Hating trees

New Zealand's Zero Carbon Act sets net emission targets. 

This is sensible. The atmosphere does not care whether the next tonne of CO2-e is not-emitted or removed. They amount to the same thing. 

It also aligns with the ETS's design, which requires surrender of an NZU for putting CO2-e into the atmosphere and awards an NZU for pulling a tonne of CO2-e out of the atmosphere. 

Arguably NZ ought to have had a carbon tax in the first place and a subsidy for removals, but it's hard to see it's worth the switching costs. 

There are things I would improve in the ETS. 

I would legislate the quantum of *unbacked* NZU that can be auctioned or allocated between now and 2050. That quantity, plus any existing stockpiles of unbacked NZU still held in reserve, would represent net emissions from the covered sector from now until forever. 

I would replace the price cap with one that tracks global weighted average carbon prices in credible systems. If prices here ever hit that cap, the government could purchase units in the cheapest country in the bundle that defines the average, retire them, and issue an equivalent quantity of NZU. Those units are backed by reductions elsewhere. NZ carbon prices would never exceed international carbon prices. 

And I'd rejig industrial allocations to ditch the 'reduces by 1% per year no matter what' with 'scales down commensurately with emissions intensity in carbon-leakage-relevant markets'. And look closely at CBAM mechanisms to make up differences. I think one was likely warranted in cement.

But none of those would take forestry out of the ETS. Trees sequester carbon. It's removed from the atmosphere as trees grow. The ETS deems all carbon immediately returned to atmosphere on harvest, which is clearly wrong, but the averaging used for credit award might be a bit too front-loaded - I've not gotten deeply into the weeds on that. Maybe it could use some fine-tuning. And there's a defensible case for surrender-or-replant liability falling onto the land on which a carbon forest sits if the company awarded NZU while trees were growing has folded before the surrender-or-replant obligation hit. 

Those are all just tweaks. The bones of the thing are fine - other than the 'not having a durable intertemporal cap' part, which is eminently fixable. 

The system finds its own balance. When it's cheaper to harvest carbon from the atmosphere than to prevent its emission, people will plant trees and generate NZU. The more that that happens, the higher the NZU-price necessary to draw the next hectare from whatever other use into carbon forestry. The land with the lowest combined opportunity cost and conversion cost converts first, then the land with the next-lowest cost, and so on up the track. And tech for reducing gross emissions keeps improving. Hard to see combustion engines continuing for much longer at the pace of battery development, so long as trade with China can continue. 

Simon Upton wants to ban trees from the ETS and perhaps only allow them for offsetting agricultural emissions. 

Describing the 18 year-old emissions trading scheme (ETS) as “rudderless”, Upton released new modelling with insights on how excessive reliance on forestry plantings leads to a collapse in the scheme’s NZ Unit price on a tonne of carbon by the mid-2030s while achieving very little at present.

Ok. Recall that NZUs are durable and don't expire. And that people investing money to plant carbon forests aren't idiots. If a carbon forestry conversion only makes sense if you can sell NZU for a particular price, you won't invest in conversion if you expect the price to be below that. 

No carbon forester has to sell their NZU when they receive them. They can hold them. That means the carbon price path ties to the interest rate. If I expect that NZU will be worth 8% more next year than this year, and selling an NZU today to invest in a bond only gets me 4%, then I'll hold the NZU. Carbon prices today go up relative to future NZU prices. The price path should wind up roughly following the interest rate. 

And, if carbon prices *did* unexpectedly collapse, carbon foresters have another option. Suppose you planted a while back and have already harvested NZU that you've then sold. If the price of carbon credits drops substantially, you can fell your carbon forest, sell the timber, and buy cheap NZU to meet your surrender obligations. 

“The modelling shows that New Zealand’s net emissions would drop below zero around 2040, meeting the first leg of the 2050 domestic target of net zero early.

“However, net emissions are projected to only stay below zero until the mid-2050s. That means that the second leg of the domestic target – that net zero is maintained ‘for each subsequent calendar year’ would not be met,” the report, tabled in Parliament today, says.

Titled “Adrift: What future does the ETS have?”, the report makes numerous recommendations for reform, all with a focus on changing how forestry is treated.

“There will be a cry from the (forestry) sector to make it stable and certain but what we are seeing is that without change, it won’t work,” said Upton.

If people hold NZU and redeem them after 2050 rather than before 2050, that isn't any kind of problem. So long as the government is not issuing or allocating unbacked NZU after 2050, and NZU surrendered after 2050 are either ones generated through sequestration, or ones that someone held onto rather than redeeming before 2050. And it is strictly better for a net tonne of emissions to happen later rather than earlier. Carbon accumulates. An NZU surrendered today is more years of higher net emissions than an NZU surrendered in 2070. 

Upton identified permanent forests as particularly prone to abandonment and limited management since they stop producing ETS revenue when they are mature. However, they remain a major fire risk and have to be maintained in perpetuity if the carbon they store is not to be released.

If you have a registered carbon forest and it burns down, you have two options. You can surrender NZU to cover the carbon that was released to atmosphere, or you can replant. If you replant, you do not get credit for re-sequestering the carbon that your forest had just released. 

It's fine, unless the surrender obligation falls on no one, carbon prices are high, and replanting has become expensive. But that is also solvable. For new forest registrations, require that surrender obligations follow through to the land if all else fails. In that case, the land's owner picks up the obligation. 

It feels like a whole lotta folks really wish that we did not have legislation targeting net emissions or an ETS targeting net emissions. That they think gross emissions are the sin, and sequestration is some form of sale of indulgences. And that because it turns out that planting trees is a very cost-effective way of sequestering carbon, we're somehow enabling sin. 

But this isn't and shouldn't be a religious mission. It's a tech problem that eminently solvable. Target the ETS at its one big job of reducing net emissions in the covered sector, make sure that it's as strong as possible, and use other policies if you want to target other stuff.