Mighty
River Power is not liable to buy additional carbon credits costing some $34.7
million after the Court of Appeal ruled against NZ Carbon Farming, owner of the
Hawarden Forest in north Canterbury.
The tangled mess which is the carbon emissions
trading scheme, created as a political response to feared global warming, was
compounded in Mighty River Power’s agreement to buy carbon credits from NZ
Carbon farming. The two could not agree
when payments fell due, there were arguments about overpayments and
complications from changes to the accounting treatment for carbon capture by
forestry.
Eighteen months into its long-term
contract to buy carbon credits, Mighty River Power was told by NZ Carbon
Farming that scaling-up mechanisms in the contract had the effect of doubling
the price payable, from $36 million to $71 million. This followed their contract using government-issued
“look-up tables” to estimate carbon capture by Hawarden Forest while new rules
required a field measurement approach applied specifically to individual
forests. New rules had the effect of
doubling the carbon credits available for transfer from Hawarden Forest.
Carbon emissions trading is intended to put
a price on carbon to force a reduction in atmospheric pollution. Specified emitters of carbon are required to
pay for the privilege. This can be
“paid” in a number of ways. Electricity
generator Mighty River Power operates a risk management policy designed to
cover at least 50 per cent and at most 100 per cent of its obligations. Carbon credits come from government (as an
incentive to develop renewable energy projects), under long-term contracts (as
with NZ Carbon Farming), and market purchases on the spot market.
The court was told Mighty River Power and
NZ Carbon agreed in January 2012 to a long term contract for the purchase of
carbon credits. Evidence of prices and
volumes were supressed. The volume of
carbon credits potentially available from new wood growth in the Hawarden
Forest was an issue in negotiations.
Mighty River Power was looking to balance its emissions risk management
portfolio. At the time of negotiations,
the take or pay agreement for carbon credits was assessed using a guide
published by the Ministry for Primary Industries: the “look-up” tables. These tables were about to be replaced by a
field measurement approach: a more precise assessment of potential carbon
credits determined following a field examination of individual forests. The density of Hawarden Forest and its
silviculture meant the future volume of carbon credits doubled in comparison
with the “look-up” tables. Armed with
this new information, NZ Carbon said the revised volume applied to the
minimum/maximum annual deliveries in Mighty River Power’s purchase contract,
doubled the number of carbon credits it had to take and pay for.
The Court of Appeal said that NZ Carbon
Farming’s interpretation parted company with commercial commonsense. The court ruled that while the contract
referred to carbon credit volumes assessed by the “look-up” tables, the
scaling-up mechanism in the contract recognised different carbon credit volumes
would follow from application of the field measurement approach. The parties did not intend during their
negotiations that later introduction of the field measurement approach would
trigger an increase in volumes to be purchased at the contract price. The fact that NZ Carbon took no objection to
the contract’s operation in its first eighteen months, at a time when the field
measurement appproach was in operation, was
a further indication of both parties intentions at the time the contract was
negotiated, the court said.
NZ
Carbon Farming v. Mighty River Power – High Court (9.06.15) & Court of
Appeal (16.12.15)
16.023