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Prudent to prepare now for ETS

By Scott Whitaker, Partner and Ross Keenan, Senior Solicitor

First published in The Rural News 21 April 2009

An amended Emissions Trading Scheme could be in full swing late this year, despite currently being on hold while under review by the Government.

Irrespective of any changes, what are some potential implications of the scheme on the rural sector once it comes into operation?

When entering into contracts for the sale and purchase of land, or the grant of forestry rights, or even simply the lease of land, it will be necessary to deal with:

• The transfer and/or use of emissions units
• The control of activities which might leave the land owner liable for emissions or credits (e.g. the receipt of units),
• The appropriate apportionment of responsibility and liability between the parties. 

While the ETS may change, it would be prudent to deal with these issues generally in any contracts currently under negotiation.

The ETS is principally a product of two statutes.  The Climate Change Response Act 2002 and the Climate Change Response (Emissions Trading) Amendment Act 2008.   These effectively implement New Zealand’s obligations under the Kyoto Protocol to put in place systems for reducing greenhouse gas emissions (of which carbon dioxide is the most well known) and to establish a framework for the proposed New Zealand Emissions Trading Scheme.

While detail of the regulations is still to come, the basic principles and frame-work are in place.  These are that anyone producing  greenhouse gases should pay for their emissions, and that assessing emissions should be placed early in the chain on primary producers (as opposed to later in the chain on individual members of the public).

Participants in the ETS will essentially have three core obligations:

• To monitor the emissions they are responsible for
• To report these each year to the Government
• To effectively pay for their reported emissions, whether by paying in units already held or buying units to cover the payment. 

Units will be allocated without charge to the forestry and agricultural sectors, as well as to trade-exposed entities, with a phase out of free allocation for agriculture and trade-exposed entities expected to start in 2018.  In other sectors, where the cost of carbon is expected to ultimately be passed on to the consumer, there is no free allocation.  Instead, units will be auctioned at public tender.

Of particular interest to the rural community are the implications of the ETS for the forestry and agriculture sectors. 

Forestry

The ETS distinguishes between pre 1990 forests and those post 1989. The former is forest land that was such on  December 31 1989, was still forest land on  December 31, 2007, and consisted predominantly of exotic forest species.   Post 1989 is an exotic or indigenous forest that was or is established after the end of 1989 on land that was not a forest on  December 31, 1989.

Owners of pre 1990 forests can harvest and then replant or regenerate their forests without joining or being subject to the ETS and incurring liabilities. If the forest is small (i.e. less than 50ha) and the deforestation activities involve trees designated as weeds, they may apply for an exemption from the ETS.  For guidance on the exemption process refer to the MAF website at www.maf.govt.nz/sustainable-forestry .

If an owner of a non-exempted pre 1990 forest deforests the land after  January 1 2008 and does not replant or regenerate it, they will be liable for the carbon dioxide emitted. This applies if the area is more than two hectares in the five years starting  January 1 2008, or any subsequent five year period.

Owners of non-exempted pre 1990 forests may receive a one-off allocation of units on the basis of the size, age and purchase date of their forest landholdings.  This allocation is proposed because the application of the ETS to the owners of non-exempted pre 1990 forests is essentially compulsory.

Owners of post 1989 forests may generally choose whether to opt into the ETS or a MAF Permanent Forest Sink Initiative scheme (see www.maf.govt.nz/sustainable-forestry . The ETS is not compulsory for them.

Agriculture

The agricultural sector participants will be fully subject to the ETS from the start of  2013.  Before that, the Government will bear the cost of the agricultural sectors non-carbon dioxide emissions.  However, the sector must begin monitoring their emissions from 1 January 2012.

The Government has not yet decided who will bear the brunt of initial responsibility - dairy and meat processors and fertiliser companies - or individual farmers.

In any event, free emissions units will be allocated to the agricultural sector over a significant period of time (e.g. until sometime between 2019 and 2029) during which the level of free allocation will be reduced to zero.

Disclaimer:  This article is general in nature and the author does not accept any responsibility or liability for any action or inaction of any person in connection with it or any error.  Any person with concerns or questions about the ETS and its application to them should obtain legal advice.