Portfolio vacated by Nick Smith faces a fresh wave of complicated issues

Poor Tim Groser.

As if the Trade Minister did not have enough to do, he has just been given the domestic climate change portfolio, following the departure of Nick Smith from office.

It is always an area of nightmarish complexity and right now there is a fresh wave of issues to contend with.


Many of them arise - ironically for Groser given he has been the minister responsible for international climate negotiations for the past three years - from changes to the Kyoto Protocol's rules relating to forestry agreed at the Durban conference late last year.

As a package, the changes are undoubtedly positive from a New Zealand Inc perspective.

But it is a mixed bag and it gives rise to vexing questions about whether and how to devolve the new rules - which at this point apply only to the Government - to players in the forestry industry, whose interests diverge as often as they align.

One change for the worse was the dropping of what was called the fast forest fix, or more formally the afforestation reforestation debit credit (ARDC) rule. This applies to "Kyoto" forests, which are those planted since 1989 on land not previously forested.

A country can claim credits for the carbon sequestered since 2008 in those trees as they grow but the credits come with an associated liability when the trees are harvested.

The ARDC rule limited the debits to the number of credits claimed. But now, without that rule, there would be a liability for all the carbon sequestered in the tree, including that which had earned no credits.

Quite how this happened is unclear, says Forest Owners Association chief executive David Rhodes, who was closely involved in the Durban negotiations.

"The rule disappeared in the middle of the night and we were left scratching our heads, saying 'Well that wasn't really contentious, what happened?'."


There was a scramble to conclude the overall agreement when the negotiations had already gone over time by 36 hours and people were exhausted.


Rhodes argues, cogently, that this adverse change is something the Government will need to factor into a decision ahead of it this year about firming up what international commitment it makes to reduce New Zealand's emissions over the next eight years.

The ARDC rule still applies to Kyoto's first commitment period, from 2008 to the end of this year. And natural justice surely requires that it continue to apply to Kyoto forest owners who have opted into the emissions trading scheme. The Government can hardly change the rules on them retrospectively.

But what about those who have not yet signed up for the scheme? They account for about half the Kyoto forest estate.

Should they be offered the same deal as those already in? And if not, would it in effect lock them out?

That question might well get entangled with the issue of whether, and how, to devolve the impact of another rule change - this time positive from an NZ Inc perspective - relating to harvested wood products.

Kyoto has, until Durban, embodied the absurd provision that when a tree is felled all the carbon stored in it is deemed to be emitted to the atmosphere then and there.

If that were true, no one would build with wood and New Zealand has long been among those arguing for something more realistic.

The new rule allows a country to account on a basis of a "half-life" of two years for paper, 25 years for wood panels and 35 years for sawn wood.

Wood harvested for energy purposes will still be treated under the instant oxidation rule, as will wood or paper in landfills.

Allowance is made for a country to use its own data rather than those default half-lives, provided the data are transparent and verifiable.

If these changes are to do more than benefit the Government in its international carbon accounting obligations, the price signals will need to be transmitted to participants in the forestry industry.

But that gives rise to a number of difficulties.

How would they deal with exports?

About half the wood harvest is exported as raw logs. How can the exporter, or any supplier upstream of him, be sure to what use that resource will be put?

But if those logs are deemed to be instantly oxidised, as at present, while domestic uses are not, would that not skew relative prices in a way that advantages domestic processors and disadvantages forest owners? From a national point of view, would that be such a bad thing?

And as far as the domestic market is concerned, the pulp and paper sector might oppose a change that made it harder for them to compete for logs.

But how much choice do growers have, in practice, about where they sell their logs? They are not a homogenous, fungible commodity.

With carbon trading for less than $8 a tonne, would it make much difference?

Is it even worth the compliance costs?

And as Infometrics chief economist Adolf Stroombergen points out, devolution may have some undesirable effects, like making biofuels from wood less attractive for example.

"The Government should say, 'Show us a good reason to devolve'."

Another change agreed at Durban, advocated especially by New Zealand, is offsetting.

It applies to pre-1990 plantation forests.

Under the old rules the owners of such forest were liable for the emission of the carbon in their trees upon harvest - even though they were not able to claim credits as they grew - unless the forest was replanted.

The replanting had to be on the very same land. That has been a formidable barrier to changing land use out of forestry to a more profitable one.

The new offsetting rule allows the replanting to be done on other land than that deforested. It has to be a plantation forest which will sequester the same amount of carbon over a normal harvest cycle as reforesting the same land would have.

While this is progress in terms of restricting flexibility of land use, Rhodes says its impact will be limited.

"Offsetting is not a costless exercise. There are expenses in roading and land preparation at the new site and if it is in a different part of the country from the rest of someone's forest, it just isn't going to work."

The Caygill review of the emissions trading scheme last year recommended that the Government introduce offsetting even if it was not agreed internationally.

But the review also suggested scrapping the second tranche of compensation, by way of an allocation of credits, pre-1990 forest owners are to receive as recompense for facing a contingent deforestation liability, on the grounds that it would now be easier for them to defer it.

While that might sound like a good idea to a cash-strapped Treasury, it is likely to encounter ferocious opposition from the forest owners, not least Maori.

Clearly all this is an area where the questions outnumber the answers at this point.

And there's more.

The Government has yet to set out its full response to the Caygill review and seek feedback on any changes it is considering.

But time is short. Kyoto's first commitment period ends at the end of this year.

In addition it has to firm up a national carbon budget for the next eight years, and decide whether to make that commitment under the Kyoto Protocol's second commitment period or under the broader United Nations Framework Convention on Climate Change.

Plenty for Groser and his new associate minister Simon Bridges to do, then.

Having the same minister across the international and domestic sides of the climate change issue should help. The division of labour hitherto reflected Groser's expertise as international trade negotiator.

"One of the things that worries me," Rhodes says, "is that we have our international negotiators and our domestic policymakers. There is a bridge between them but not enough traffic across that bridge at times."