Shaw JamesHon JAMES SHAW (Minister for Climate Change): Thank you Madam Chair. There's a lot between those two questions and so I'll just try to unpick it as best I can.Firstly just to complicate matters even further there are two types of offsetting. One is where you—which is I think what the Hon Scott Simpson was referring to—buy an offset in the form of forestry. There's also something called offset forestry which is where you have an existing forest in one part of the country and you plant up another and then you cut down the other forest. So it's about flexibility in land use. The idea is that if I want to cut down this forest over here permanently and convert it to say dairy or some other land use then in order to avoid the liability of losing that forest I have to plant up another. So the new forest is the offset against the one that I've cut down.NZ Carbon Farming's proposal was actually related to that second type. One of the features of this bill is that we're changing the nature of how we account for forestry. So the member will be familiar during the select committee that historically we've used a sort of sawtooth accounting. So you acquire units up to a certain point you cut your forest down you surrender the obligation and then repeat. What we're moving towards is an averaging system. So you accumulate up to the average life of the forest and then you basically stick with that average over time even if you cut down and replant that forest over time. That's one of the ways of making the system simpler for smallhold forests to participate in the scheme because they don't have to worry about this constant acquisition and obligation system there. However in moving between those two systems it creates a discrepancy which ends up with a liability on the Crown's books which we've got to settle up in the year 2022 between those two systems. So the issue that NZ Carbon Farming are saying is Well we've got these pre-existing forests. We'd like to be able to move them to another part of the country and in so doing we can take advantage of the sort of financial income that would enable us to then scale up even more." which on the face of it sounds good. However there are some complications to that one of which is it creates a significant liability on the Crown's books and in Treasury's view would result in a transfer of several hundred million dollars from Treasury to that company.So whilst the—Hon Member: How much please?Hon JAMES SHAW: Several hundred million dollars from Treasury to that company. Whilst the issues that they're pointing at are worth exploring given the need to make sure that we consider all of the unintended consequences we do need to drill into the issue of the liability on the Crown's books.We need to test some of the other issues that we were exploring earlier about what it would mean in terms of afforestation in areas where it may be inappropriate for that to occur. The view that we took was now is not the time to introduce that at this point in the legislation. As has been pointed out a number of times this is five years' work with multiple rounds of consultation huge amounts of analysis and so on. So this change that's been proposed is simply too significant to introduce at this stage without a similar level of analysis and consideration. What we have said is that we will explore it. Actually this was a policy decision that we made sort of right before we started drafting—that we would come back in 2021 looking at organisations like that and to explore that. So that's on one side. On the other side of course we've got—in particular beef and lamb and others in the drystock who are concerned that—about what I was saying a significant move like that could lead to loss of productive land in areas where it's inappropriate or would have an untoward effect on rural economies and communities and so on. There were some proposals there as well for limiting the ability of the other type of forestry offset which is the ability to use offsets.Hon Member: That's kicked to the commission though isn't it?Hon JAMES SHAW: Yes. Those two things are kind of countervailing forces and both of them have significant sets of implications some of which I've canvassed quite a lot already. So we do have a work programme. It is some regret to me that once we have passed this bill it will not be the final chapter of the emissions trading scheme that there is therefore further work to be done. And we will come back again possibly with a future amendment based on exploration of those two sets of factors. I just want to come back to—Hon Member: It's the climate equivalent of RMA.Hon JAMES SHAW: Yeah a little bit! Ha ha! God I hope it's not like the Resource Management Act. I do want to come back to the point that he made—this sort of high-level point though about the use of forestry emissions offsets to kind of buy your way out of sin. Now part of the issue here of course is that the price has been artificially low. And one of the reasons why organisations choose to buy forestry offsets for their emissions rather than invest in new technologies that have a lower emissions profile themselves is because it's been cheaper to buy forestry offsets than it has been to change the technologies and their manufacturing processes for example. So there is a point—and this is kind of counterintuitive—at which if the price is allowed to float and operate like a true market it actually becomes cheaper to invest in the new technology than it does to buy a forestry offset. So different technologies kick in at different prices. One of the pieces of advice that we've received is that some of the low-grade industrial heat for things like milk drying units for example become quite feasible at about $40 a tonne. Whilst you might say well at 40 bucks a tonne you're talking about carpeting the country in trees. Actually it becomes more feasible for Fonterra and other users of that kind of heat in their industrial process to swap out their existing technology for new technology. That is actually how the scheme is supposed to work. The problem is that because we've had this artificially low price cap Fonterra's never been allowed to get to that point so they've gone for forestry offsets instead. I know that seems counterintuitive but that is actually how the programme is supposed to work. There's another component to that as well which is that organisations are already looking at—they're starting to forward-price decisions. So even whilst the price is still comparatively low at $25 a tonne they're starting to make investment decisions on the basis that the price will be eventually $40 or $50 or higher. They're not quite sure when that will occur but the point is if you're having to buy a new plant that plant's going to have 30 or 40 years in its asset life and at some point during that 30- or 40-year period you know that the price will be above $40 a tonne—and probably sooner rather than later. Therefore if you buy you know a fossil fuel - powered replacement now then you're actually going to be stuck with a really expensive liability within say 10 or 15 years. And therefore it makes more sense to invest in the new plant even at $25 in the knowledge that you know that's not always going to be the case. An example of this was Synlait who invested in an electrode boiler in their plant down in Canterbury. At 25 bucks a tonne that makes no sense at all. But it was a new boiler and they know that that's going to be in place for quite some time and so it makes very good economic sense within the life of that asset. Similarly Ports of Auckland made a choice. One of their tugboats had come to the end of its life. They have a commitment to be carbon neutral by 2030. So the next tugboat they buy which will have a life of about 40 years 30 years of its service will be after the point at which they're supposed to be carbon neutral. Therefore they had to buy a zero-emission tug. Now it turns out that no one in the world makes zero-emission tugs in that weight class. So they had to go looking for a manufacturer. That drove the price up to twice what it would be for an off-the-shelf diesel-powered tug. But you know if you take the full life-cycle cost of it it actually ends up saving them over $2 million both in the operations and the capital expenditure. So that is one of the unintended consequences of artificially holding the price low because there's an economic crisis on that has really long-term consequences which is that you know organisations don't have that predictability to be able to make decisions on that basis."