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• What is a Sink?
• New Zealand's Forest Sinks
• How are Sinks Treated?
• Article 3.3 - Forest Sinks
• Diagram 2 Increases in Carbon Stock
• Article 3.4 - Additional Sink Activities
• Sinks and Emissions Trading - Their Role in Meeting Countries' Emissions Obligations Targets
• Recent Government Decisions on Sinks

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FORESTRY SINKS AND THE KYOTO PROTOCOL

What is a Sink?

Sinks are any natural or man-made systems that absorb and store GHGs, primarily CO₂ from the atmosphere. To be considered a sink, a system must be absorbing more CO₂ than it is releasing so that the store of CO₂ must be expanding.

Forestry activity can influence the amount of GHGs in the atmosphere because forests can act as both a sink (absorbing emissions) and as a source of emissions when trees are felled. When a tree or forest is increasing in size, it absorbs CO₂ or carbon as part of the process of increasing its biomass -a growing forest is a sink. Once the forest reaches maturity its carbon density remains approximately constant as decay is releasing about the same volume of CO₂ as the forest is absorbing -this is called a carbon "reservoir." Finally, when a forest is cleared or harvested (or subject to a major disturbance such as fire) without replanting, much of the stored carbon is converted back to CO₂ again and the forest is a "source" of CO₂ . Under Kyoto Protocol accounting, clearance of a forest without replanting is treated as for any other sources - it is assumed that the carbon in the removed forest is converted to CO₂ emissions. This only applies to deforestation (i.e. harvesting without replanting or other types of forest regeneration).

New Zealand's Forest Sinks

This section describes New Zealand's forest sinks under the Kyoto Protocol. The international negotiations on sink activities have largely focused on production forests, such as New Zealand's plantation forests. Only Japan has sought to include conservation forests as eligible sinks. This position has found little international support.

New Zealand's plantation forests planted since 1990 have significantly increased in area and the role these forests play in removing CO2 is an important component of New Zealand's climate change policy. During the Kyoto Protocol's first commitment period, 2008-2012, New Zealand "Kyoto forests" are expected to remove approximately 100 million tonnes of CO₂ equivalent. By comparison, New Zealand's initial assigned amount for the first commitment period is 363 million tonnes of CO₂ equivalent.

The average new planting rate over the last 30 years has been 43,500 hectares per year. Over the period 1992 to 2000 new planting rates have been high. Over this eight year period 520,000 hectares of forest have been established, giving an average planting rate of 65,000 hectares per year. New entrants to forestry have carried out much of this new planting. Accurate details of the ownership composition of these new entrants is not available.

Anecdotal evidence suggests that the majority of these new owners are either private land owners or syndicate investors and that most of the forests established by these owners are small in size.

While these new owners have planted a significant area during the 1990s, 72 percent (1.3 million hectares of total pre and post 1990 forest) of the entire forest resource is still currently owned by growers with more than one thousand hectares of forest.

Indigenous forests cover approximately 6.2 million hectares. Scrublands cover an additional 2.7 million hectares. The combined area of indigenous forest and scrub covers more than five times the area that is under plantation forest, and contains a significant stock of carbon locked up in trees, understorey, forest floor and soil. New Zealand has sought in negotiations to include sinks from the abandonment of marginal pastures, which are reverting to scrub and which, if allowed, may eventually develop into high forest. Whether this will be allowed depends on future international negotiation.

How are Sinks Treated?

The Kyoto Protocol does not include all sinks on a comprehensive basis. Only a limited subset have been agreed upon.

The main reason for only including a subset of forest sinks, for the first commitment period, was that countries' targets were set for all sources of human-caused GHG emissions except CO₂ from the land use, land use change and forestry sector. 1

Allowing credit in the commitment period for all sinks in countries that have taken on targets would have weakened the effect of these targets by around 10 percent. In the negotiations, this was referred to as "the gross-net emissions loophole".

Some limitation was therefore necessary to maintain the environmental objective of the Protocol. The limitation agreed upon in Kyoto was that only new "since 1990" forests would qualify in the sinks accounting system and if additional sink activities beyond this were to be subsequently included, these too should represent activities "since 1990".

Both at Kyoto and since, countries have noted the possibility of a fuller inclusion of sinks in the second commitment period, when targets can be set that are consistent with fuller carbon accounting.

But in the meantime, for the first commitment period, the relevant parts of the Kyoto Protocol for sinks are Articles 3.3 (forest sinks) and 3.4 (additional sink activities).

Article 3.3 - Forest Sinks

Under Article 3.3, countries with targets can gain additional Assigned Amount (sink credits) for the CO₂ absorbed during 2008-2012 (the first commitment period) by forests established by "afforestation or reforestation" since 1990. This will be measured by the increase in carbon stock in these forests during this five year period. Countries will also have to give up Assigned Amount for any loss of carbon stock during this period from land subject to "deforestation since 1990". To be in compliance with the Protocol at the end of the commitment period, countries need to have sufficient assigned amount to cover their GHG emissions from the sources covered by their targets.

Under the emissions trading provisions of the Protocol, sink credits from Article 3.3 are fully tradable like any other form of Assigned Amount.

The situation for New Zealand for Article 3.3 activities is described in Diagram 2.

Diagram 2 Increases in Carbon Stock

The left axis of Diagram 2 represents accumulated carbon or changes in carbon stock. The diagram shows that over time a growing forest or stand has accumulated carbon. The arrow represents verified increases in carbon stock - eligible for sink credits.

If the diagram were to represent New Zealand's likely total Kyoto forests, the arrow would represent approximately 100 million tonnes of CO₂ equivalent.

Conversely, New Zealand must account for decreases in carbon stock over 2008-2012 from deforestation (conversion of forest land to another use) that has occurred since 1990. Consideration needs to be given to how to account for deforestation between 1990 and 2008.

So what forest sinks are counted? A "qualifying" or "Kyoto" forest sink must meet four tests:

• it must be considered a "forest" (see the glossary at the end of this document for definitions related to Article 3.3);
• its establishment must have been "direct human-induced" e. g. through planting, seeding or possibly, if New Zealand's position is adopted, through human induced promotion of natural regeneration;
• it must have been established after 1 January 1990; and
• the forest must have been established on land that was previously in some other land-use and did not contain forest on 1 January 1990.

For example, a pine plantation that was planted after 1 January 1990, on land that was previously in pasture, is an eligible "Kyoto forest" sink. This Kyoto forest would receive credits and incur obligations for changes in carbon caused by the plantation (harvest/regeneration) cycle. Credits would accrue for carbon absorbed, but only in relation to carbon absorbed during the commitment period (2008-2012). Obligations would be incurred for the loss of carbon during harvesting (regardless of whether the land is deforested or replanted).

Replanting after harvesting would not remove these obligations but they would create a new inflow of credits as the new plantings grew.

A forest that existed prior to 1 January 1990 and was subsequently harvested and replanted does not qualify as a Kyoto forest. Under this circumstance, no credits would accrue for carbon absorption and no obligations would be incurred. If the forest were removed (i.e. not replanted) and replaced with another land use (e. g. lifestyle blocks) then the forest owner would incur obligations created by the permanent loss of carbon that was originally stored in the forest. ²

The key issue is that there must have been a "land-use change" since 1990. So, only land that was not in forest on 1 January 1990 can be claimed as a Kyoto forest. Eligible Kyoto forest land would be accounted for continuously over any future commitment periods i. e. once counted, carbon stock changes on that land (both positive and negative) are always accounted for. This means there will be an obligation at the time of harvest.

Reverting high scrub on agricultural land could be considered for sink credits if it meets the tests above. This will depend in part on the agreed definition of a "forest."

All forests are included as far as deforestation is concerned, i. e. forests established pre and post 1990, but deforestation has a very specific meaning. It refers to a forest that is cleared and converted into a non-forestry land use.

Article 3.4 - Additional Sink Activities

This Article provides a process for the negotiation of additional sink activities that may apply in the first commitment period but are more likely to be included in the second and subsequent commitment periods.

Under Article 3.4, countries with targets can gain additional Assigned Amount (sink credits) for the CO₂ absorbed by "additional sinks activities." For the first commitment period this is only true for sink activities that have occurred since 1990.

However, what "additional activities" are to be counted was left open in Kyoto to ongoing negotiation.

Possible additional activities that may be agreed under Article 3.4 include:

• forest management (of non-Kyoto forests);
• grazing land management;
• cropland management; and
• revegetation.

As with Article 3.3, there are a number of definitional and operational issues that need to be resolved under Article 3.4.

Article 3.4 provides opportunity for credits derived from changes in management practices since 1990.

In other words, credits could be given for changes in management practices on lands where carbon absorption was verified to be over and above what would otherwise have occurred, but only carbon absorbed during the commitment period would qualify for credit.

In international negotiations some countries have sought a discount or maximum cap on credits that could be earned under Article 3.4 if it were applied in the first commitment period.

Sinks and Emissions Trading - Their Role in Meeting Countries' Emissions Obligations Targets

The Kyoto Protocol provides a basic framework for the inclusion of carbon sinks in meeting countries' emissions commitments. The Protocol provides for developed countries to use international emissions trading 3 to assist in meeting their emission targets. Sinks could be incorporated into an emissions trading system by issuing a 'sink

credit' for each tonne of CO₂ sequestered (absorbed) in qualifying sinks during the commitment period. Sink credits would be interchangeable with emissions units and could be purchased by industries and countries needing to account for any "excess" emissions over their Kyoto target.

A country's responsibility for meeting emissions targets could be devolved to its individual firms or sectors. So for example, a factory required to account for emissions above its target could either reduce emissions or purchase sink credits or emissions units. If sink credits are purchased the effect on the atmosphere is neutral - a unit of CO₂ is released into the atmosphere and an equivalent unit has been absorbed. The factory takes account of its emissions either way and can choose the least cost approach to meet its target. If the factory chooses to purchase sink credits, the 'sink owner' receives the monetary benefit for the atmospheric benefits their trees provide.

Recent Government Decisions on Sinks

The Government has already taken a number of preliminary decisions on domestic sinks policy.

These decisions provide strategic guidance but do not provide the detail of how an operational sink credit trading system would function.

In July 2000, Cabinet agreed in principle that all or most of the 'sink credits' derived from sink activities would be tradable within an international emissions trading system under the Kyoto Protocol. They also agreed that some proportion of the benefits from those sink credits would go to those undertaking the sink activities.

The Government's intention is that domestic emitters face the cost of their emissions reduction responsibility and should not be shielded from price signals by domestically generated sink credits. In other words, domestic emitters wishing to purchase domestic sink credits for their emission activities would have to pay the international market price for them. Correspondingly, sink credit sellers can expect to get the international price.

In January 2001 Cabinet confirmed that some proportion of the benefit from sink credits would accrue to those undertaking the sink activities.

Cabinet noted that it is yet to finally determine its position on what this proportion should be, but that it considered that any decision should take into account the following goal:

"To maximise the net economic benefit to New Zealand whilst protecting and enhancing sinks and reservoirs consistent with our international obligations under the Kyoto Protocol and the United Nations Framework Convention on Climate Change".

Cabinet also agreed to a number of principles by which to determine the proportion of benefit that should go to those undertaking sink activities.

These principles are:

Environmental Integrity

• Provide incentives to protect and enhance sinks.

Economic

• Promote strong market incentives for efficient use of capital flowing from efficient price
• signals.
• Minimise economic distortions and any adverse effects on international competitiveness and investment.

Participation

• Provide incentives for land and forest owners to participate in a sink accreditation scheme, by conferring additional Assigned Amount Units (sink credits) from sink activities in exchange for fulfilment of obligations.
• Ensure that allocation decisions provide certainty and confidence for business and are open, transparent and consultative.
• Ensure allocation is conducted in a fair manner having regard to private investment made in the creation of Kyoto forests (forests established after 1990 that generate additional AAUs (sink credits)).

Government

• Minimise the risk of legal liability to the Crown.
• Ensure that arrangements are consistent with the Treaty of Waitangi.
• Ensure taxation treatment is consistent with that of other assets.
• Ensure the wider public interest is balanced with private interests.

¹ Except for Australia who, under Article 3.7 included emissions from land clearing in their 1990 base year.

² This will depend on international negotiations and domestic decisions concerning Article 3.4 of the Kyoto Protocol.

³ See the Glossary for a definition of international emissions trading.

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