Brian Fallow: Green and mean

Today's Budget will include a new tax on the carbon content of fossil fuels.

The rationale is to set up a means of sending price signals to consumers to conserve energy and to electricity generators to invest in renewables (or geological sequestration).

But in the area where a price signal would do most good, forestry, the silence is deafening. Climate-change policy in that key sector is a shambles.

The forestry industry is in the glum position of someone who has lost a dollar but found a cent.

The cent is the foreshadowed promise that the Budget will give the industry $20 million over the next five years.

Grandly entitled the Forestry Industry Development Agenda, it includes funding for such "industry good" purposes as market access and development, skills and training, bio-energy and encouraging excellence in wood design in the construction industry.

It will require the industry to contribute an extra $3.8 million.

The dollar lost is the value of forests as carbon sinks under the Kyoto Protocol.

Thanks largely to New Zealand negotiators at Kyoto in 1997, the climate-change treaty recognises that a change in land use from grass to trees takes carbon dioxide out of the atmosphere.

It allows credits for forests established since 1990 on land not previously forested. It also imposes liabilities if forests are harvested but not replanted.

Forest sink credits could be worth in the order of $1 billion to $2 billion during Kyoto's first commitment period, 2008 to 2102, the Ministry of Agriculture and Forestry estimated in a briefing to its new Forestry Minister, Jim Anderton, last December.

Kyoto forests, as those which give rise to credits under the treaty are commonly called, represent about a third of New Zealand's plantation forest estate.

It is a long-standing sore point among the owners of those forests that the Government has opted to retain ownership of the sink credits - or nationalise them without compensation as the Kyoto forest owners call it.

The Government has doled out 10 million carbon credits, worth upwards of $100 million on the international market, to give incentives to projects like wind farms that will reduce greenhouse gas emissions.

There is also is a scheme to reward the establishment of permanent, non-commercial forests. But there is no taxpayer-funded incentive to establish new commercial Kyoto forests, the kind you are allowed to harvest.

Cover a windswept hilltop with wind turbines and you get a subsidy. Cover it in pine trees and you get zip.

Never mind that this is kind of ungrateful, given it is only the Kyoto forests already planted which will allow New Zealand, on present projections, to meet its Kyoto target for net emissions during the first commitment period.

It is also short-sighted. The problem is that new planting has all but dried up.

The annual rate at which land was switched to commercial forestry peaked at just under 100,000ha in 1994. But it has declined rapidly since then, to about 15,000ha in 2003 - half the annual rate of 30,000ha officials assumed when New Zealand ratified Kyoto three years ago.

As the Ministry of Agriculture and Forestry noted, the rules for claiming sink credits have only been negotiated for the 2008 to 2012 period. Negotiations for a second commitment period are due this year. Failure to secure a favourable regime for forest sinks in the future could have far-reaching effects on the costs and impacts of New Zealand's future climate-change policies.

The low level of new planting - about a third of the long-run historical average - is not just a response to disappointment about the Government retaining the credits from existing Kyoto forests and the absence of any incentives for new planting.

It reflects the weak returns to forestry from the combined effect of world prices, the exchange rate and freight costs, compared with bumper returns from pastoral farming. Those relative prices may change.

But, in the meantime, the present stingy policy puts New Zealand in a false position internationally. It would be difficult for New Zealand to argue for an extension of Kyoto's forest sink provisions when it is doing exactly nothing to encourage the establishment of new forests.

The entire rationale of such provisions, after all, is that they affect climate-friendly changes in behaviour. It is hard to see how carbon policy in respect to forestry could claim to do that. If anything, the effects of the policy are perverse, not least on the liabilities side of the ledger.

The Government partially justified retaining ownership of the forest sink credits by saying it would also assume the liabilities arising when forests are harvested and not replanted.

But there is a catch. The Government will cover the liability only so long as no more than 10 per cent of the forest area harvested between 2008 and 2012 is deforested - that is switched to other uses.

Historically only between 2 and 4 per cent of the forest harvested is not replanted, so the Government contends that the 10 per cent cap should be ample.

But, says Forest Industries Council chief executive Stephen Jacobi, the industry is not confident the cap will not be breached. Land suitable for dairying is commanding high prices. And trace element deficiencies in soils, which were the reason some land was given over to plantation forestry in the first place, have been identified and can be readily remedied.

As things stand, no one knows who will pay, and how, if the 10 per cent cap is breached.

And following the failure to conclude a forestry industry framework agreement, the Government is now refusing to take part in any process of ongoing discussion with the industry on carbon issues.

The ministry estimates that Kyoto liabilities on land deforested are likely to be between $10,000 and $20,000 a hectare.

When combined with the cost of clearing stumps, say $4000 a hectare, that creates a substantial potential barrier to exit.

The net result of all this uncertainty has been to create an incentive for owners of pre-1990 forests who are thinking of switching land use to harvest early, before 2008, despite adverse market conditions.

"And that is happening," Jacobi said.

Kyoto forests are not subject to the 10 per cent cap.

The situation is further complicated by the fact that forest owners often do not own the land under their trees. Often the land is owned by Maori trusts or is subject to treaty claims.

"If the Government were as a result of deforestation over the 10 per cent cap to seek to recover the liability from landowners - who after all are the ones with the opportunity to change land use - they would immediately run into a treaty claim," Jacobi said.

The way to hack through this Gordian knot is obvious:

* Forget the 10 per cent cap on deforestation liabilities. If officials are right that it will not be breached, there would be no fiscal cost. And it would remove economically and environmentally perverse incentives to deforest before 2008.

* Make subsidies, payable in carbon credits, available to those who establish new forests, conditional upon their assuming any deforestation Kyoto liabilities arising in the future from those forests.

It is not good enough for the Government just to cite uncertainty about what the international regime will be from 2013 on, and the attendant risk that taxpayers' money might be wasted.

For one thing, there is a clear and hefty fiscal risk in the status quo.

More importantly, however, climate-change policy itself is all about mitigating long-term risks.

It is bedevilled by long lags between cause and effect. The US National Academy of Sciences says of 100 CO2 molecules emitted to the atmosphere today, 38 will still be up there in 100 years' time contributing to the greenhouse effect. In 200 years, 14 per cent will still be there.

Such long lags underpin the moral case for acting now in the face of large uncertainties about the impacts of greenhouse gas emissions. If we wait 20 years, say, for greater certainty in the science before doing anything, the avoidable emissions in the meantime will have effects for generations.

It is a risk we are not entitled to take.

But if the Government is justified for those reasons in imposing a whole new tax in the face of those uncertainties, it is not justified in citing uncertainty about the future of the Kyoto Protocol a mere eight years out for doing nothing about forestry now.

All tree'd out

New forestry planting has all but dried up.

The annual rate at which land was switched to commercial forestry peaked at just under 100,000ha in 1994.

It has declined rapidly since then, to about 15,000ha in 2003.

That is only half the annual rate of 30,000ha assumed when Kyoto was ratified three years ago.