Farm forestry blocks have been a feature of farming in New Zealand for many decades.
What has changed in the last 15 years is that these forestry blocks are no longer just a timber opportunity but also feature carbon credits and the Emissions Trading Scheme (ETS). However, the ETS is a complex scheme and its complexity and treatment of forest land continues to confuse both farmers and the general public. With ongoing changes to the ETS over the years the following is a short stock-take on where we are.
Pre-1990 forest land
The ETS treats land that was in forest on 1 January 1990 much less favourably than land planted into forest after that date. Essentially NZ signed up to international agreements that assessed the use of the land on 1 January 1990. If you were already planted in forest on that date it was deemed ‘locked’ into that use (unless you had already harvested by 1 Jan 2008).
Despite being automatically locked into the ETS, pre-1990 forests do not receive carbon credits for each year of growth (carbon stored) and on harvest they must be replanted or left to re-establish as native forest.
The Government partially recognised the impact on landowners by providing some one-off compensation between 2011 and 2013 in the form of up to 60 carbon credits per hectare. However, at that time the carbon prices were low, and many landowners still feel aggrieved at having their land use choices determined in this way.
Pre-1990 forest land continues to feature on land transactions and parties need to be careful to avoid any liability and to understand their obligations to keep such land in forest.
This is land to be used as forest land that was otherwise not forest land on 1 Jan 1990. It is essentially pasture that has been retired into forest. This category provides the most opportunity under the ETS as it allows voluntary registration. Registered post-1989 forest receives carbon credits for each year of growth which, if sold, can provide a healthy source of revenue.
The amount of carbon stored will depend on the species and location but for example a 12-year-old pine forest could hope to achieve on average 45 tonnes per hectare per annum. At today’s carbon price of $70 this could net the landowner $3,150 per annum per hectare if the carbon credits are traded. The value of carbon is volatile and is currently going through a ‘relevelling’ period after peaking at $88.50 per carbon credit in late 2022.
However, the main downside to the ETS, and post-1989 forest regime, is the need to pass the carbon credits back to the Government on harvest. This issue has resulted in many farm forests never actually selling any credits as they know they will be required down the track. No recognition is currently given for what the trees become. The simple rule is once the tree is cut the carbon is lost back to the atmosphere and the credits must be surrendered.
There is growing public concern that productive land is being ‘locked’ as exotic forest (i.e. pine). The Government consulted on the introduction of a restriction preventing registration of new permanent exotic forests within the ETS. These amendments gathered some public support as it prioritised the planting of native forests instead. While these amendments were not adopted in the latest round of amendments to the ETS, it does signal a potential change in the treatment of new permanent exotic forests moving forward.
In June 2020, to try and simplify the ETS, the Government introduced ‘averaging’ for first rotation forests registered as post-1989 in the ETS after 1 Jan 2019. From 2023 all newly registered post-1989 forests must use averaging unless they are registered as permanent forests.
The averaging method allows a forest to receive carbon credits up to the long-term average carbon stock that is stored in that forest. This means that by a certain age (say year 17 of a 30-year forest) carbon credits will be received but then will stop. The key advantage is that the credits do not need to be handed back on harvest.
This allows for carbon credits to be freely traded without a need to pay them back, provided the forest is replanted. However, it means only the first rotation of trees earn carbon credits.
Native planting has increased in the last few years. Whilst earning substantially less carbon credits than an exotic plantation forest there are ecological and environmental benefits to this approach. Native species can still earn carbon credits provided they meet the minimum canopy thresholds. As a comparison to the example above a similar age and size native forest might earn 15 carbon credits per annum so at $58 each a landowner might earn $870 per annum per hectare.
Work is currently underway to show how native forests in the ETS can still be economically rewarding.
Recent amendments to the ETS now provide an exemption from ETS reporting requirements where the forest has suffered temporary damage as a result of natural disaster or other accidental events (i.e. windthrow, fire, landslide). The exemption places ETS obligations on ‘pause’ until the forest recovers to the same level of carbon storage as it had before the adverse event.
The ETS has provided opportunity for additional revenue from a forestry block. Most landowners contemplating a forestry block or ETS registration will tend to become well researched on the scheme and the pros and cons. Where we encounter problems is when the forest block changes owners with the sale of the farm and the purchases are less well researched. Those purchasers can get caught out by not understanding what obligations run with the land and will become their obligations.
ETS is a feature of forestry in New Zealand, whether you agree with it or not. We would encourage clients to become more familiar with the basic rules of the scheme.
Disclaimer: The content of this article is general in nature and not intended as a substitute for specific professional advice on any matter and should not be relied upon for that purpose.