Detailed tradeable permit regime design questions

Definition of deforestation

Under a tradeable permit regime any party that deforested an area of land would be required to relinquish a suitable number of permits (either general Kyoto compliant emission units or deforestation-specific permits1), or make a cash payment to cover the cost of the carbon released. This immediately raises the question of how deforestation should be defined, and when it should be deemed to have occurred.

Definition of deforestation

Deforestation is defined in the Kyoto Protocol as a change in land use away from forested land (either natural or planted) to another use such as cropland, grassland or settlement. In turn, forested land is defined in the New Zealand context as: a minimum area of land of 1.0 hectare with tree crown cover (or equivalent stocking level) of more than 30 percent with trees with the potential to reach a minimum height of 5 metres at maturity in situ. A forest may consist either of closed forest formations where trees of various storeys and undergrowth cover a high proportion of the ground, or open forest. Young natural stands and all plantations which have yet to reach a crown density of 30 percent or tree height of 5 metres are included under forest, as are areas normally forming part of the forest area which are temporarily unstocked as a result of human intervention such as harvesting or natural causes but which are expected to revert to forest.

It should be stressed that while definition must be used to calculate the deforestation liability of New Zealand as a whole, the government has the right to use a different definition in designing its tradeable permit regime. If it does so, the government will be required to meet any difference between the deforestation payments made by industry under the tradeable permit scheme, and New Zealand’s overall deforestation liability.

As noted in the overview, the government is considering the option of exempting small areas of deforestation from the requirements of a tradeable permit regime. This threshold for the permit regime could be set at a higher level than the 1.0 hectare cutoff that will be used to determine New Zealand’s overall deforestation liabilities (with the government meeting the cost of any difference). In setting a minimum deforestation threshold for the requirements of the tradeable permit regime the government will need to consider its fiscal position, any impacts on the effectiveness of the regime as a whole, and impacts of the level of permits it would be able to allocate.

Questions

1. What minimum land area, and threshold forest definition (characteristics such as potential tree height and stocking density), should be used to determine when the requirements of the tradeable permit regime would apply?

When deforestation will be deemed to have occurred

The question of when deforestation will be deemed to have occurred is less straightforward to answer. Under the Kyoto Protocol rules, forest owners can harvest their trees and replant the area concerned, or allow the land to revert to native forest, without deforestation being deemed to have occurred. But no clear rules are given about the maximum allowable period between the act of harvesting, and the subsequent replanting or regeneration of trees.

To operationalise a tradeable permit scheme the government would need to provide clear rules setting out when deforestation would be deemed to have occurred, and therefore the time at which the requirements of the permit regime would apply. Possible options include stating that deforestation would be deemed to have occurred if:

  • active steps had been taken by the landowner to introduce a new land use (such as stump removal and oversowing, fencing, houses or other farming infrastructure being put in place, or stock being introduced); and/or
  • no steps had been taken, within a specified period of time after harvesting, to ensure that the land would remain under forest cover (such as re-planting, or placing the land under a covenant to protect regenerating trees)

Questions

2. What rules do you think the government should introduce to determine when, after harvesting, deforestation would be deemed to have occurred, and therefore when the obligations of the tradeable permit regime would come into force?

Identification of the party responsible for deforestation

It is common in New Zealand for the party owning a forest to be different from the owner of the land which the forest is planted on. Land ownership can be separated from forest ownership through a number of legal mechanisms, including:

  • forest on land governed by a Crown Forest Licence;
  • Crown forestry leases on Māori land;
  • forest on land under a “forestry right”;
  • forest on leased land.

The government’s preliminary view is that a tradeable permit regime should apply to any party that takes a decision to deforest. Even where the forest and landowner are separate, the government expects that in many cases it will be the landowner that has the power to decide whether or not to deforest and introduce a new land use. However, it is possible that in some situations – such as under a long term lease – the forest owner will have that power. In such a situation the government considers that it should be the forest owner that is subject to the deforestation liability.

The government currently expects that it would use a process of self-declaration under a tradeable permit regime, such as that used for income tax and GST (see Compliance section below for more details). If deforestation was identified that had not been declared the government would determine which party was responsible for the deforestation and seek payment and/or take other legal action. In most instances it is not expected to be difficult to determine which party is responsible for the deforestation in each specific instance, as land owners will generally delegate control over the use of land through a formal legal document or process.

Questions

3. Do you agree that a tradeable permit regime should apply to any party which is responsible for deforesting an area of land, regardless of whether they are the forest owner or landowner?

4. You may wish to provide further comment on the reason for you answer above or propose alternative options for assigning responsibility for deforestation.

Life of scheme

If a tradeable permit regime for deforestation emissions was introduced for CP1, the government’s intention would be that it remain in place through CP2 and any subsequent commitment periods. However, it should be stressed that it is possible that some changes to the design and operation of the regime might be needed in those later commitment periods; in response to changes in the nature of New Zealand’s international commitments, or in response to changes in the way that emissions from other sectors of the New Zealand economy are managed.

Nature of emissions permits

Use of deforestation-specific permits

If it were to introduce a tradeable permit regime the government would need to decide whether to create new, deforestation-specific, permits in addition to the general Kyoto-compliant emission units.

A party that deforests an area of land would always be able to meet its deforestation liabilities by making a cash payment or relinquishing general Kyoto-compliant emission units. However, the government could choose to also establish deforestation-specific emission permits, and allow deforesters to choose whether to cover their emissions by retiring general emission units or deforestation-specific permits.

General Kyoto compliant emission units can be used to cover greenhouse gas emissions from any source, and in any developed country. They will be able to be bought and sold in New Zealand and internationally. In contrast, deforestation-specific permits would only be able to be used to cover emissions resulting from deforestation, and could only be used in New Zealand.

Because of these differences it is likely that deforestation-specific permits could be bought and sold at a lower price than general emission units. However, it is not possible to predict the likely size of this discount, as that will depend on a number of factors, including:

  • the number of deforestation-specific permits issued;
  • the level of demand in the industry to deforest;
  • the “profit” that can be generated per permit; and
  • people’s expectations of future deforestation rules.

Those parties needing to buy more permits than they were allocated could potentially do so more cheaply if the government established and allocated deforestation-specific permits, rather than general emissions units.

Questions

5. Do you support the option of the government creating and allocating deforestation-specific permits that can only be used to cover emissions from deforestation in New Zealand?

Characteristics of permits

If the government were to introduce deforestation-specific permits it would also need to decide what characteristics to give them, including:

  • what minimum unit of emissions they should be based on (such as down to deforestation of a single tonne of CO2 – equivalent to deforestation of around 0.1 percent of a hectare of mature pinus radiata);
  • whether they should be defined in terms of absolute amounts of CO2 emissions, or as a proportion of a total NZ allowable deforestation limit;
  • whether they should be able to be used in perpetuity, or have a finite life (such as a period of 30 years).

The question of what minimum unit of emissions to base the permits on would most likely be driven by an assessment of the likely administrative costs. In principle the government cannot see any broader policy reason to limit the divisibility of permits, and they could in theory be infinitely divisible. But in practice it is likely to be more cost effective to define a minimum unit of emissions, such as an individual tonne of CO2, and require permits to cover multiples of that minimum unit.

Turning to the issue of how to define permits, expressing them in terms of absolute amounts of emissions of CO2 would provide greater financial certainty to industry members and the Crown. However, doing so could make it harder for the Crown to tighten deforestation controls in CP2 and beyond if necessary.

Lastly, the use of very long lived, or non-expiring, permits could make it more difficult and costly for the government to manage its finances and the country’s overall emissions profile. However, forest owners are likely to prefer longer lived permits as they would allow owners greater flexibility over when to use the permits they own.

Questions

6. Do you have views over the approach the government should take to these three permit design questions?

Administration and compliance arrangements

The Government’s preliminary view is that a tradeable permit regime would operate most effectively through a process of self-declaration, supported with random auditing and significant penalties for failure to accurately declare. This type of arrangement has proven to be effective in the taxation regime, the collection of excise-type duties, and the fishing quota regime.

However, considerable further work is needed to determine how the compliance and administrative arrangements of a deforestation tradeable permit regime might work in practice. This work will take account of whether tradeable permit arrangements are expected in other sectors in CP1, or later periods.

Administration agency

It would be necessary to task a government agency to administer a tradeable permit regime.

The choice of administrative agency would depend in part on whether tradeable permit arrangements for greenhouse gas emissions are ultimately expected in a number of other sectors of the economy. If so, the government may choose to have a single agency to manage a number of sectoral tradeable permit regimes, or a single combined regime. If not, it might be more appropriate for the deforestation tradeable permit scheme to be administered by a government agency which already has forest sector responsibilities.

Questions

7. Do you have any views on which agency the government should task with administering a tradeable permit regime for deforestation?

Weed control

The Department of Conservation, regional councils and private landowners all sometimes cut down exotic trees that are considered to be plant pests (i.e. weeds). Such activity might be classified as deforestation, and therefore lead to an emissions liability, where:

  • prior to removal, the trees at a site were sufficiently high and dense to meet the formal definition of a forest2; and
  • after removal, the site will fail to meet the definition of a forest if the vegetation is left to regrow (such as areas of grassland or tussock-grassland).

Under a tradeable permit regime the Government would need to decide whether to meet the cost of deforestation that was undertaken for weed control purposes.

Exempting weed control activity from these arrangements would help to ensure that New Zealand’s efforts to prevent the spread of wilding conifers and other tree weeds were not undermined. However, there is currently no comprehensive information on the level of weed control activity that is likely to be classified as deforestation. So it is difficult to assess the size of the cost that this exemption would place on the Crown. Further, in order to avoid undermining the effectiveness of the permit regime the government would also need to ensure that its definition of weed control activity was sufficiently tight to avoid parties classifying deforestation as weed control when in practice it was not done for that purpose.

There may also be other similar situations, such as deforestation for biosecurity or forest health reasons, where the government would need to consider how any measures to address deforestation will be applied.

Questions

8. Do you think that the government should meet the cost of deforestation carried out for the purposes of weed control?

9. Do you think that this could be done in a way that does not undermine the effectiveness of the regime as a whole?

Treatment of land under a crown forestry licence

A significant area of plantation forest is currently on land governed by a Crown Forestry Licence. This forest land is subject to a unique regime following the 1989 agreement between the Crown, New Zealand Māori Council and Federation of Māori Authorities – reflected in the Crown Forest Assets Act 1989. The Act protects forest land for potential return to claimants as part of remedying a Treaty breach. The Act provides the Waitangi Tribunal with the ability to make binding recommendations for the Crown to return forest land to Māori. Several Treaty settlements have involved the transfer of forest land that was subject to the Crown Forests Assets Act 1989.

Annual licence fees are held by the Crown Forestry Rental Trust, and the accumulated licence fees are transferred to claimants in respect of the Crown Forest land that they purchase at an agreed price from part or all of their settlement quantum. While the Crown is owner of the land, the terms and conditions of the Crown Forestry Licence (CFL) apply. Further, some CFLs contain replanting covenants that apply only while the Crown is owner of the land. When Crown Forest Land transfers to a claimant the licensee is issued with a 35 year termination notice commencing on the 30th of September immediately following the date of transfer of the land. From that date the term of occupancy reverts to a typical Forestry Right transacted in the current market unless the parties agree to some other arrangement. There were around 490,000 hectares of land under Crown Forestry Licences in 2003 – representing 27 percent of the land in exotic forests in New Zealand.

Under a tradeable permit regime it would be necessary to decide whether non-Kyoto forest on land that is currently under Crown Forestry Licences should receive a portion of any permits that are allocated. If the permits are allocated to the land owner then those permits could be held in trust and then be transferred to successful claimants in the same way that the forest licence fees currently are. Alternatively, some other arrangement could be negotiated between the parties, for example allowing the Government to retire the permits in return for a negotiated adjustment in the value of the Crown Forest Land.

Questions

10. Do you think that non-Kyoto forests under Crown Forestry Licences should be eligible to receive a portion of any permits allocated to industry?

11. If not, what alternative approach would you suggest?

1 It is also possible that the government might want to consider introducing more general, New Zealand specific emission permits if tradable permit arrangements were being considered in other sectors.

2 “forest” is defined as a minimum area of land of 1.0 hectare with tree crown cover of more than 30 percent with trees with the potential to reach a minimum height of 5 metres at maturity in situ

Contact for Enquiries

Sustainable Land Management and Climate Change
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