December 2020

Changes to the Emissions Trading Scheme coming into effect on 1 January 2021

The Climate Change Response (Emissions Trading Reform) Amendment Act 2020 came into force in June 2020. This Amendment Act will help New Zealand reach its targets to reduce emissions. It changes how the Emissions Trading Scheme (ETS) operates for all sectors.

For forestry, some new provisions under the Act come into effect on 1 January 2021. Three key changes that affect the forestry sector are outlined here.

New penalty regime

Failure to surrender or repay units on time

From 1 January 2021 forestry participants with an emissions return liability of more than 25,000 units per year in their emissions return will face new penalties if they do not surrender or repay units by the due date. This includes surrenders following deforestation, the harvesting of post-1989 forests or deregistration of forest land.

If a participant does not surrender or repay units on time, they will need to:

• surrender or repay the outstanding units owing, and
• pay a penalty of three times the value of the outstanding units owing.

For some forest owners this penalty could be hundreds of thousands of dollars, and it cannot be reduced. It is therefore very important for participants to ensure they avoid failing to surrender or repay units on time.

Until 1 January 2023, the current penalty of $30 per unit owing will continue to apply to forestry participants with a liability of less than 25,000 units per year in an emissions return.

Errors in emissions returns

From 1 January 2021, incorrect emissions returns will be subject to a new process and penalty.

If we find errors in a return, we will notify the participant that we are going to amend it. Deadlines for any outstanding penalties or units owing from the return will be paused until the return is corrected.

When the return is amended, new penalties will apply if the participant didn’t take reasonable care preparing the return. These will be based on:

• the size of the error,
• the behaviour of the participant,
• the current carbon price, and
• whether the error was voluntarily disclosed.

A penalty of up to $1000 applies if the participant’s error meant they received too few units or surrendered too many units.

Failure to submit a mandatory return

Before the law change, ETS participants who didn’t submit their return in time could have their return ‘assessed’ by Te Uru Rākau, and penalties could apply. From 1 January 2021 we will tell participants they didn’t submit their return and they will have 20 working days to submit it.

A new penalty will apply if the participant doesn’t meet the extended deadline and has not taken reasonable care. This will be based on:

• the number of units the participant owes/receives,
• the behaviour of the participant,
• the current carbon price, and
• whether the error was voluntarily disclosed.

A penalty of up to $1000 applies if the participant received units from the return.

Note: A mandatory emissions return is required:

• within six months of the end of a mandatory emissions return period (the next required submission period is 1 January 2023 to 30 June 2023),
• within 20 working days of a transmission of interest occurring, for example land sale and issuing or expiry of forestry rights or leases, and
• when all or part of an area of post-1989 land is deforested and must be removed from the ETS or is voluntarily removed.

Payment of penalties

These penalties are due within 20 working days of receiving notification of the assessment by Te Uru Rākau. The Environmental Protection Authority may agree to a deferred payment arrangement.

Entitlements while an obligation is outstanding

If a participant has earned units through an entitlement (for example, from their forest growing) any outstanding surrender or repayment obligation they have from previous years will be deducted from the entitlement before it is paid.

Rights and leases

Before the law change, when a forestry lease or right was granted on registered post-1989 forest land participation in the ETS would automatically transfer to the new holder. From 1 January 2021, this transfer will become ‘opt in’.

This means that before the transmission occurs, both parties will need to agree in writing whether ETS participation will be transferred. This could be part of the lease or right agreement, for example. Before the right or lease takes effect, the current participant (transferor) must notify Te Uru Rākau in writing if ETS participation is transferred to the new holder.

Fixed price option (FPO)

When a participant owed the Crown for emissions, the fixed price option let them pay money instead of surrendering units. The FPO will not apply for emissions from 1 January 2021 – the participant will need to surrender units.

The FPO continues to apply to emissions before 1 January 2021, regardless of when the emissions return is submitted or amended. Emissions in a calendar year (for example from pre-1990 deforestation) will use the appropriate rate – $25 per unit for emissions prior to 2020 and $35 per unit in 2020.

There are transitional provisions for post-1989 forestry emissions returns covering multiple years. Under these, the participant will need to submit a net return for all carbon accounting areas covered by the return. Access to the FPO will be pro-rated based on the proportion of the period covered by the return for each FPO rate.

For more information on penalties or the fixed price option – visit the Environmental Protection Authority website

This information is guidance only and is not a substitute for, or in any way an alteration to, New Zealand law, or other official requirements. It does not constitute legal advice, and users should seek advice from qualified professionals before taking any action based on this information.