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A Guide to Forestry in the Emissions Trading Scheme

22 October 2009

2 Post-1989 Forest Land

An owner of post-1989 forest land can choose to become a Participant in the ETS.

In general, being a Participant entitles the forest owner to receive NZUs for the increase in carbon stocks in their forest from 1 January 2008 onwards. However, it also requires that they repay emissions units whenever the carbon stocks in their forest falls below a previously reported level.

This section covers:

• who is eligible to participate in the ETS;
• your obligations as a Participant;
• dividing forest land into carbon accounting areas (CAAs);
• how the emissions return process will work;
• how to exit from the ETS;
• what fees you will have to pay if you join the ETS.

Voluntary participation in the ETS

The following persons are eligible to apply to be registered as post-1989 forest land Participants in the ETS:

• The owners of post-1989 forest land (that is, the owners of both the forest and the land on which the forest is located, or alternatively those who do not own the forest land but have legal rights to the forest on the land – specifically registered forestry right holders; registered lease-holders; or parties to a Crown conservation contract):
  • owners of land that was not forest land on 31 December 1989 and that has subsequently been established as exotic or indigenous forest land;
  • owners of land that was forest land on 31 December 1989 but deforested before 1 January 2008, and then later reforested (thus becoming eligible post-1989 forest land);
  • owners of pre-1990 forest land or exempt land that was deforested after 31 December 2007, and then later reforested and for which emissions units to match the deforestation liability have been surrendered, thus becoming eligible post-1989 forest land. For exempt land, the number of units that would have been required had it not been exempt must be surrendered.
• Participants in the Permanent Forests Sinks Initiative (PFSI) who terminate their forest sink covenants and join the ETS and who do so by 31 March 2010.

Interested Party Permission

In some cases written permission will be required from another interested party before a person can be registered as a Participant in the ETS:

• if the forest landowner (that is, the person or persons with legal title to the land) wishes to be registered as the Participant, but there is a registered forestry right or registered lease over the post-1989 forest land, then the written permission of the registered forestry right holder or registered leaseholder is required;
• if a registered forestry right holder or registered lease holder wishes to be registered as the Participant, the written permission of the forest landowner is required.

No Exemptions for Deforestation

No exemptions are available (or necessary) for the deforestation of post-1989 forests, as owners of such forests can deforest them without liability provided they have not previously chosen to bring these forests into the ETS.

Participant Obligations

The following section provides information of how post-1989 forest owners participate in the ETS.

Step 1: Obtain a Holding Account from the NZEUR

Participants must have a holding account for NZUs. The account receives any NZUs allocated for increases in the carbon stocks of their forest land. Any emissions units that must be surrendered for reductions in carbon stocks on their forest land will also usually be surrendered from this account.

Participants may apply online for a holding account at any time from the NZEUR at www.eur.govt.nz.

If you have questions about the holding account application process, please contact 0800 CLIMATE (254 628).

Step 2: Register as a Participant

A post-1989 forest landowner, a Permanent Forest Sink Initiative forest landowner or an interested party may apply online at any time to be registered as a Participant at http://www.maf.govt.nz/sustainable-forestry/ets/ets-transactions.htm, or by downloading and completing a paper-based registration form from the same site.

The registration process will require the applicant to provide information such as:

• the name of the person who wishes to be registered as a Participant;
• the Participant’s NZEUR holding account number;
• legal details of the post-1989 forest land they wish to bring into the ETS;
• an electronic shapefile delineating the post-1989 forest land in each Carbon Accounting Area (see below) to be registered;
• evidence that the land is eligible to enter the ETS as post-1989 forest land;
• contact details for any third parties who would meet the “interested party” criteria listed earlier;
• a declaration on the prescribed form that any actions by the applicant on the post-1989 land since 1 January 2008 (such as removing existing indigenous vegetation) complied with the Resource Management Act and the Forests Act at the time.

MAF provides an online tool for applicants to use to create a shapefile. Alternatively, applicants may upload their own shapefile generated from existing spatial data, as long as it complies with the content and format prescribed in the Geospatial Mapping Information Standard. The online tool, the Standard, and A Guide to Mapping Forest Land for the Emissions Trading Scheme are available at: www.maf.govt.nz/sustainable-forestry.

Step 3: Determine the Carbon Accounting Areas Relating to Post-1989 Forest Land

As part of the ETS registration process, Participants will be required to divide their forest landholdings into discrete Carbon Accounting Areas (CAAs). CAAs can include forest land areas of any size, and there are no limits on the number of CAAs a Participant may specify. CAAs also need not comprise contiguous forest areas. A permanent Carbon Accounting Record (CAR) is kept by MAF of the change in carbon stock over time, and of the NZUs issued or surrendered to match that change for each CAA.

The ETS caps a Participant’s maximum emission liabilities (for example, from harvesting, deforestation or fire) for the forest land in a CAA at the total number of NZUs previously issued in respect of that CAA. That is, if the units that would otherwise be required to be surrendered for emissions exceed the NZUs that have been received for a particular CAA, the owner is not required to surrender more emissions units than the total received (by all Participants who have owned the land).

For example, the harvest of a 28-year-old post-1989 forest stand in 2020 would result in far more CO₂ being emitted than had been sequestered since 2008. In this case the cap would apply and the Participant would only have to surrender emissions units equivalent to NZUs transferred to any participant for that CAA for CO₂ sequestered since 2008.

It will be up to the Participant to decide how many CAAs they would like to specify for the post-1989 forest land they register with the ETS. For some Participants, one simple CAA may suffice for their total area of forest land. Other Participants may wish to specify multiple CAAs. The area covered by each CAA can be determined in such a way that the Participant gains the maximum benefit from the liability cap. Guidance on issues to consider when selecting a CAA layout is included in A Guide to Mapping Forest Land for the Emissions Trading Scheme, available at http://www.maf.govt.nz/sustainable-forestry/ets-mapping-guide.pdf.

In general terms, the CAA layout that maximises the potential benefit from the liability cap is one that:

• has similar age classes of the same species in each CAA; and
• reflects the likely harvest pattern of the forest, that is, the entire area within a CAA that would likely be harvested over a five-year compliance period , and not over a longer period.

The forest land comprising a CAA established on registration cannot be amended except when:

• The Participant has sold some registered land to a new owner, and the record of NZUs received and emissions units surrendered on the area of land that has been sold must be associated with the new owner.
• The Participant has decided to withdraw some of their land from the ETS.

If a Participant brings more post-1989 forest land into the ETS to join their existing registered area of forest land they will be required to specify additional CAA(s) to cover the additional forest land.

Step 4: Calculate Changes in the Carbon Stocks in the Forest

As described earlier (see the Carbon Sequestration and Determining Carbon Stocks section), the ETS is expected to provide for more than one method of determining changes in carbon stocks in a Participant’s forests. However, only the Look-Up Table approach is currently available. Assessment of total forest carbon stocks is always completed at two points in time (at the beginning and end of the emissions return period) so the change in carbon stocks, that is the amount sequestered or emitted, can be determined.

The Regulations provide the detailed rules that govern how available methods for determining carbon stocks may be used. For a more detailed explanation on applying the Look-Up Table approach refer to A Guide to Look-Up Tables for Forestry in the Emissions Trading Scheme at http://www.maf.govt.nz/sustainable-forestry/ets/guide/lookup-table-guide.pdf.

Step 5: File an Emissions Return

Participants filing an interim emissions return must do so on or after 1 January and before 31 March in any year (in the period 2008–2012).

Forest owners that are members of the same corporate group may form a consolidated group in order to file a single emissions return for their post-1989 forestry interests. For the definition of a consolidated group see the Glossary at the end of this Guide.

Forest owners can file an emissions return online at http://www.maf.govt.nz/sustainable-forestry/ets/ets-transactions.htm. The website also provides downloadable forms for making paper-based emissions returns, and instructions for submission of completed forms. An emissions return requires information such as:

• the Participant’s name and NZEUR holding account number;
• details of the Participant’s CAAs that are covered by the return;
• an assessment of the Participant’s net carbon stock change at the time of the return for each CAA, on which is based their entitlement to receive NZUs (or liability to surrender units) during the calendar year(s) covered by the return.

Step 6: Surrender NZUs

Participants with a liability to surrender units must do so within 20 working days following the filing of the emissions return to which the liability relates.

Related Information

Register of Participants

Participants with post-1989 forest land will be entered into a publicly available Register of Participants. The Register shows:

• the Participant’s name;
• the ETS-related activity they undertake (owning, holding a registered forestry right, being a registered leaseholder, or being a party to a Crown conservation contract with respect to post-1989 forest land).

A Participant’s CAAs or specific details about their post-1989 forest land are not available to the public from the Register of Participants.

A Participant will be notified that they have been entered in, or removed from, the Register of Participants.

Receiving Units

Participants entitled to receive NZUs for a net increase in forest carbon stocks during a given period will receive these following the filing of the emissions return to which the entitlement relates.

Cease to be a Participant or Remove Land from the ETS

A Participant can cease to be registered in the ETS in respect of post-1989 forest land in the following ways:

• via land transfer (covered in the next section);
• if they decide at any time that they wish to cease being a Participant in the ETS;
• if they no longer meet the eligibility criteria to be a Participant in the ETS. An example would be deforesting and changing the land use to growing crops, so that the land is no longer forest land.

In the second and third cases above, the Participant has an obligation to surrender units equal to the outstanding net balance of units (that is, the number of NZUs issued over the life of the area minus the number of NZUs surrendered) for each CAA or part thereof that is no longer registered in the ETS.

A Participant may choose to remove all or part of their forest land from the ETS. As long as they still have some post-1989 forest land in the ETS they remain a Participant. If the forest land removed from the ETS represents part of a CAA, the outstanding net balance of NZUs previously allocated to that CAA are apportioned pro-rata between the land removed and that remaining in the ETS.

A Participant must notify MAF that they wish to remove an area of registered forest land from the ETS and supply details that fully define the area to be deregistered (in terms of existing boundaries within a CAA or CAAs). They then will be notified that the land will be removed from their Participant record with effect from a specified date.

When either ceasing to be a Participant or removing land from the ETS, the Participant is required to submit an emissions return within 20 working days of having ceased to be a Participant or removing land from the ETS. They must then surrender any outstanding net balance of emissions units previously allocated in respect of that forest land within the 20 working days in which they must submit their return.

Being removed from the Register of Participants does not alter any outstanding obligations a person has under the ETS (for example, filing emissions returns and surrendering emissions units).

Transfer of Land Already Registered in the ETS

Post-1989 forest land that is in the ETS may be transferred to another party if:

• the Participant transfers the forest land, registered lease or forestry right, or Crown conservation contract to another person;
• a forest landowner who is already a Participant, registers a forestry right, or lease, or enters into a Crown conservation contract over some of the land.

A person transferring forest land is required to notify MAF as soon as practicable. The notification may be submitted by using MAF’s online deregistration application process available at http://www.maf.govt.nz/sustainable-forestry/ets/ets-transactions.htm, or by downloading and completing a paper-based application form available from the same site.

Where an area of post-1989 forest land that is registered in the ETS is transferred, the transferee (buyer) automatically becomes the Participant with respect to that land from the date of transfer, and the transferor (seller) automatically ceases to be the Participant. A similar situation arises with transfer of a registered forestry right, registered lease or Crown conservation contract in respect of which a person is registered as a Participant.

In the case of this sort of transfer, there is no requirement to undertake a mandatory emissions return at the time of transfer, or to surrender units equal to the outstanding net balance of units in respect of each CAA (or part thereof) transferred. This is because the new owner automatically takes responsibility for any outstanding net balance of units for the area of forest land transferred to them. As usual, any liability the buyer may incur from carbon stock decreases is capped by the NZUs previously recorded as being issued for that CAA (or part thereof, on a pro-rata basis).

The transferor remains entitled to receive (and liable to repay) NZUs for carbon stock increases (or losses) covered by any emissions return submitted before the transfer.

A separate situation arises when the Participant is the holder of a registered forestry right, lease or Crown conservation contract, over some or all of the land, which expires or is terminated.

In this situation, transfer of registration as a Participant to the landowner of the land is automatic. However, a mandatory emissions return must be completed by the former participant within 20 working days of the expiry of the right, lease or contract and the previous Participant is entitled to NZUs for any net increase, or must surrender emissions units to meet any net decrease, in carbon stocks reported. The landowner, as the new participant, may face a liability related to the decay of post-harvest forest biomass.

Administration Fees

The following table sets out the fees to be recovered from Participants under the Regulations:

Fee Schedule for Post-1989 Forest Participants (incl. GST)
Registration Application Fee (per Participant) (based on a MAF involvement up to 4.25 hours) Total cost per Participant	$550.00
Emissions Return Filing Fee (per return) (based on a MAF involvement up to 0.75 hours) Total cost per Participant	$100.00
MAF Hourly Rate (over and above standard time) Cost per hour	$130.00
MAF Travel Costs Cost per hour for time spent travelling The cost of travel	$130.00 Actual & Reasonable

The registration application and emissions return filing fees are based on MAF’s estimated standard processing time. In cases where ETS applications or emissions returns are particularly large (for example, involving large numbers of land titles, forestry rights or CAAs), or complex and involve additional processing time or travel costs, there may be additional charges as outlined above.

Note that fees and charges paid to MAF in respect of applications and emissions returns are not refundable.

Fees will be reviewed periodically to ensure they meet any relevant cost recovery policies. This could result in changes to the level of fees (up or down). Advance notice of any change will be given through the regulations consultation process.

Tax Treatment of Post-1989 Forestry

This section sets out the tax and GST treatment of units which relate to post-1989 forest land under the ETS.

This guide does not deal with tax treatment related to complex transactions such as contracts for forward sale or purchase of units, put and call options, or derivative financial instruments involving units etc.

The tax rules set out below apply in the same way to:

• New Zealand Units (NZUs);
• Kyoto units;
• approved overseas units.

Transactions in units which relate to post-1989 forest land are treated as being on revenue account for tax purposes, which generally means that income is assessable and expenditure is deductible. In common with the general tax treatment of forestry, income and expenditure relating to units is recognised on a cash basis.

The tax consequences of common transactions for post-1989 forest land Participants in the ETS are explained below.

Transfer of NZUs to Participants

A post-1989 forest land Participant is entitled to receive NZUs for the net increase in carbon stocks in their forest from 1 January 2008. No income tax is payable either on receipt of these NZUs or at the tax year end if they are still held.

Sale of NZUs

The proceeds from any sale of NZUs that were received in relation to a net increase in carbon stocks are subject to income tax in the year of sale. This will include any holding gains or losses.

It is intended that, except for the sale of NZUs allocated under a Forestry Allocation Plan for pre-1990 forests, sales of all emissions units (however acquired) are subject to income tax in the year of sale.

Surrender of emissions units in relation to post-1989 forest

A liability to surrender emissions units arises when there is a net decrease, below a previously reported level, in carbon stocks sequestered within a post-1989 Participant’s forest land area. However, the liability is capped at the maximum NZUs previously received by the Participant (or any previous owner of the forest) for net increases in carbon stocks (if any).

If the Participant (and any previous owner) did not previously receive any NZUs for net increases in carbon stocks in a particular forest, the liability to surrender emissions units for a subsequent net decrease in carbon stocks is nil. Thus, there are no tax consequences.

If a Participant (or a previous owner of the forest) has previously received NZUs for net increases in carbon stocks, the liability to surrender emission units is capped at the number of emissions units previously received. If the Participant still holds the NZUs previously received for net increases in carbon stocks, the surrender of those emissions units has no tax consequences.

However, if the Participant is required to purchase additional units in order to satisfy their obligation to surrender the same number of emissions units previously issued for net increases in carbon stocks (but subsequently sold), the tax consequences are set out below under “Purchase of replacement units”.

Purchase of replacement units

Where a post-1989 forest land Participant purchases emissions units to replace NZUs previously issued for net increases in carbon stocks that have been sold (“replacement units”), a tax deduction is available for the cost of those units on acquisition.

Purchase of additional emissions units

Purchases of emissions units that are not replacement emissions units will be treated in a similar fashion to trading stock, with any net deduction only being available on disposal.

GST

All transactions in emissions units (including surrender) are treated as being zero-rated for GST purposes. When supplies, such as the sale of units, are made, GST invoices should record GST at zero percent. This means that no GST will be charged.

A Participant with post-1989 forest land may also be treated as making a supply to Government of a service of carbon capture. This service is also zero-rated, so invoices should show GST at zero percent. The value of the supply is the market value of the emissions units received by the Participant from the Government.

There is no restriction on the ability to claim any GST incurred either in dealing with units or in relation to the supply of carbon capture to the Government.

Contact for Enquiries

Emissions Trading Scheme
Ministry of Agriculture and Forestry
PO Box 1127
Wellington

Contact us

Or call us on 0800 CLIMATE (254 628)