Forestry Update

Challenges ahead

Forestry is attracting a great deal of interest and opportunity right now. This rapidly growing area faces challenges in terms of public opinion, regulation and general understanding. With all that is going on, where does this leave the agricultural sector in terms of sequestering carbon and the Emissions Trading Scheme (ETS)? We update you on some current issues.

‘Forest land’ and the farm

Forestry is a big player in sequestering carbon, however, not all forestry on a property can be registered in the ETS. The ETS defines ‘forest land’ as an area that is at least one hectare in size and has (or will have) tree crown cover of more than 30% in each hectare of forest species, at least 5m in height at maturity and an average width of at least 30m.

This set of rules restricts the parameters of registerable areas for carbon sequestration and, in particular, discounts some current developments and areas on farms. The scheme, for example, rules out smaller areas of riparian planting that many farmers have invested in to improve the ecology and environment on their land. However, if He Waka Eke Noa achieves its alternative emissions goal, this could change and, while these areas would not generate the same economic gain as ‘forest land’ under the ETS, they could create reward for existing on-farm sequestration.

Carbon accounting

Carbon accounting is the method by which an ETS participant calculates and reports changes in the carbon stored in a forest. To determine how many units a participant is entitled to earn (or must surrender), an emissions return must be completed and filed with the Ministry for Primary Industries. An emissions return must be made at least once during an emission return period; the current period runs from 1 January 2018 to 31 December 2022.

The 2023 ‘rush’

If an eligible area is ETS-registered before the end of the current emission period (see above), significant returns could be leveraged by a participant claiming carbon units back to the start of the return period – 1 January 2018. This opportunity will, however, lapse by the end of 2022 when the next emissions period begins, thus creating an incentive (or ‘rush’) for landowners to consider the ETS in a more serious light in order to reap this financial reward.

2023 also introduces a change to carbon accounting. All post-1989 forests currently registered in the ETS use the stock change accounting method for carbon units and will continue to do so until 2023, at which point a landowner can decide whether to move to averaging accounting or remain in stock change accounting. From 1 January 2023, however, if a post-1989 forest is registered in the ETS the participant can only use the averaging accounting method unless the forest land is registered in the permanent forest category. The permanent forest category (see below) will continue to use the stock change accounting method despite this change.

Stock change accounting: as a forest grows it stores carbon and the participant earns units; however, if the carbon stock decreases then carbon units must be surrendered, that is, harvested. In other words, stock change accounting focuses on short-term increases and decreases in carbon storage in a forest.

Averaging accounting: the participant will earn units for the first rotation growth, until the forest reaches its ‘average age.’ Averaging accounting means that if an area is replanted within a reasonable time period, the landowner is entitled to keep harvesting and not surrender credits.

While a participant can earn more carbon units under stock change accounting compared with average accounting, a participant will earn fewer ‘low risk’ units under stock change accounting. Low risk units are less likely to need to be repaid or surrendered.

Permanent forest category

2023 will bring about an additional category in the ETS called the ‘permanent post-1989 forest’; it replaces the current ‘permanent forest sink initiative.’

The new category is for forests that will not be clear-felled for at least 50 years. This option has generated much interest as an attractive investment opportunity for forestry owners and, more particularly, landowners seeking to turn farmland into economic gain. With the carbon price at upwards of $80/tonne, it is unsurprising the permanent forest category, and ETS generally, is pushing many farmers to consider forestry as a more viable practice in the future.

But is this set to change with the government’s recent proposal?

Proposal to exclude exotics

Under the current rules, a permanent forest category allows both exotic and indigenous forests to be registered in the ETS and earn New Zealand units (NZUs). The government has now, however, proposed excluding exotic species (such as pinus radiata) from the permanent forest category in a bid to better manage carbon farming in New Zealand.

The government’s proposed change (click here) has been generated from significant feedback and concern from scientists, primary industry and community groups, and local government with the increased rate of planting of exotic carbon forests on productive farmland.

Carbon farming is a hot topic not only in the rural sector, but also in environmental circles. Hopefully, the government’s proposal is the first step to a more strategic and managed process for the ETS in New Zealand.

In an ideal world we will have balanced opportunities for farmers to harness an income stream from their less productive land, while cultivating more valuable and sustainable areas of farmland for food production.

DISCLAIMER: All the information published is true and accurate to the best of the authors knowledge. It should not be a substitute for legal advice. No liability is assumed by the authors or publisher for losses suffered by any person or organisation relying directly or indirectly on this article. Views expressed are those of individual authors, and do not necessarily reflect the view of this firm. Articles appearing in this newsletter may be reproduced with prior approval from the editor and credit given to the source. Copyright, NZ LAW Limited, 2019. Editor: Adrienne Olsen. E-mail: adrienne@adroite.co.nz. Ph: 029 286 3650 or 04 496 5513.