This is a further article in a series I have been writing exploring the issues of carbon farming. The issues are important because we are on the cusp of massive land-use changes. These are driven by the current economics of carbon farming now being far superior to sheep and beef farming on most classes of land.
Carbon farming is part of a virtual market, called the Emission Trading Scheme (ETS) in which there is no exchange of a physical product. As such, the ETS is controlled by Government rules and regulations, rather than by physical supply and demand factors.
The carbon farming component of this virtual market relates to post-1989 forests. These are forests on land that was not in forest on 31 December 1989 or in the immediately preceding years.
The current amount of post-1989 forest land is around 700,000 hectares and increasing. All of it is eligible for entry into the ETS, but perhaps surprisingly, less than half is currently registered. That means that less than half is earning the carbon credits that it could earn.
Why is this happening?
As with everything in relation to the ETS, the answers are complex. But in large part this non-registration in the ETS is because forest owners do not appreciate the extent to which the ‘rules of the game’ have changed.
People shy away because of the complexity, combined with the fact that it is a virtual market controlled by Government regulations rather than physical supply and demand. These regulations can and do change, making foresters cautious. Nevertheless, my expectation is that within the next year most owners of post-1989 forests, including farm-foresters, will join the ETS.
The ETS forestry rules work in five-year cycles. The current five-year period runs to the end of 2022. As long as forests are registered before the end of 2022 it will be possible to obtain credits back to 2018.
The forestry elements of the ETS were designed to encourage people to plant new forests, with the international baseline set at 31 December 1989. Any land already in forest immediately prior to that does not earn credits. Also, there are strong financial disincentives applied to deforestation of pre-1990 forests.
Accordingly, if a pre-1990 forest is harvested, then almost always the forest is replanted. Some of these forests are now into their fourth cycle since original planting in the 1920s.
These pre-1990 forests are production forests, independent of carbon farming, and there are about 1.4 million hectares in this category. Sometimes they have been profitable and sometimes not.
Then came the 1990s, which was a time when timber prices were booming relative to agricultural prices. Conventional wisdom at that time, at least in relation to the harder hill country, was that production forestry based on a rotation length of around 28 years was the smart thing to get into.
In contrast, there was no consideration given at that time to carbon farming. Some of us were already talking back then about carbon farming as a possible future land-use, but such thinking was a long way from mainstream thinking. The ETS that would make those earnings possible was still well over a decade away.
The big planting years for post-1989 forests, with new forests termed ‘afforestation’ to indicate the land was not previously forested, were from about 1993 through to around 1998. Plantings then declined rapidly and have only started to recover in the last two years. Accordingly, well over half of the 700,000 hectares of post-1989 forests are between 21 and 28 years of age.
Registered forests
Approximately 330,000 hectares of these post-1989 forests are currently registered in the ETS. Those forest owners, including farm foresters will have been receiving one NZU for each tonne of carbon dioxide sequestered, with each unit currently worth around $64.
Some foresters will have sold their NZUs when the prices were much lower than now and some will be holding them as registered assets.
Those who have sold their NZUs under old rules and old prices will now have good reason to be nervous about the carbon liabilities they will incur at harvest. The ETS has not worked out well for them.
I expect many of the foresters who have sold their NZUs will never harvest their forests. Rather, at the start of 2023 they will move across to the permanent forest category and keep acquiring carbon credits. Alternatively, some of them will decide to convert to the new ‘averaging system’ that commences in 2022 so as to minimise their liabilities.
For those who have sold their NZUs, it is not possible to say which option is best without looking at the specific situation of the individual forester. What can be said with confidence is that anyone in this situation needs to get specialist informed advice specific to their situation. There are some nasty fish hooks out there.
The situation for those who have registered in the ETS but have retained their NZUs is somewhat simpler. As of March 2021, there were 71 million NZUs worth over $4 billion held by foresters.
If these ETS foresters with retained units now harvest their forests, then they will need to surrender their NZUs. However, by signing up to the averaging scheme they could well be left with a significant number of units which they can sell, with these having a current value of around $64 each.
Alternatively, some of these foresters might also choose to join the permanent forest scheme, cash in all of the units they currently hold, and earn more credits in the coming years that they can sell for cash.
Non-registered forests
So what about the approximately 400,000 hectares of post-1989 land that is not in the ETS?
My assessment is that these foresters should be looking very seriously at joining the ETS. The clock is ticking, and they need to do this prior to the end of 2022. At that date, the option to earn credits for the 2018-2022 period will be foregone.
These forest owners will typically be able to claim between 125 and 160 NZUs per hectare for this five-year period, with each unit currently valued at around $64. That approximates to between $7500 and $10,000 as credits available to be cashed, with further credits available in following years.
If these foresters also join the averaging scheme, they can earn between 300 and 400 units per hectare, depending on location, without incurring harvest liabilities as long as they replant. Alternatively, they may choose to join the permanent-forest scheme as from 2023.
I know of some foresters who have not joined the ETS but plan to do so when they plant the second rotation. This is on the assumption, which is correct, that they will be able to claim credits for that second rotation.
However, what many foresters taking this stance do not appreciate is a nasty little fish hook called ‘residual carbon’ from their first-rotation forest, which relates to both above and below ground carbon remaining after the first-rotation harvest. The consequence is that although they will be registered in the ETS, they will typically not be able to claim any credits for at least the first ten years of their new forest.
If I was the owner of one of these forests, I would be starting the registration process right now, recognising also that there is currently a six-month processing delay within the system. But I would not cash in my credits until all the new regulations are locked in place.
The Big Message
The big message in all of this is that for any forester with existing post-1989 forests, and this includes many farmers as well as the corporate foresters, specialist advice is essential. The challenge is to separate informed from mis-informed advice as there are very few experts, if any, on how the ETS will play out. Also, although the principles are all laid out in enacted legislation, the detailed regulations are yet to be gazetted.
When I started writing this article, I thought I would also write about some broader implications of the post-1989 forests on carbon prices within both the ETS and national carbon budgets. But alas, that will have to wait. Once again those are big complex issues. I suspect that the Government will encounter some unexpected consequences from non-alignment between the ETS and the national carbon budgets on which it reports to the UNFCCC.
*Keith Woodford was Professor of Farm Management and Agribusiness at Lincoln University for 15 years through to 2015. He is now Principal Consultant at AgriFood Systems Ltd. You can contact him directly here.
43 Comments
Another 'earn' for farmers.
'Environmental Drivers of Agricultural Productivity Growth: CO2 Fertilization of US Field Crops
We find consistently high fertilization effects: a 1 ppm increase in CO2 equates to a 0.5%, 0.6%, and 0.8% yield increase for corn, soybeans, and wheat, respectively. Viewed retrospectively, 10%, 30%, and 40% of each crop's yield improvements since 1940 are attributable to rising CO2. '
Liebig's law of the minimum still applies. Growth is dictated by the scarcest resource, not by the total resources available.
It was established in the 1950's that CO2 was a limiting factor in maize growth. A crop can halve CO2 concentration to 150m height by lunchtime. Thus current global greening - not the desertification predicted by the chicken littles.
'...on still days and nights a maximum variation of 0.02 % has been observed; from 0.041 % at night to 0.021 % during active photosynthesis. Since the equilibrium CO2 level at which net photosynthesis becomes zero is in the neighborhood of 0.01 % such marked drops in the CO2 content of the air may be expected to limit photosynthesis and crop yields.'
https://www.ncbi.nlm.nih.gov/pmc/articles/PMC540574/pdf/plntphys00391-0…
Gosh the government makes us work hard to make a buck, wouldn’t it be easier to join the mob?
If we were smart we would licence our national parks as carbon sinks, sit back and enjoy the income.
Can’t be done?
Gabon is having a go.
https://www.ft.com/content/4f0579ac-409f-41d2-bf40-410d5a2ee46b
edit..behind a paywall, sorry, in summary they have a managed national park surrounded by legislation, much like us. Elsewhere I saw Europe thinks it may be eligible as a source of credits. But of course Gabon was a French colony.
Certainly our government is using some Kyoto credits which were created from thin air, like printing money It’s another easy care scheme..
The balance is obtained by legislation, another cunning plan.
Railways and local bodies would probably think forestry was too much like hard work.
positivelywallstreet
The Government was certainly using Kyoto units through to the end of 2020 to meet our international commitments. Those units were paid for but at ridiculously low prices on account of fraudulent international activities stemming from Ukraine in particular.
To the best of my knowledge the NZ Govt is no longer using these units for its national budget beyond 2020. I believe there were about 5.3 million left over at the end of 2020.
But what happens with national emission budgets should not be confused with the ETS. A lot of NZs emissions lie outside the ETS.
The units made available by the Govt in the ETS auctions are indeed created from thin air. That is the way it has to be.
The availability of units in the ETS affects behaviours, and these behaviours then have implications for the national emissions budget.
Anyone who thinks these relationships are simple does not understand the reality.
KeithW
I thought I saw some included in the 2021 emissions budget, Group 1 credits, but I could be a year out and they were included in the 2020 budget.
I take your point that not all emissions are included in a ETS scheme and of course the europeans do the same.
I guess that will be reconciled for some global emissions trading scheme, some time.
Keith,
Sorry to bother but would a global emissions trading scheme be between regulatory bodies, such as Governments and States or would they occur at a corporate level, Danone Fr buying from Fonterra NZ for example.
I have seen an example of California and Quebec trialling a system as an example.
Great article, Keith. Also points up a lucrative opportunity for 'ETS Navigation Consultancy' for a Modest Fee, ongoing naturally. Somewhat analogous to the 'Pre-Consent Navigation' which is needed because District Plans are so complex, discretionary powers so wide, and the ticket clip so attractive.
All non-productive non-tradeable activity but hey, adds nicely to GDP. Perhaps there's an earner in a degree course to School up these warm bodies. Clearly, opportunities abound.....and it's desk work - no attaching cups at 0400.....
You almost certainly need a consultant to claim for credits. However , I would imagine the ETS is only one part of the consultancy , and I would want a consultant who could advise on what trees to plant , best layout / stocking rates etc. I'd be checking they knew how to use a planting spade.
Keith, Are you 100% sure about this because I'm now confused.
Say your trees were planted in 1994 so at the start of the current Commitment Period in 2018 the trees are 24 years old. The trees are already older than the "average age" of 16-17 years assuming a harvest age of 28 years. How can there be any benefit in joining the ETS and then switching to averaging?
https://www.mpi.govt.nz/forestry/forestry-in-the-emissions-trading-sche…
SimonP
The regulations have yet to be gazetted and until that occurs it makes sense to hold the units rather than surrender them for cash. Registration plus claiming of units plus holding on to them in the meantime is the minimal risk option, with all potential liabilities covered, while still creating earning potential.
Here is what the MPI website says in regard to averaging: "A first rotation forest will earn carbon credits up to its long-term average carbon stock".
Note that it refers to 'carbon stock'. It does not say that the credits can only be earned in the first 'x' years although 'the long term average stock' is defined in terms of growth that occurs in the first 'x' years. The value of 'x' depends on tree species and planed rotation length. The long term average carbon stock' will also depend on region.
Whether or not a forest is eligible for the averaging scheme depends on when it is registered for the ETS, not wen it is planted.
So my understanding is that you could register your 24 year-old forest, claim credits back to 2018, and you will still be well within the 'long term average carbon stock'.
KeithW
If you registered into the ETS prior to 2019 you cannot convert to averaging as the rules stand at the moment. This may change in a few years but will not help if the proposals stay as they are now for averaging. As it stands only forest registered from 2019 can opt to change to averaging. As below this is only useful really for young first rotation forest.
Why
Under averaging you can only claim the NZUs for the first @16 years of the first rotation. If you planted in 1994 this means you would have only been able to receive carbon up until 2010. So if you register from 2008 (the earliest you could claim) you would get to keep only the last 3 years - 2008, 2009, 2010. Everything else you have claimed would have to be repaid at harvest time. Your only option then would to be to revert to permeant to claim carbon(after a @10 year stand down after harvest). Otherwise its timber only therforth.
If you stay in Forest stock you can keep claiming until you decide to harvest - you then have to pay all the carbon back at harvest time or shortly after and after a @10 year stand down you start claiming again. Under this process if you sell carbon you have to weigh up the carbon liability at harvest versus the timber return.
For larger forests this can be modelled and allowed for by staggered harvest and using carbon from standing areas to repay harvested areas - you can calculate your own average stock. This is complex forest modelling.
For small single stand forests its a choice of
1. Harvest and give carbon back and then claim later but you have to repay again at the next harvest.
2. Don't harvest and leave the trees growing, take the carbon, sell and wait until, if ever, the timber value exceeds the carbon repayment liability - essentially the same as a permenant forest but you have the option to harvest at any time you wish subject to timber vs liability equation.
Early 1990s forest owners have a hard choice to make!! but if you can accept the permenant vs timber equation you are ok. Having these forests registered a least gives you the carbon option with flexibility on harvest age compared to permanent.
The key to this is the new adverse event cover which means you don't have to repay carbon if the forest is lost to a natural event - you have to then replant the forest but don't have to repay the carbon (you keep the timber salvage value). The carbon liability follows the 2nd crop so it isn't gone. - just parked.
Hope this explains it but you can see how scale and multiple ages and sites works for Forest Stock but is very hard for small stands.
Averaging should've been introduced right at the start as its a bit of a raw deal for small Post89 first owners who planted in the 1990s.
As an aside I am expecting the approved rules around averaging and adverse event cover to be out in the next month - not the regs but the Cabinet approved principals from which the regs will be written and gazetted next year. These should give good guidance to what they will be.
Jack,
I agree with your first two lines, but not some of the statements thereafter.
In relation to the ETS and averaging, it is the date of registration rather than the age of the trees that is crucial. The key issue when a forest transfers to averaging is the number of units (NZUs) which have been received. The precise period for which these units were earned is not crucial. What is crucial is that these units do not in total exceed the allowable units under averaging for a forest of that type, which is determined by the long-term (multiple rotation) average for a forest of that type. That means that a forest first registered now that is, for example 20 years of age, can earn credits for the current growth phase and retain those units under averaging unless they exceed the allowable maximum under averaging. They do not have to have been earned during the period when the forest was less than 16 -17 years of age.
KeithW
Sorry to say but I think you will find I’m right. Averaging offers nothing to 1990 forests even those in a second rotation and weren’t registered in the first. The only option if registered after 1 Jan 2023 is permanent.
As you say this is complex and very few understand the rules. In the forest industry there are only around 10 to 15 people who understand this.
I concur with Jack's interpretation. I guess the answer is wait until the rules and regulations are actually released. The rules for forestry in the ETS are just too complex. We have three categories of land (pre-1990, post-1989, and 'new' post-89) plus two very different methodologies of accounting for carbon. The problem is that the Government is trying to push all of the risk and obligations of Kyoto and Paris onto forestry land-owners, even though the national forestry accounting standards keep changing. If the experts can't agree on how the rules are to be applied, how can the general public?
There are electronic maps available to show the land was not in forests immediately pre-1990 and this is the key criterion you must meet.
Most people will be able to find some level of documentation of their own to show when the forest was actually planted thereafter. But the long term average stock' is set out in the Look up tables. This figure derives from the planned rotation length and is independent of precisely when your own block might have been planted.
KeithW
Any forest registered before 2019 cannot transfer to averaging.
in Simple terms
If you have an existing Post89 exotic forest, PLANTED 1990 TO 2018 1st or 2nd rotation, (on eligible land)
GET IT REGISTERED NOW
YOU NEED TO HAVE IT REGISTERED, NOT APPLIED FOR, BY THE END OF 2022.
Beef and Lamb are asleep - instead of funding FSOG they should be helping all farmers to do this.
JUST DO IT OR MISS OUT AND WATCH YOUR NEIGHBOURS WHO DID EARN MORE MONEY THAN YOU CAN DREAM OF.
I would rather the money stayed in the South Auckland factory workers pocket rather than being gifted to multi million dollar land owners and middlemen like yourself. Are you virtue signalling that you don't like it going to overseas investors or do you let your competitors take that business?
At the end of the day the factory isn't going to get his $15 back and this whole exercise isn't going to change a thing.
'Not a single G20 country is in line with the Paris Agreement on climate, analysis shows
..."Of particular concern are Australia, Brazil, Indonesia Mexico, New Zealand, Russia, Singapore, Switzerland and Vietnam'
https://edition.cnn.com/2021/09/15/world/climate-pledges-insufficient-c…
Keith, appreciate your work. You seem to be the only person who is prepared to speak their mind on the already unfolding disaster that is the conversion of FX-earning farmland to transfer payment earning carbon farming.
Your observation that of post 1989 afforestation "less than half is currently registered" is interesting, but when it comes to the potential volume of NZUs to be sold by foresters we need to add a) those units that have accrued but have not been sold (stockpiled) in existing registered forests to b) the carbon in existing forests not presently registered but which may be registered and c) those that will accrue in new planting in the medium term due to government incentive and price signals.
I have taken the lookup tables and the government wish that by 2035 a further 380,000ha of p.radiata is planted, and another 300,000ha in indigenous species. Assume that these areas are planted evenly over the next 14 years. By 2035 the additional p.radiata will be producing 48m NZUs pa (a total of 235m NZUs over the period) and indigenous 30m NZUs pa in 2035 (165m over the period).
Add the new planting to the existing increment and stockpile, and on the other side consider that the government is doing its level best to drive down emissions. Isn't there a serious risk that those who pile on now (registering the half that is currently unregistered, and buying farmland at circa $15,000/ha for carbon farming) might find that supply overshoots demand and the price in the secondary market balances that latent supply with a shrinking demand ? and find themselves locked in to the averaging, or even worse for 50 years in the permanent scheme ?
Doing your budgets assuming that carbon price will just keep rising (Climate Change Commission advice that $140 is required by 2030 and $250 by 2050) must be perilous. We are witnessing price elasticity of supply in action, just as we did in the mid 1990s planting boom. Its just that with forestry, and the ETS, you can't easily change your mind once the ratchet clicks in. Worst case you are locked in for 50 years, I can't think of a better illustration of buyer's remorse both for the individual and the nation.
The secondary market, not the Climate Change Commission, will tell us the real value of those NZUs.
T. Akston
There is too much here for me to reply to in a comment - it would need an article.
But yes, the stockpile of NZUs held in private hands is now approximately 138 million, with something a little over 70 million held by foresters. At the current price of $64 the value is over $8 billion. These numbers start to become interesting from a macro economic perspective. And you are correct in suggesting that the behaviours of these investors can have an important effect on unit prices. This was what I was suggesting when I said in an earlier article that investors had outgunned the Government.
KeithW
@KeithW
"The big message in all of this is that for any forester with existing post-1989 forests, and this includes many farmers as well as the corporate foresters, specialist advice is essential."
I have a couple hundred + hectares of forests, purchased cause of my closet "tree hugger" tendencies, more than business reasons. I have followed your commentary and understand I need to engage a professional for advice on this topic. I have looked but selection of a "professional" in its self seems daunting.... Do you have any resource links or pointers that may aide my quest? Thank you. And thank you for your topics of discussion. I always find very engaging.
fender bender
I am pondering on this.
Part of the reason I started writing about these topics was because there did not seem to be anyone who had put the whole story together. The requests I am now getting to provide talks and webinars tell me that there is quite some fog out there.
The situation is made even more complex because although the legislation has been enacted by Parliament the regulations are still being sorted out. If you want to email me and tell me a little more about your specific situation, we can discuss where some fish hooks and answers might lie, but it won't be formal advice.
KeithW
Well I won't be, Jack. With all due respect.
The thing is a hocus-pocus rort. The physical idea is to sequester carbon. The problem is that reforestation should be seen as redressing the clearances done prior - mostly for farming. Only then, could we consider sequestering carbon we're digging up and ADDING to the above-ground biosphere.
The digging-up has been to increase our surplus energy, without which we have no wealth (no energy; no work, no work; nothing done, nothing done; no wealth generated). We have avoided mitigating the costs, and did so while he going was good (when the surplus energy flow was greatest). We have no show of reducing the surplus energy (using it to mitigate) and keeping the growth-requiring financial construct intact.
Indeed that construct has been on life-support since 2008 (keystroke-issued debt, ever-increasing). So relying on that construct, to 'pay' us something for ' sequestering carbon' won't work. As we are seeing, it has to triage something else off the agenda - and tthat something else in the first instance is food-production. Which, as currently practiced, is the process of turning dug-up calories (oil, coal, gas) into food calories - inefficiently.
Yes, we need to plant trees, and recreate wetlands. No, society cannot afford it. Society can no longer afford itself, period. So don't expect the money flow to last long........ After all, that money was an expectation of more underground energy having been expended......which meant more carbon burnt.... So we need to plant, and we also need a new accounting system. This fellow is 90% of the way there:
https://www.gov.uk/government/publications/final-report-the-economics-o…
In my perfect world I don't disagree. If I stand back a long way the game continues. We are really not serious about recognising the position we have come to. In my real world I'm taking the most practical option I can to try and pull back something. Humans have proven they are stupid many times over.
Doing something is better than doing nothing. And we need a method of measuring and rewarding , even if it's not perfect. It's a bit like recycling plastic when you hear some is going to landfill anyway. Your sending a message you want to help recycle plastic. Trees planted are our quickest way to reduce carbon balance. Some kind of planning process would be preferable, to ensure the best (worst) land is planted, and a mix of species, but the market system is used. Good country calendar episode on a Scottish couple planting native, they won't be around to harvest the timber, but doing it anyway.
Hot of the Press on averaging from MPI
Under averaging accounting, once a forest reaches its average age it stops earning units.
This means that if you register a first rotation forest that is past it’s average age, or you register a second or later rotation forest, it will not earn any units in the ETS.
Each forest type in the ETS has its own average age:
- Radiata pine: age 16
- Douglas fir: age 26
- Exotic softwoods: age 22
- Exotic hardwoods: age 12
- Indigenous: age 23
For example, a radiata pine forest is usually harvested at 28 years. The average amount of carbon stored by a radiata pine forest over multiple rotations when it is harvested at 28 is equivalent to the amount of carbon it stores at age 16. If you register a first rotation radiata pine forest in the Waikato region into the ETS when it is planted it would earn carbon for 16 years.
No repayment of units after harvest
If you harvest your forest from age 10 onwards you will earn units based on the forests average age and you will not have to repay units after you harvest, as long as you replant your forest afterwards.
You can also change species and harvest age during a later rotation, without having to surrender units, giving you freedom to manage your forest as you see fit in the future.
Because units do not have to be repaid after harvest or species changes, all of the units a forest earns under averaging can be traded at low risk, so long as you keep replanting your forest. This compares to stock change accounting which earns a larger number of units overall, but far fewer of those units are ‘low risk’ as most need to be surrendered after harvest.
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