Permit allocation issues
The government is proposing to meet a portion of the costs of deforestation in CP1 and subsequent commitment periods. The principal way it would do this under a tradeable permit regime is through allocating – for free or at a subsidised rate – a certain level of deforestation permits or emission units to the industry3.
This section discusses:
- the total value of permits to allocate;
- the method to use to allocate permits;
- who to allocate those permits to;
- when to allocate permits.
Total level of permits to allocate
Background information
Previous commitments
In 2002 the government announced to industry that it would retain deforestation liabilities in CP1 for forests planted prior to 1990, provided that these remained within a cap equal to 21 million tonnes (Mt) of CO2 equivalent. That 21Mt figure is roughly equal to the amount of CO2 that would be released by the deforestation of 10 percent of the area of non-Kyoto forest reaching maturity during the first commitment period.
It should be stressed that this 21Mt cap commitment only applied to deforestation in CP1. The government has not made any statement around the level of deforestation costs it is willing to carry in subsequent commitment periods.
Historic and expected deforestation rates
Deforestation intentions have only been regularly surveyed since 2001. Table 1 below sets out the government’s best estimate of deforestation rates over each of the last five years, based on those survey results.
Table 1: Indicative deforestation rates
| Year ended 31 March | ||||||
|---|---|---|---|---|---|---|
| 2001 | 2002 | 2003 | 2004 | 2005 | Average | |
| Harvest area (ha) | 38,000 | 40,700 | 49,000 | 40,800 | 39,000 | 41,500 |
| Estimated area of deforestation (based on MAF survey results) (ha) | 1,790 | 1,120 | 1,748 | 1,732 | 7,000 | 2,039 |
| Estimated deforestation rate | 4.8 % | 2.8 % | 3.6 % | 4.2 % | 18 %1 | 6.7 % |
Note: Survey methodology changed for 2005
Over the last five years the estimated average rate of deforestation is 6.7 percent of the area harvested annually. This average figure is significantly influenced by the estimated 2005 deforestation rate, which at 18 percent was significantly higher than in previous years.
The government does not have good data on deforestation levels prior to 2001. However, anecdotal evidence suggests that they were comparable to those seen between 2001 and 2004. That suggests that the average annual rate of deforestation over the last 10 years, including 2005, is 5.2 percent.
A recent deforestation intentions survey indicated that from 2008 to 2012 the deforestation rate would be about 16 percent of forest area harvested if current policies were maintained. This result is supported by officials’ analysis of the potential profitability of deforesting land, especially in the Central North Island.
Options
Table 2 below sets out the nominal costs the government would face under a range of different allocation options. Under each option the government is assumed to meet the costs of a different level of deforestation by changing the number of permits it allocates. For ease of understanding, the number of permits allocated are expressed in three different ways:
- the percentage of the total non-Kyoto forest estate the government could meet the deforestation emissions cost for;
- the number of hectares the government could meet the deforestation emissions cost for; and
- the number of tonnes of emissions the government could meet the costs of.
For example, under the first option the costs to government of deforestation of up to 2 percent of the total non-Kyoto forest estate is shown. That would be equivalent to the deforestation of 23,800 hectares or the emission of 21 million tonnes of CO2.
It should be stressed that these options do not just relate to the costs of deforestation in the first commitment period. They represent the levels of deforestation emissions the government might meet the costs of across all future commitment periods. The table assumes the non-Kyoto forest estate is 1.19 million hectares, that only mature forest is deforested, and a price of carbon of $15 per tonne CO2 equivalent.
Table 2: Cost of Illustrative Options for Government Covering Deforestation Costs Across the Total Non-Kyoto Forest Estate
| Options for Number of Permits to Allocate Across the Total Non-Kyoto Forest Estate (estimated to be 1.19 million hectares) |
Total nominal value of allocated permits (expressed as cost of associated emission liabilities) $ Millions | ||
|---|---|---|---|
| Expressed as % of the total non-Kyoto forest estate |
Expressed as number of hectares deforested | Expressed as million tonnes CO2 emitted | |
| 2 % | 23,800 | 21 | $315 |
| 4 % | 47,600 | 42 | $630 |
| 5.2 %4 | 61,880 | 54 | $810 |
| 6.5 % | 77,350 | 67 | $1,005 |
| 10 % | 119,000 | 103 | $1,545 |
Notes: The table should be read in conjunction with the section on When to Allocate Permits on page 16 of this document. The costs in the right column are nominal values only (they have not been converted into net present values).
It should be stressed that the options provided in the table have been provided as a guide only. The government could choose any different level of coverage between, or outside of, the options provided here.
Questions
12. What level of deforestation permits do you think the government should allocate? Why?
Method of allocating tradeable permits
The government has identified three possible methods for allocating permits (grandparenting) to industry (in addition to a purely commercial sale or auction process):
- grandparenting to the owners of land under non-Kyoto forests on the basis of land area;
- auctioning on a subsidised basis; and
- grandparenting to the land owners on the basis of land area and the quality of that land – a greater number of permits per hectare would be given to owners of land with more; valuable alternative uses (possibly based on the land use capability assessments provided by Landcare Research).
The key advantage of the option of grandparenting permits on the basis of land area is its simplicity and transparency. One issue is that it provides the same level of permits to owners of marginal land with few alternative uses as it does to owners of much higher quality land with more valuable alternative uses. This could result in windfall gains to the owners of forested land that has no economically viable alternative use.
The option of auctioning deforestation permits on a subsidised basis was initially developed by Motu Research and has been discussed with a number of industry participants. Under this approach, permits would be auctioned, with all buyers paying the same price. But the government would meet the cost of a fixed number of the permits, thereby reducing the average cost of the permits sold. The price paid per permit would depend on the total number of permits wanted by industry. This would lead to a steadily increasing “price schedule” that ultimately trends towards the full market value of permits as the number of permits sold increases. A numerical example of this approach is provided in Appendix 1.
Under the subsidised auction approach, the government would publish that permit price schedule in advance of the auction. During the auction itself, parties would bid for the total number of permits they were willing to buy for a given permit price. During each round of the auction the price would be increased, and new bids received, until the aggregate number of bids received for permits at a given price equalled the number of permits the government was willing to supply under the schedule.
The primary advantage of this subsidised auction mechanism is that it would, at least in theory, ensure that the permits automatically went to the parties that valued them the most highly. As such it can be considered fair and less likely to produce large windfall gains. It also has the advantage of being relatively quick to implement. However, the clear disadvantage of this option is its complexity. There is a risk that only the larger industry participants would be able to fully understand, and therefore actively participate in, an auction of this nature. It is also not clear how non-Kyoto forests on land owned by the Crown would be treated under this approach. It would be unusual for the Crown to design, manage and then participate in an auction.
The option of grandparenting permits to land owners on the basis of a mix of land area and land quality would avoid providing windfall gains to landowners without real alternative uses for their land. The primary disadvantage of this approach is likely to lie in its greater operational difficulties. The Landcare Research land use capability assessments were not prepared for this purpose, and would be likely to be subject to challenge in cases where a landowner felt his or her classification was unreasonable. There is also likely to be considerable debate over the appropriate weight to apply to each land use category. As a result, this option could well prove complex and time consuming to implement.
Questions
13. Do you have a preference between the three different allocation methods discussed in this paper? Why?
14. Do you wish to propose any alternative option for allocating permits?
Who to allocate permits to
Landowners or forest owners?
If permits are allocated, rather than auctioned, a decision would be needed on who to grandparent those permits to.
One option would be to allocate the permits to landowners in all instances, regardless of whether or not the forest on their land was owned by another party. The alternative approach would be to allocate the permits to the forest owner where they could demonstrate that they had legal authority over land use decisions in CP1.
The Government’s preliminary view is that permits would be grandparented to land owners since they are the more likely to be affected (in terms of land value) by the introduction of a tradeable permit regime.
15. Do you think that permits should be allocated to forest owners or landowners? Why?
Owners of indigenous forests
Under a tradeable permit regime a decision would be needed on whether owners of indigenous forests should be eligible to receive a share of any deforestation permits allocated, in addition to the owners of plantation forests.
New Zealand’s Kyoto protocol obligations do not differentiate between indigenous and exotic forest; we will incur a liability if either type is deforested. But it could be argued that the impact of the proposed deforestation measures will be significantly less on indigenous forest owners than the owners of exotic forests, because the deforestation of indigenous forests is already relatively tightly managed through:
- strict controls on the clearance of indigenous vegetation that exist in many district and regional plans; and
- strict controls on the sale of timber from such activities under Part IIIA of the Forests Act 1949.
Owners of indigenous forest have also been able to use the period since October 2002 (when the deforestation policy was first announced) to deforest where they believed this was viable. This is not the case for some owners of exotic forest who generally have to wait for their forests to reach maturity before harvesting and subsequent deforestation.
Further, owners of indigenous forest would only attract deforestation liabilities if they exceeded any deforestation threshold. Officials consider that this is likely to be sufficient to allow for the small amounts of deforestation of indigenous forest that are likely.
Although SILNA landowners (owners of native forests allocated to Māori under the South Island Landless Natives Act 1906) are exempt from Part IIIA of the Forests Act and its requirements for sustainable forest management, officials understand that the vast majority of clearfelled SILNA land is either allowed to regenerate or is planted in exotic species, and is therefore not considered to be deforested.
If permits were allocated to owners of indigenous forest there would probably be significantly fewer to allocate to owners of planted forest.
Questions
16. Do you support the owners of indigenous forests being eligible to receive a share of any permits allocated, or do you consider that permits should only go to the owners of planted forests?
When to allocate permits
A significant number of land and forest owners will not have any use for permits in the first commitment period, due to having young trees which are not ready for harvest for 1-2 decades, or more generally, due to their planning to re-plant immediately after harvesting. The government would therefore not necessarily choose to allocate the full planned amount of permits before the beginning of CP1; some could be withheld until subsequent commitment periods when they are more likely to be needed.
The government has identified three options around when to allocate permits:
- allocate all permits on (or soon after) introduction of the scheme, regardless of when they are likely to be needed;
- allocate all permits on (or soon after) introduction of the scheme, but “forward date” some of them so that they cannot be used until after the future date specified on them;
- allocate permits in a number of “tranches”, with a portion of the overall level of permits to be allocated issued at the start of each commitment period.
The options of allocating permits in several tranches (Option 3), or forward dating the permits given to some land owners, such as those with young trees (Option 2, would have the advantage of allowing the government to spread the costs it faces across a number of years or commitment periods, rather than incurring them in one financial year.
However, it is unclear how landowners would perceive these options (2) and (3). They might prefer to receive valid permits immediately, thereby securing the ability to sell the permits they initially received, and then buy more closer to when they needed them. But many landowners are likely to simply hold on to any permits received until the date they need them, and therefore may have no clear preference between these options, or might prefer Option 1.
Questions
17. Which of these three options around the timing of permit allocation do you prefer? Why?
3 The government would also meet a portion of those costs by exempting small amounts of deforestation from the tradable permit arrangements and, if relevant, by meeting the costs of any weed control activity that was classified as deforestation.
4 5.2 percent is the estimated rate of deforestation that has occurred over the last 10 years.
Contact for Enquiries
Sustainable Land Management and Climate Change
MAF
Pastoral House
25 The Terrace
PO Box 2526, Wellington
Tel: 0800 CLIMATE (254 628)
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