Forest 360 land use consultant Andrew Buswell explains the Emissions Trading Scheme

The Emissions Trading Scheme is designed to offset the production of greenhouse gases.

Forest 360 Land Use Consultant Andrew Buswell takes complexity out of the Emissions Tradning Scheme.

The Emissions Trading Scheme (ETS) is New Zealand's tool to incentivise net greenhouse gas emissions reductions - either by directly reducing emissions e.g. lowering fuel use, or through offsetting by planting trees.

The ETS has been around for more than a decade and has already undergone a major suite of changes, which perhaps demonstrates the complexity and challenging nature of the problem we face.

At the forefront of the recent changes is the introduction of averaging accounting – a model that determines carbon credits allocated to forest owners. Under this model a forest is recognised for carbon stored over multiple rotation cycles. This method of carbon accounting avoids surrender liabilities associated with harvesting (providing the forest is replanted) and is more in line with how New Zealand reports under the Paris Accord.

Averaging aims to incentivise new land planting as forest owners will know that they can keep the carbon allocated. Older and second rotation forest will be significantly disadvantaged under the new rules.

This is despite the fact that these forests have been the reason New Zealand has been able to meet our climate change targets to date.

With the new rules not coming into effect until 2022 there is still time for any older forests not yet registered to do so, and make the most of the previous system ("stock change" aka "Sawtooth").

However, in some cases, it can take more than six months to successfully register forest in the ETS and with a likely surge in applications as we approach 2022, these delays may increase.

There is a common misconception that the ETS is not worthwhile because a significant amount, if not all carbon, will need to be surrendered at harvest. While risks do need to be considered, they are manageable and generally, potential benefits far outweigh the costs.

Historically forestry investments have involved outlaying a significant amount of capital in the first 10 years, for a return in year 28 for example. A variable log market can lead to mixed results in terms of return on investment, with harvest returns ranging from negative to upwards of $50,000/ha net return.

The Emissions Trading Scheme changes the structure of a forestry investment with the ability to achieve income throughout the rotation by trading carbon credits. With two products being produced (carbon credits and timber) a forest can be a resilient investment.

An average forest in the Manawatū will sequester around 587NZUs per hectare between age 10 and 28 in the second rotation. At current prices this represents $20,545 per hectare and is equivalent to a reasonable return from harvesting.

Though there is uncertainty in predicting carbon prices for 2050, current commentary suggests there will be more upward pressure in the near future. A further price increase would soon tip the scales in favour of carbon. Whether or not this is a good thing is up for debate.

The opportunity the ETS brings to forest investments has seen land prices for eligible post-89 forest land increase significantly since the inception of the scheme and especially so with recent carbon price inflation.

One of the attractions of the scheme for forest owners is the ability to accrue carbon credits, but not trade. No financial liability is created until credits are sold. If at any point cash was needed, the outlook for the timber market less certain, or the price of carbon set to fall, the forest owner has a valuable asset to liquidate.

If none of the above were to eventuate, the only loss would be the administrative cost of entering and participating in the scheme (arguably low when compared to other management expenditure).

There are hundreds of thousands of hectares of unregistered land in New Zealand, many of which have been planted in the 1990s. If these forests do not register very soon, they will miss out on the extra benefits the ETS offers - over and above those of a conventional timber forest.

We have seen landowners miss out with the ETS before, for example the "pre-1990" allocation aimed at compensating landowners for a loss in capital value. Those who made claims at that time benefited, but failure to do so meant others missed out. The same may be said about this situation in 10 years.

Coming to terms with the complexities of the ETS can feel overwhelming and considerable effort is required to understand all the implications for individual forest/landowners.
However, if you own a forest initially planted in the 1990s, it is now time to investigate and think about registering your forest... while you still can.