Government has just opted to devolve the forest sink credits, Terry says.
* He then takes Climate Change Minister David Parker's estimate that policy initiatives will trim the 124 million tonnes by 20 million.
* Terry assumes a carbon price of $30 a tonne. That is the sort of price high-quality units in the international Kyoto market have been trading at.
* Multiply 104 million tonnes by $30 a tonne and 50 per cent, which is agriculture's share of national emissions, and you get $1.56 billion. "That's quite a transfer of wealth from taxpayers to farmers," Terry said.
Invitation to biggest users
The Government wants to limit the number of firms that are obliged to take part in carbon trading.
It plans to place the "point of obligation" as far upstream as it can - the oil companies, and the producers or importers of coal, natural gas or geothermal steam.
However, it is open to the idea of allowing large users of fuel, like the electricity generators or airlines, to opt in to the system.
If Genesis Energy or Air New Zealand, for example, thought they could do better managing the risks around carbon prices than their suppliers of jet fuel or coal, they could opt to become the point of obligation.
Naturally that would mean carving out the fuel supplied to them from their upstream suppliers' liabilities to avoid double counting.
When agriculture is brought into the system in 2013 the Government has indicated a preference - no more than that - for making the processors, like Fonterra and Affco, the point of obligation.
