Clarky's Comment - October 2008

The Emissions Trading Scheme was passed on 26th September 2008 with numerous amendments. Which of these affects the forestry and wood processing sectors and how?

  • The most material change is the exclusion of Russian "Hot Air" Assigned Amount Units (AAUs), unless "greened". These are units arising from the reduced pollution in Eastern Europe following the collapse of the Berlin Wall divide. Exclusion of these units will underpin the price of NZUs - probably close to the cost of a Certified Emission Reduction (CER) at around NZ$40/NZU. This change has a mixed outcome for forest owners. If you are a seller of NZUs then it is positive. But for the two thirds of our national plantation estate that is pre-1990 this is negative as the wood processors will be hit hard by the additional cost of electricity. However this cost increase should affect more energy-intensive building products (such as steel and concrete) even more and make wood more competitive in a carbon-constrained world.
  • Owners of pre-1990 forest land that owned their land prior to 1st November 2002 will receive around 60 units as compensation for loss of land value, up from 39 units in the original Bill. Post-2002 landowner compensation remains at 39 units, and Crown forest licence claimants get 18 units on settlements taking place after 1st January 2008.
  • The delay of entry of liquid fuels to 2011 is negative for forest owners wanting to sell NZUs but positive for harvesting and log transport that are by far our largest supply chain costs for logs to port or mill.
  • A new National Biodiversity Standard is to be developed. This is in response to concerns that the planting of exotic species would threaten existing indigenous vegetation. We will be watching the drafting of this standard carefully to ensure it does not have the perverse and overall negative environmental effect of making forestry planting uneconomic within hill country catchments of otherwise low-producing pasture due to the presence of small patches of emerging scrub.
  • The cost of entering your post-1989 forest into the ETS is set at a modest $489 plus GST per application (regardless of scale). Fees for filing returns will be in the order of $100/return. This effectively removes compliance cost as a real barrier and should encourage entry for all but very small forests.
  • If processing an ETS entry application takes more than four hours, then there will be an additional charge of $120 per hour. This could affect applications of large estates (multiple forests) and applications that have poor records or supporting data.
  • Tax treatment of NZUs is favourable. Details are not set out in this column but in essence NZUs are not taxed at the time of sequestration, or at year-end as "Stock", nor on change in value. The principle adopted is that emissions units are taxed on revenue account, and follow the cash cost and receipts. All transactions in emissions units are GST zero-rated, meaning that GST on input costs of making the supply is fully claimable, but no GST on purchase or sale of units. "Partial Compensation" units allocated in respect of loss of land value to pre-1990 forest landowners are treated on capital account - no tax on sale of these units (with some exceptions for land developers).
  • Key dates have been set. There is now no end-date to enter your post-1989 forest into the ETS - previously within 18 months - (other than the final reporting date for CP1). The most critical deadline is 30th June 2009 for the pre-1990 forest <50 ha exemption applications. The catch is that exemption applications cannot be accepted for processing by government until after the Forestry Allocation Plan is finalised in April or May 2009. This leaves a very short window. Some forest owners could be caught out if they have not yet worked out if they qualify for the <50 ha exemption and made a decision to apply.
  • Some time soon after 30th June 2009 pre-1990 forest land owners will be able to apply for their allocation of "partial compensation" units. It is important to apply, as the default position is that these landowners are in the ETS and subject to deforestation liabilities. Not to apply is to be subject to full liabilities without any compensation, a lose-lose scenario.
  • MAF has published a Guide to Forestry in the Emissions Trading Scheme. This is now available from MAF's website.
  • Government officials are taking a pro-active leadership role in seeking changes to the post-2012 terms. The key elements NZ is seeking are land use flexibility (changing the location of a forest without penalty), delayed accounting for emissions based on the effective life of wooden products, and retention of the rule that sees post-1989 liabilities capped at level of credits earned ("fast forest fix").

Summary of Key Dates

Requirement Date Comment
Applying for entry into ETS. Any time within reporting window for Commitment Period 1 (CP1) returns. Previously 18-months from passing of legislation.
Applying for <50 hectare exemption from deforestation liabilities. 30th June 2009. Exemption applications cannot be accepted for processing until after the Forestry Allocation Plan is finalised in April or May 2009. - narrow window of time!
Pre-1990 forest land owners applying for allocation of "partial compensation". Some time after 30th June 2009. It is important to apply as you will get the allocation whether or not you deforest subsequently.