Isramart: City Forests holds off on carbon initiative

Isramart news:

City Forests in Dunedin is not rushing to sign up to a Westpac bank pool buying foresters' carbon credits, but believes credit sales will pick up when the emissions trading scheme (ETS) comes into force on July 1.

With low demand for credits at present, Dunedin City Council-owned City Forests appears to be positioning itself to reap the benefits of supply-and-demand economics, as opposed to pooling its credits now with others at what could be a discounted rate.

In early February, City Forests boosted its bottom line $3 million after signing its inaugural carbon-credit deal with an unidentified New Zealand company.

The deal was brokered through a specialist Auckland-based company.

Westpac bank has begun buying carbon offsets from New Zealand forest owners with the aim of selling them to firms which are big polluters.

Westpac has approached about 600 foresters in a bid to pool carbon offsets issued to them to sell in large lots to firms such as refiners and cement makers that will have to meet carbon costs under the ETS.

When contacted, City Forests chief executive Grant Dodson confirmed Westpac had recently sent an "introductory email" on its intentions.

He said he would meet them before the end of the month, but no offers had been made.

"If I am sounding luke-warm [to Westpac's proposal] it is because most of the emitters are sitting on their hands and not buying [carbon credits].

But come July, when their liability comes in, I would expect increasing demand from them," Mr Dodson said.

About a-third of City Forests' 16,1000ha of forestry was eligible, under the Kyoto agreement, to produce carbon credits as the trees were planted after 1990.

After selling the inaugural 150,000 credits, City Forests has 11,000 left for sale on the global "spot market".

In September last year, southern forester Ernslaw One sold more than $10 million of carbon credits to the Norwegian Government in what was believed to be the first international carbon-credit sale by a New Zealand company.

Mr Dodson said while credits were capped at $25 per tonne, he understood major forest owners were selling credits in the $20-$21 range.

Smaller forest owners, who would have been part of the Westpac mailout, may have only about 10,000 credits to sell and their prices may be at a discounted price of $19-$20 per tonne.

Mr Dodson said some of these smaller forest owners could go into a "pool situation" such as that suggested by Westpac.

"It is an open market and there will be a few players [after July 1], which is good if you are a holder of credits and someone wants your commodity."

New Zealand's ETS, only the second national scheme outside Europe, will ramp up from July with the entry of power generators, transport firms and steel and cement makers, which emit about half the nation's greenhouse gases.

"We've done some deals," said Lloyd Cartwright, head of New Zealand financial markets for Westpac Institutional Bank, declining to give specific details.

"You can see the deals in the market and nothing is going through near $25," Mr Cartwright said in an interview, referring to the scheme's initial capped price.

He pointed to the price and regulatory risks of entering the fledging ETS, particularly since it faces a mandatory government review in 2011.

Neighbouring Australia last week further delayed its ETS, and a climate Bill in the United States does not yet have enough backing to pass the Senate.

Some New Zealand firms have called for the Government to further water down or delay the scheme, something it has refused to do.

The ETS centres on trading New Zealand units (NZUs), which represent a tonne of carbon dioxide equivalent.

Polluting firms will have to surrender these to the Government annually, while foresters can receive them free as reward for growing trees, which soak up planet-warming carbon dioxide as they grow.

The catch for foresters is the liability they face when they harvest trees or if their plantations are wiped out by fire.

Mr Cartwright said foresters had to understand the risks of cashing all their credits and not banking any for possible future liabilities to the Government.

Under the scheme, between July 1, 2010, and January 1, 2013, emitters have the option of paying a fixed price of $25 per tonne of carbon, or going to the market and sourcing cheaper NZUs from foresters.

Polluters also will only have to surrender one unit for every two units of emissions.

Critics have said the ETS is too weak and will only result in muted trade in the initial years because of a large amount of free NZUs that will be allocated to energy-intensive firms that export their goods.

This will cut demand for NZUs.

Brokers and other market players have reported only a small number of deals to date and do not expect the market to take off in a major way, at least in the first year.

Some deals have gone through covering the conversion of NZUs into sovereign "assigned amount units", or AAUs, under the Kyoto Protocol, with buyers in Japan and Europe paying in the range of 6-10 ($NZ10.80 to $NZ18) a tonne.

Mr Cartwright said the bank was initially focused on catering to New Zealand polluters but was also looking at the AAU trade.

"Possibly yes; we've done some work on that," he said.

He said the bank was trying to distinguish itself from brokers by taking on price risk.

He said he believed firms that were already aggregating or pooling forestry credits were not taking principal risk.