New Zealand closes carbon trading loophole

Fri May 16, 2014 12:05am EDT

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May 16 (Reuters) - New Zealand has closed a loophole in its emissions trading scheme that had allowed foresters to earn several hundred million dollars in arbitrage opportunities by trading their emission permits for cheaper U.N. offset credits.

The New Zealand market pioneered emissions trading in the Asia-Pacific region when it launched in 2008, but has been riddled with controversy as critics say its lax rules means it does nothing to cut the country's greenhouse gas emissions.

Foresters who planted their trees after 1989 will no longer be allowed to use U.N. offsets to meet their obligations under the national carbon market, said a budget bill released on Thursday night.

"The purpose ... is to prevent reregistration arbitrage, which was an unintended consequence ... and arose from significant differences between the price of New Zealand units and the price of certain Kyoto units," the bill said.

The move pushed New Zealand Unit (NZU) prices up 20 percent in early trading on Friday as sellers retreated.

Landowners with forests planted after 1989 can voluntarily join the emissions trading scheme (ETS). The government gives them permits, called New Zealand Units (NZUs), for each tonne of carbon dioxide stored in their trees.

They must hand permits back to the government when they harvest the forest, or if they wish to leave the scheme.

But over the past four years, forest-owners have taken advantage of scheme rules which allow participants to use offset credits issued by the U.N. to meet their full obligation requirements, a rule meant to keep costs down for utilities and industrial emitters.

Credits from projects in Russia and Ukraine, known as Emissions Reduction Units (ERUs), trade at a fraction of the NZU price - one NZU is currently worth the same as 23 ERUs.

Post-1989 foresters have joined the ETS, received NZUs from the government, sold them to emitters and bought cheaper ERUs back, then handed those ERUs back to the government before exiting the scheme. In the process they have made a huge profit but not cut a single tonne of CO2.

Rules let the foresters reregister the following year and repeat the procedure.

Government data shows that post-1989 foresters received over 50 million NZUs in the 2010 to 2012 period, the latest years for which data is available.

Buyers have been able to keep those NZUs - enough to meet all the obligations for all emitters in the scheme for three full years - in their accounts for future use.

The new bill cutting post-1989 foresters off from U.N. offsets came into force on Friday. The Forest Owners Association (FOA) complained that no forewarning was given that would allow them to prepare.

"Forest owners who have bought international units to meet their obligations during the next 12 months will be forced to sell them at a likely loss," said FOA President Paul Nicholls. (Reporting by Stian Reklev in Beijing; Editing by Muralikumar Anantharaman)

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