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NOTE RE EMISSIONS TRADING SCHEME IMPACT ON FORESTS

PRE 1990 EXOTIC FORESTS

Although the Kyoto Protocol says that only forests planted after 1990 can be claimed as carbon sinks, the government has determined that landowners with forests planted before 1990 should be given some carbon credits. This is because if pre-1990 forest land is ever deforested and not replanted, the landowners will be required to surrender carbon emissions units worth millions of dollars.

The draft forestry allocation plan suggests that the allocation for these pre 1990 exotic forests will be around 60 emission units per hectare. At a carbon price of $25 tonne that equates to $1500 per hectare (each emission unit is equivalent to 1 tonne of carbon).

These units are meant to be held until the land is deforested. However, their existence suggests that the value of felling the timber and changing the use of the land to a non-forestry use be compared to the value of the forest left intact or felled and replanted.

For example, if some or all land in a forest is on steep country, and the cost of removing trees is high, and the land is unlikely to be replanted in pine, is there an opportunity for leaving the crop standing (depending on what contracts there might be for felling and whether they can be modified), or replanting in a low cost and low maintenance species, creating in essence a permanent forest sink, and selling the emission units?

In terms of replanting or natural regrowth, there is no limit to species that may be planted or allowed to regrow, provided that the tree species are capable of reaching at least 5 metres in height at maturity in the place that it is located and:

Within 4 years after clearing every hectare has at least 500 trees planted on it or at least 500 trees have naturally established; or
‘Predominantly’ exotic trees are growing on the land and those over 5 metres in height cover at least 30% of the land within 10 years after clearing, or 20 years in the case of indigenous trees.

Note that the landowner assumes the responsibility of determining whether the land will meet these definitions for replanting in the future and therefore whether they will be liable to surrender emissions units.

To give an example, if a forest contains 1000 acres on steep country that (assuming there is enough coverage now for them to fit the definition of forest lands under the Act), would return around $90,000 net profit if felled, but $1,500,000 worth of emission units (assuming a carbon price of $25 tonne).

In terms of replanting options, MAF has indicated that the following species are commonly used in forest planting at the moment.

Exotics

Coastal redwood
Douglas fir
Eucalyptis globoidea
Eucalyptus fastigata
Eucalyptus fraxinoides
Eucalyptus microcorys
Eucalyptus muelleriana
Eucalyptus nitens
Eucalyptus pilularis
Eucalyptus regnans
Eucalyptus saligna
Giant redwood
Lawson cypress
Leyland cypress
Lusitanica
Macrocarpa
Radiata pine
Tasmanian blackwood

Natives

Kahikatea
Kanuka
Kauri
Manuka
Red beech
Silver beech
Totara

However there is no limit in the legislation to the species that may be planted, provided that they meet the height, density or coverage requirements above.

Before 30 June 2009 landowners of pre-1990 forest land have to decide:

to seek an exemption from the scheme for any 50 hectare or smaller lots (less than 2 hectares is not affected);
Not seek any allocation – in which case deforestation and failure to replant more than 2 hectares any time between 2008 and 2012 will require the surrender of emission units;
Seek an allocation – which would help in paying for any emission units that have to be surrendered if deforestation occurs.

The government expects that most pre 1990 forest land will come under the ETS and the legislative scheme described above certainly provides a strong financial incentive to join the scheme.

This analysis is supported by a Ministry for the Environment paper, “Māori Impacts from the Emissions Trading Scheme: Detailed Analysis and Conclusions” prepared in January 2008, before the ETS was finalised, but the analysis is consistent with the scheme as finalised (see http://www.mfe.govt.nz/publications/climate/maori-impacts-analysis-conclusions-jan08/html/index.html)

On pre 1990 forests that report notes:

4.2 Pre-1990 forests

Devolving deforestation liabilities to owners of pre-1990 forests should encourage the retention of a greater proportion of such forests in forestry, rather than see them converted into non-forestry uses, all other things being equal. This should result in a net negative impact on pre-1990 forest land values relative to no emissions pricing, since it will reduce the opportunities faced by some pre-1990 forest owners to convert their land into higher and better uses, at the margin. For example, economic modelling analysis commissioned by the Federation of Māori Authorities suggests that, at an initial carbon price of $15/tonne and initial milk-solids price of $4.42/kg, pre-1990 forest value as at June 2005 would be 13 per cent less with deforestation liabilities devolved to landowners (without any free emissions right allocations) than if they were retained by the Government.20 This value loss arose from reduced dairy conversion options. At an initial carbon price of $25/tonne ($43/tonne) the corresponding value loss was estimated to be 19 per cent (47 per cent) relative to government retention of deforestation liabilities. If landowners were assumed to be unable to take advantage of free pre-2008 deforestation – whether due to institutional constraints on land-use changes or otherwise – the value loss rose to 18 per cent. This figure rose to 26 per cent if only post-2012 deforestation was assumed possible.

This negative forest value impact will be small or even non-existent, however, where pre-1990 forest lands currently lack higher or better alternative uses (given current land-use technologies), and/or with free NZU allocations to forest landowners. It will also be small where forest landowners face other constraints on changing land use. These might include replanting requirements under the Resource Management Act, or other land-use restrictions such as those emerging in some parts of the country to manage the nitrification of waterways, or Department of Conservation opposition to native scrub clearance.

Where pre-1990 forests have essentially no alternative use in the foreseeable future, such as might be the case with many indigenous forests (if pre-1990 indigenous forestry is to be included in the ETS) or forestry on extremely marginal land, the ETS’s impact may be inconsequential. In fact, if the owners of such lands receive a free allocation of NZUs under the proposed ETS, this could result in an initial windfall gain, which could be important to Māori who are large stakeholders in this estate. This is because those NZUs can be traded now for value that was not otherwise attainable, although at the expense of possible future development options. Importantly, the extent of any such gain will depend on the type of allocation mechanism, which initially at least will be based on simple forest land area, favouring lower-valued forests over higher-valued ones.

Another important, related consideration is the extent to which owners of pre-1990 forests are able to apply for exemptions under the proposed ETS. Notable among these is the provision for owners of forest blocks of up to 50 hectares to apply for exemption from deforestation liabilities. This exemption, however, is not available to owners of related bodies which in aggregate hold more than 50 hectares of pre-1990 forests.

PRE 1990 INDIGENOUS FOREST

As far as pre-1990 non-exotic (ie indigenous) forest is concerned, the definition for pre 1990 forest land includes only forest land that on 31 December 1989 consisted predominantly of exotic forest species and has not been felled in the interim. The only indigenous forest included in the scheme in indigenous forest planted since 1 January 1990.

Consequently, no units will be allocated for pre 1990 indigenous forest, but conversely, there is no requirement to surrender emission units if that forest should be felled (felling in such forest is limited anyway by the Forests Act 1949 which requires any felling to be on a sustainable yield basis – essentially limiting felling for “only single trees and small groups of trees” - www.maf.govt.nz/forestry/indigenous-forestry/).

The government has established a Permanent Forest Sinks Initiative which allows for non commercial planting in exchange for the allocation of emissions units. However, this is only available for planting after 1 January 1990.