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Clarky's Comment - December 2008

This is our last edition of Wood Matters for this year. The staff at PF Olsen would like to take this opportunity to thank all our clients, suppliers, contractors and other folk that we have been involved with during the year - and wish you all a very MERRY CHRISTMAS and PROSPEROUS NEW YEAR.

It has clearly been a challenging year, not just in forestry, but across almost all sectors in New Zealand and across the globe.

Some holiday season reflection may give us a chance to ponder some of the upsides that are inevitably ahead of us:

  • Rapid gains in housing affordability driven by rapid falls in interest rates and lowering house prices.
  • Lowering interest rates lowering the cost of business.
  • Fundamental under-supply of housing in NZ and Australia.
  • Lowering fuel costs and other costs of production.
  • A falling exchange rate increasing our export competitiveness.
  • Revisiting the increase in the Russian export log tariff (after the 9-12 month deferral announced a few weeks ago).

Let us hope that some of these considerable upsides are significant enough to more than offset any as-yet-unforeseen future set backs.

The Emissions Trading Scheme - Where to From Here?

Since the announcement of the deferral of the Emissions Trading Scheme, there has been a mixture of sighs of relief (e.g. from many emitters) and howls of anguish from those that had businesses and projects partially initiated or poised for action. It is probably safe to speculate that no matter your view on this subject, there would be a general consensus of opinion that the lack of certainty in this area has been damaging to individuals, firms, the NZ economy and NZ's international reputation.

It now seems likely that the order that will go before Parliament will be one of full suspension of the ETS. That leaves the question of deforestation of pre-1990 forest land. Some commentators are speculating that the economics of dairy farming are now such that there would be relatively little forest-to-dairy conversion - this would appear to make the offset scheme proposed by the Flexible Land Use Alliance (FLUA) much more tenable to the government. Either way, some strong signal will have to be given regarding deforestation of pre-1990 forests.

Although the Select Committee's terms of reference for the review of the ETS is wide-ranging, and includes a consideration of a carbon tax, most commentators are expecting some form of ETS will still prevail. And since forestry represents one of the lowest-cost and environmentally positive ways of mitigating greenhouse gas emissions, it is likely that the ETS will be positive for forestry.

If you are considering new forest investment, you should take a look at the Permanent Forest Sink Initiative or the Afforestation Grant Scheme to see if they could fit your needs (see below). Otherwise, unless you have a clear vision and personal conviction about how things might shape up, new forest investment projects predicated on carbon values may have to sit tight and wait for more clarity and certainty.

Afforestation Grant Scheme and Permanent Forest Sink Initiative

Depending on your circumstances, the Afforestation Grant Scheme (AGS) or the Permanent Forest Sink Initiative (PFSI) may suit your circumstances. These programmes are expected to remain in place. The AGS provides a significant subsidy for planting that meets specific criteria - see link Wood Matters Issue 3. The PFSI provides the ability to generate Assigned Amount Units (AAUs) which are tradable on the international market but there is a 99 year harvesting covenant. PF Olsen can help you evaluate these schemes further - call you local PF Olsen representation of call FREEPHONE 0508 PF Olsen (0508 736 5736) or email us at info@pfolsen.com.

PF Olsen's Role in Carbon Forestry

Frequently the question has been asked (by business partners and internally by our own staff), what has been, and what will be, PF Olsen's role in carbon forestry going forward. This question is often asked in the context of all the new carbon-related business that have emerged this year purporting to be just what "the doctor ordered" in terms of servicing people's carbon forestry needs. Don't be fooled, many of these businesses will disappear just as quickly as they popped up. Forest owners and would-be forest owners should keep their wits about them and their options open to ensure that they don't make commitments they don't fully understand, or know the risks involved.

 

Many of these newly emerged businesses are focussed on sales and brokering of carbon credits. They are interested in attracting large numbers of forest owners with the primary motivation of selling their (the forest owners) carbon credits and "clipping the ticket". Whilst sales and brokering are important end points of a carbon forestry project, it's important that the brokering "tail" does not wag the project "dog".

So what is PF Olsen's current and future role in this area? We anticipate a busy future in carbon forestry and look forward to getting projects off the ground as soon there is more certainty:

  1. Continued representations to Government Ministers and officials to get the best long-term outcome for forest owners (e.g. active support and involvement via the Kyoto Forestry Association, the NZ Forest Owners Association, the Flexible Land Use Alliance and the Climate Change Leadership Forum);
  2. Contribution to processes that shape legislation and regulations (such as the Measurement Working Group);
  3. Evaluation of opportunities for owners and would-be forest owners;
  4. Evaluation of opportunities for emitters who wish to hedge their emission exposure with forestry-based projects;
  5. Research and consulting into optimum site, species and regime choice;
  6. Optimisation and management of carbon measurement;
  7. Stand records and carbon accounting. Filing obligations and carbon returns on behalf of forest owners;
  8. Projecting timber, carbon and cash flows;
  9. Project implementation and management;
  10. Developing a fund which will have the effect of a carbon "pool" and provide a broad range of efficient carbon trading opportunities and carbon instruments, including price hedging and forward sales opportunities. This will benefit both new and existing post-1989 forest owners.

PF Olsen will continue to communicate via our carbon seminars (currently in abeyance due to the recent uncertainty) and Wood Matters. For those of you who are full PF Olsen management clients (which means we have your forest on our FIPS data base) we will continue to monitor the situation and communicate directly with you when we see either an obligation falling due or an opportunity emerges.