Questions & Answers
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Forestry in a New Zealand Emissions Trading Scheme (ETS)
Background
The Government has introduced legislation into Parliament which, if passed, will establish an economy-wide Emissions Trading Scheme (ETS) covering all greenhouse gases in New Zealand. The draft legislation and public submission on it will be considered by the Finance and Expenditure Select Committee.
The ETS is designed to allow New Zealand to meet its international climate change commitments (for example, under the United Nations Framework Convention on Climate Change and its Kyoto Protocol) at least cost in the long term. It will require specific people and companies to surrender emission units (NZUs) or other Kyoto Protocol emission units to match the level of emissions for which they are responsible. The NZUs will be able to be bought and sold by the private sector.
The draft legislation proposes that various sectors of the economy be brought into the ETS at different times, with forestry being the first. Below are answers to some common questions, based on the legislation as it was introduced to Parliament, prior to consideration and report back by select committee. It is important to note that the select committee may make changes to what is currently proposed, and that decisions on some aspects of the scheme have not yet been made.
Why did forestry become the first sector to enter the ETS on 1 January 2008?
Deforestation is the second-largest source of greenhouse gas emissions in the world; it and the resulting land use change contribute 20 percent of the world’s carbon dioxide emissions. It is therefore important that owners of forest lands factor the cost of carbon emissions into their decision-making as soon as possible. Delaying the introduction of the ETS for forestry for just one year could have resulted in 12 to 24 million tonnes of additional emissions if foresters decided to deforest early to ‘beat’ future controls. This could result in $180–$600 million in additional costs for the taxpayer to meet the increased CO2 liability.
What is deforestation and why is it so important?
Deforestation is the conversion of forested land to non-forest uses, such as farmland, roads or housing developments. Without policies to manage deforestation, it is predicted that about 50,000ha of forest would be deforested in New Zealand over the period 2008–12. This would result in about 40 million tonnes of carbon dioxide being emitted. Unless deforestation/land conversion is managed, the liability to the taxpayer from this land use change in the period 2008–12 will be more than $651 million.
What does the ETS mean for forest landowners?
The Kyoto Protocol makes a distinction between pre-1990 and post-1989 forests. This has been reflected in the New Zealand ETS. To date the titles of ‘non-Kyoto forest’ (pre-1990) and ‘Kyoto forest’ (post-1990) have been used publicly. To simplify matters, only the terms ‘pre-1990 forest’ and ‘post-1989 forest’ are now used.
The division date of 1 January 1990 is the date selected because of the way New Zealand has to account for its liabilities under the Kyoto Protocol. Some differential treatment between "old" and "new" forest is necessary to allow the scheme to simultaneously discourage deforestation of existing forest and encourage afforestation.
Pre-1990:
Owners of forest land planted pre-1990 who have not been granted an exemption will be subject to emission liabilities if they are deforested. This will not apply if forest owners harvest and replant their forests or allow them to regenerate. Pre-1990 forests do not earn emission units. However, the Government will give free emission units to owners of pre-1990 forest land. For the period 2008-12, the Government will make available 21 million emission units to cover exemptions, and an allocation to cover pre-1990 exotic forests. A further 34 million units will be available after 2012. The number of units allocated per hectare cannot be predicted with accuracy at this stage. The preliminary estimate is that landowners are likely to receive in the order of 39 units per hectare, worth approximately $585 per hectare, assuming a carbon price of $15 per tonne.
Post-1989:
Owners of forests established on eligible land post-1989 and those intending to establish new forests on eligible land can choose to participate in the ETS and take responsibility for carbon stock changes that occur from 2008 on. If participants then harvest or deforest, or if there is any decline in carbon stock (for instance, as a result of fire), the owner has to surrender emission units to cover the amount of carbon released (that is, the reduced carbon stock). The obligation to surrender will not exceed the number of emission units previously received by the forest owner under the ETS in relation to that forest. If carbon stocks increase, the owners will earn credits in the form of New Zealand Emission Units (NZUs).
Whilst the owner of a post-1989 forest who chooses to participate in the ETS could stand to make a financial gain, there will also be associated costs and risks. Here are two examples:
• If a forest contains many different age-classes, there will be a financial gain from the carbon sequestered as the forest grows. The liability incurred by harvesting a stand might be balanced or managed by carbon sequestration (storage) in all the other stands.
• If a forest consists of one age-class, and the owner intends to harvest it all in one year, he or she may wish to keep most of the units issued for sequestration to cover the loss of carbon from harvesting, or take a risk on a future unknown liability. There may be an opportunity for owners to pool their forests with those of other owners in order to jointly manage their carbon credits and liabilities, but this would be a private arrangement and not part of the ETS rules.
What do foresters have to do and when?
Under the proposed legislation, 1 January 2008 is the date from which obligations will apply. However, no action is required of forest landowners until the legislation has become law. Under the proposed legislation, owners of pre-1990 forest lands will have until 30 June 2009 to apply for an exemption from the ETS (for example, if they own 50 hectares of forest or less as at 1 September 2007), and owners of post-1989 forest lands who wish to participate in the ETS will have until 1 January 2010 to apply.
What will forest owners have to pay for?
Forest owners will have to pay for:
• emissions from the conversion of pre-1990 forest land to a non-forestry use (i.e. deforestation). This does not include forest harvesting, provided the harvested land is replanted or allowed to regenerate into forest;
• negative net carbon stock changes (for example, emissions from harvesting, deforestation or fire) from post-1989 forest land that has chosen to join the ETS.
Will those forest owners who cut down their trees before 1 January 2008 have avoided deforestation liabilities?
Deforestation will be treated as if it was completed prior to 2008 (and therefore will not face any liabilities) if, by 1 January 2008:
• there were no trees standing, live or dead on the land; and
• any merchantable timber was removed before 1 January 2008.
What do forest owners have to do if they want to deforest pre-1990 forest?
The core obligations for people deforesting Pre-1990 forest land will be to:
• report on the area deforested to the administering agency;
• calculate (using formulae to be provided) the emissions associated with this deforestation;
• surrender a number of New Zealand Emission Units (NZUs) or other acceptable units equal to the calculated emissions.
What is the ‘deforestation cap’ and does it still exist?
In 2002 the Government said it would cover a certain level of deforestation based on the historical deforestation rate in New Zealand. This level has been set at 21 million tonnes of CO2 for the period 2008–12 and is known as the ‘deforestation cap’. Between 2008–12, the Government will make available 21 million units for pre-1990 exotic forests. However, some of this will be reserved to cover the expected deforestation of exempt areas (for instance, the 50-hectare threshold exemption). The balance will be allocated to pre-1990 forest owners as a free allocation of NZUs. A further 34 million units will be made available for use after 2013.
What are carbon credits, sink credits and NZ Emission Units (NZUs)?
As a forest grows, it removes carbon dioxide (CO2) from the atmosphere and stores it as wood. New forests that were established post-1989 on eligible land can generate Removal Units (sink credits) under the Kyoto Protocol. A Removal Unit equals one tonne of carbon dioxide. Under the New Zealand ETS, participants will be awarded New Zealand Units (NZUs) for growth that occurs from 1 January 2008. As with Removal Units, NZUs are equivalent to one tonne of carbon dioxide.
Only forests established on non-forest land (for instance, agricultural land) since 1989 can be counted for emission units, and only in relation to the carbon they absorb after 2008.
When and how will free NZUs be allocated to the owners of pre-1990 forest?
The Government has 55 million NZUs to allocate but the specifics of how this will be done are still the subject of consultation with the forestry sector and Maori. Once this has been determined, a Statement of Intent will be published. Whatever allocation method is chosen, it is intended that one block of units will be allocated in 2008/09 to the owners of forest that is closest to harvesting age. Two additional blocks of units for young and medium-age forest will be allocated in 2008/09, but the units will be post-dated so that they cannot be used to offset emissions until after 2013. Under current proposals, the units allocated could be sold to other sectors that have obligations under the ETS.
What about pre-1990 indigenous forest?
The Government has not yet expressed a preferred position on the inclusion or otherwise of deforestation of pre-1990 indigenous forests in the ETS. It welcomes specific feedback on this issue.
If private indigenous forests were to be incorporated into the ETS, they would receive an additional allocation of units, though at a lesser rate than exotic forests. This would reflect the much lower deforestation rates of these forests in recent history.
Indigenous forest on Crown land would also be incorporated into the ETS, but would not be allocated any units.
What forest areas will be exempted from the ETS?
Landowners with less than 50ha of pre-1990 forest on 1 September 2007 can apply to be exempt from the ETS.
People who deforest less than two hectares of their total pre-1990 forest land holding during the first five years of the ETS will not have to report this to the administering agency.
Landowners with weed trees affected by the ETS can apply for an allocation of units for weed control purposes and this will be allocated from a fixed weed control budget.
Landowners required to deforest to make way for public utilities such as roads or transmission lines will be compensated by the entity requiring the deforestation.
It is proposed that applications for exemptions be made within 12 months of the legislation being passed.
What post-1989 forest can be entered into the ETS?
To be eligible for entry into the ETS, post-1989 forest land must have been non-forest land as at 31 December 1989. Acceptable evidence of eligibility includes aerial photographs from around 1990, current photographs, land management records and acceptable demonstration of forest establishment.
In addition to post-1989 forest land, pre-1990 forest land that has been deforested and on which the liabilities have been paid can also join the scheme, as can pre-1990 forest land that was deforested before 31 December 2007.
What do owners of post-1989 forests have to do to participate in the ETS?
Owners of post-1989 forest will need to apply by 1 January 2010 to enter the ETS. Those who join will have to report to the administering agency, at least by the end of the period 2008–12, any carbon stock changes in the relevant post-1989 forest areas.
Owners will have to calculate, using guidelines provided, the removals (that is, increased carbon stocks) and/or emissions (decreased carbon stocks) associated with this forest.
What happens if post-1989 forest is harvested – will the owner have to pay liabilities even if they replant?
Yes. Forest owners will be required to surrender a number of NZUs equal to the calculated emissions. However, as the trees grow they will steadily earn new credits. Forest owners will have to pay costs associated with administration of the scheme.
What if the liabilities exceed credits?
The liabilities associated with each post-1989 forest will not exceed the number of the credits that are received by the forest owner for that forest. However, the value of credits and liabilities may change over time, so there is no guarantee that they can be bought back for the same price later when the owner wants to harvest or deforest.
What are NZUs worth?
The value of NZUs will be determined by the market and what people are prepared to pay for them. It is not possible to put a value on them yet. Their price will be influenced by the price of Kyoto Protocol Units on the international market.
How many NZUs will forest owners get per hectare of forest?
Owners of both pre-1990 forests and participating post-1989 forests can receive NZUs, but in different ways.
Pre-1990 forest landowners will be gifted NZUs. An example in the Forestry in a New Zealand Emissions Trading Scheme Engagement Document estimates that they will receive about 39 units per hectare of exotic pre-1990 forest.
Owners of post-1989 forest who chose to participate in the ETS can receive NZUs in recognition of the carbon being stored in the forest as it grows. A radiata pine forest absorbs around 30 tonnes of CO2 per hectare, per year on average over a typical rotation. On harvest, roughly two thirds of this will be lost and will need to be repaid. If the forest is not replanted after harvest, then virtually all the units issued will eventually have to be repaid.
How is carbon in forests measured?
The Government is developing methodologies for assessing the amount of carbon stored in a forest, and the changes in carbon stocks over time, for the purposes of allocating units and liabilities.
For deforestation of pre-1990 forests, accounting will be based on standardised tables based on species, age, and in the case of Pinus radiata, region.
The entitlement to units of the owners of post-1989 forest will be based on a carbon stock assessment, using carbon accounting methodology that is still under development. Initially, look-up tables will be available, and a measurement approach is also being developed. The key elements of the carbon accounting methodology for post-1989 forests are likely to be:
• carbon will be assessed for all carbon pools, that is, for above and below ground biomass, deadwood, litter and soil organic matter;
• ETS participants will be required to measure their forests for carbon in much the same way as they measure forests for timber: by measuring sample plots and using models to convert stem volumes to carbon.
Tools for measuring carbon are expected to be fully available for use by July 2008
Will it be more difficult to convert forest land to dairying or other uses?
The ETS will make it relatively more expensive to convert land from forestry into another use, such as dairying. However, conversion can and will occur where the benefits are sufficient to meet all the costs involved, including the relevant deforestation liability.
Will forest land lose value as a result of the inclusion of forests in the ETS?
In some cases, where conversion from forestry to other activities becomes more expensive, land may lose value. However, the allocation of free emission units to owners of pre-1990 forests may mitigate some, if not all, of this loss. In other cases, marginal land unsuitable for uses other than forestry may increase in value because of the extra economic value that can be derived from new planting under the ETS.
Where will forests owners hold their units?
Landowners will open an account at the New Zealand Emission Unit Register (NZEUR) into which NZUs can be transferred – see the document The Framework for a New Zealand Emissions Trading Scheme.
Where can I get more information?
You can get more information about the ETS and the other forestry initiatives by clicking on the following links: Forestry in a New Zealand Emissions Trading System, Permanent Forest Sink Initiative, Afforestation Grants Scheme and East Coast Forestry Programme.
You can ask other questions or sign-up to receive regular information updates by emailing info@climatechange.maf.govt.nz
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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