Tuesday, 15 September 2015

Calculating the size of the bank

By Judd Ormsby and Suzi Kerr

From the 1st of June this year NZ ETS participants have been able to surrender only NZUs or NZ AAUs. NZ AAUs are units designed for NZ to meet Kyoto commitments. Prior to June participants could also surrender international Kyoto units (such as CERs and ERUs). Since November 2012 participants have surrendered almost exclusively cheap international units but many have received free allocation of NZUs which they have saved for future use. A natural question to ask is ‘how many NZ AAUs and NZUs are there in private holdings?’ We refer to this as the NZ ETS bank, or the bank for short. The size of the bank affects prices in the NZ ETS (we have previously blogged about our own simple modelling – here and here).  It will also affect how many NZUs the government may want to auction for use in the ETS in coming years, and hence how much revenue the NZ ETS could generate.

From the NZ EUR registry, we can see details about allocations and surrender over time, up until December 2014. While the website doesn’t explicitly list the size of the bank, we can get a good estimate of what it was at the end of last year by calculating the number of units that have entered private holdings and then subtracting the number of units that have since left private holdings.

Table 1 summarises the information for NZUs. NZUs can find their way into private holdings in one of two categories listed in the NZ ETS Holdings and Transaction Summary: “units transferred for entitlements” or “units allocated”. By the end of last year these categories added up to 139.7 million NZUs. NZUs are subtracted from private holdings when they are surrendered to meet emissions obligations, cancelled voluntarily, or converted to NZ AAUs (by eligible participants) for overseas sale.1  By the end of last year, these categories added up to 15.4 million units.2  Taking the inflows and outflows together there were 124.3 million NZUs still in private holdings at the end of 2014.

Table 1
Total  NZUs allocated              66,249,980
Total NZUs transferred for entitlement      73,472,694
Total NZUs put into stockpile            139,722,674
Total surrendered                      14,106,055
Total voluntarily cancelled                     18,645
Total replacements                         Unknown
Transferred overseas directly                      0
Converted to AAU (and then transferred)              1,236,690
Total NZUs removed from Stockpile      15,361,390
Estimated NZUs in stockpile (end of 2014)   124,361,284

Table 2 summarises the information for AAUs. Like NZUs, NZ AAUs enter private holdings through the category titled “units allocated”. However, unlike NZUs none have entered the system through “units transferred for entitlement”. NZ AAUs also enter private holdings (briefly) when NZUs are converted to NZ AAUs for overseas sale.3  Adding these categories together we see that approximately 5 million AAUs have entered private holdings. NZ AAUs leave private holdings when they are surrendered, voluntarily cancelled, or transferred overseas.4  This subtracts a total of approximately 2 million units from the bank. The private bank of NZ AAUs was therefore around 3 million units at the end of last year.

Table 2
Total AAUs allocated                 3,833,764
Total NZUs converted to AAUs for overseas sale 1,236,690
Total foreign AAUs transferred into NZ              19,532
Total AAUs put into stockpile         5,089,986
Total surrendered                            709,248
Total voluntarily cancelled                      35,008
Transferred overseas directly                 1,299,862
Total AAUs removed from stockpile         2,044,118
Estimated AAUs in stockpile (end of 2014) 3,045,868

Taking both the bank of NZUs and NZ AAUs together, there were 127.4 million units eligible for future surrender at the end of 2014.5 

What does this mean?
The bank contains nearly four times as many units as the 32 million surrendered in 2014 (see page 13 of the 2014 ETS Annual Report). Valued at current NZU prices of $6.75 per tonne the current holdings of NZUs and NZ AAUs are worth 860 million dollars.  

Net New Zealand wide emissions (i.e. including forestry removals, and also emissions which do not face a surrender obligation, notably agriculture) in 2015 were projected to be 67.9 million tonnes (Ministry for the Environment 6th National Communication, page 100). If a unit were worth one tonne of carbon equivalent emissions then the private bank is about 1.9 times these 2015 projected emissions. However, a unit is not worth one tonne as non-forestry participants can surrender 1 unit for every two tonnes of emissions.

In the absence of access to Kyoto units that were cheap relative to NZUs the bank would have been smaller but it would not have been zero. Participants bank units in anticipation of future liabilities, for example some foresters bank units as their forest grows in order to meet their liabilities when the forest is harvested.

1. There are two more ways in which NZUs can leave or enter private holdings: they can be transferred back to the NZ government for repayment or transferred to participants as reimbursement. This usually occurs when an entity is allocated units and the size of the allocation is subsequently revised. This number is not reported on the NZEUR Holdings and Transactions Summary, but can be found in the annual reports on EPAs website here. Unfortunately these numbers are not broken down by unit type, but net reimbursements are around half a million, and so for our purpose small enough to be ignored when calculating the bank.

2. The information for the number of NZUs surrendered and cancelled can be found on the NZ EUR Unit Holdings and Transaction Summary page. Information on the NZUs converted for overseas sale can be found on the NZU conversions page.

3. A very small number of international AAUs (19,532) have entered private holdings from overseas transfers. International AAUs are no longer allowed to be surrendered in the NZ ETS so we don’t want to include them in our estimate of the stockpile, and hence we exclude them from our calculations. These units may be counted in the outflows, through units transferred overseas, in which case we should include them in the inflow. At any rate, how we deal with these units is trivial relative to the size of the bank.

4. Throughout we are assuming that NZ AAUs transferred overseas will not be transferred back to New Zealand. Even if one did assume that all the units transferred overseas came back it would only increase the total private holdings of NZ AAUs and NZUs by 1.2 million units from our current estimate of 127.4 million units.

5. Since that time more units will have been allocated to participants, through industrial allocation and for forestry. These numbers are not yet known.

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