May 16, 2014 / 6:42 AM / 4 years ago

UPDATE 1-NZ carbon jumps 25 pct on unexpected rule change

* Govt bans post-1989 foresters from using U.N.-issued offsets for compliance

* Ban is effective immediately, leading to criticism fair notice not given

* NZ carbon ends at 5-mth high, posts biggest 1-day gain since Aug (Adds market response and trader’s comments)

By Stian Reklev

May 16 (Reuters) - Carbon permits in New Zealand’s emissions trading scheme (ETS) jumped 25 percent to close at a five-month high of NZ$3.90 ($3.37) on Friday, as traders reacted to an overnight rule change that is likely to tighten supply.

Spot New Zealand Units (NZUs) opened at NZ$3.10 but were bought up as news spread that the government had banned post-1989 foresters from using U.N.-issued offsets for compliance with immediate effect, forcing them to use NZUs instead.

Supply, especially from foresters, quickly dried up, and emitters pushed the price up as they chased any NZUs they could get. The contract traded as high as NZ$4 before settling at NZ$3.90, the biggest intra-day price move since last August.

“There is not a forester in sight,” said one market participant about the group that has traditionally been the biggest sellers of permits into the New Zealand market.

The rule change, entirely unexpected and buried deep in government budget papers released Thursday night, was put in place to close a controversial loophole in the scheme that had let some foresters earn hundreds of millions of dollars in arbitrage opportunities by trading their NZUs for cheaper U.N. offsets.

Landowners with forests planted after 1989 can voluntarily join the ETS. The government gives them 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 24 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.

But while the market in general welcomed the move to end this practice, there were complaints the rule came into effect immediately, leaving foresters with no opportunity to prepare.

As late as December, the government said that everyone in the market would be allowed to rely on U.N. offsets until May 2015.

Some foresters that have swapped their NZUs for this year into ERUs will now be forced to return to the market to buy NZUs at higher prices.

“The government changed the rule without giving fair notice,” one trader said. (Reporting by Stian Reklev in Beijing; Editing by Muralikumar Anantharaman)

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