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Clarky's Comment - April 2009, Surplus Tree Seedlings in 2009

Why do we have Surplus Tree Seedlings in 2009?

Millions of tree stocks may have to be dumped at nurseries around New Zealand. How has this come about?

The United Nations Framework Convention on Climate Change was adopted by 192 countries, including NZ at Rio de Janeiro in 1992. In December 1997 the Kyoto Protocol (KP) was signed and set binding targets for 37 developed nations, including NZ, for net greenhouse gas emissions during the 5-year period 2008 to 2012. New Zealand, along with most other signatories later ratified the Kyoto Protocol and it effectively became international law for those nations that signed up.

During the early part of the new millennium it was thought that New Zealand would be able to meet its KP target emissions due to continued forest planting that would offset any expansion in economic activity in agriculture, transport or industry. But around 2000 new tree planting effectively halted, mainly in response to declining log prices, but also because at that time the government's policy was that it would exclusively own the rights to any carbon sequestered in post-1989 forests.

Following an aggressive media campaign by the newly formed Kyoto Forestry Association, and a rethink by government, this policy was reversed and in the September 2007 Emissions Trading Scheme Engagement Document the treatment of both pre-1990 and post-1989 forests was outlined. These policies were captured in new legislation passed just prior to the Labour coalition breaking for the November 2008 election campaign.

That legislation was in time for forest nurseries to take orders and sow seed for 2009 planting. Forestry investor confidence had been given a boost and plans for land acquisition and planting were initiated.

In submissions leading up to the passing of this legislation, forest industry and other rural land users argued for changes that would preserve the flexibility of land use that has been important for New Zealand's past economic growth. This requires changes to the way pre-1990 forests are treated. The National party and most of the minor parties expressed sympathy for this position and committed to re-visit it in the event they formed a new government. The new government is meeting that commitment, but unfortunately, the broad-ranging nature of the current review of the scheme has spooked forestry investors that were preparing to plant trees in 2009.

While the ETS legislation is still in place, the forestry sector is the only sector currently covered. The key questions for potential forestry investors are not just in respect of what changes may be made to the forestry sector legislation (if any) arising from the review, but also how other sectors will be treated. Treatment of other sectors matters to the forestry sector because:

Agriculture
Forestry competes with dry stock farming for land. Land is the single biggest cost and constraint to forest investment. The motivation of farmers to plant trees to offset farm emissions, or to sell or lease low productivity land for forestry depends on the treatment of the agriculture sector in the ETS. Agriculture is excluded from the Australian Carbon Pollution Reduction Scheme until at least 2015, and even after that, inclusion is uncertain. Alignment with Australia looks attractive to our farming sector. But in New Zealand farming accounts for nearly half the national emissions. The question to ask is whether on-going shielding of farm emissions to that extent by the taxpayer is sustainable or smart in terms of innovation, or behavioural change, to reduce farm emissions?

 

Stationary Energy, Industrial Process and Waste
The NZ ETS is designed to include all sectors and all gases to achieve least-cost net greenhouse gas reductions. But the current review has opened the door to a new wave of lobbying to delay entry, or the phase-in, of emitters' obligations. From a NZ Inc perspective it is important that we strike the right balance between loss of industry and jobs to non-Kyoto countries and getting the ETS working.

Clearly there is little incentive to plant forests to create carbon credits while it is uncertain whether, or when, any of the emitters will be required to account for their emissions by purchasing those credits.

So that is why there are many millions of surplus tree stocks in nurseries this year, facing the prospect of becoming expensive compost! While the ETS review is in process treestock orders have been cancelled and farmer planting of trees and forest investor activity remains low. This is expected investor behaviour, especially during our current financial crisis when the appetite for investment risk is low. The other awful prospect is that whilst tree stocks face being wasted this year, it is highly likely that there will be a shortage of tree stocks in subsequent years.

Does Current Farmer/Investor Sentiment Create an Opportunity?

First let's take a look at the big picture and assess whether this whole climate change and ETS thing is likely to go away.

Overwhelming scientist opinion is that:

  1. Climate change is caused largely by a build up of greenhouse gases.
  2. The build-up of greenhouse gases is largely a result of human activity (dominated by burning of fossil fuels and forest destruction).
  3. Humans can do something to change or reverse that build up.

Furthermore, the most recent evidence is that climate change is accelerating and at the upper end of former projections, adding urgency to both finding solutions and adaptation measures.

 

The other key driver is that climate change is causing floods, sea level to rise, droughts, fires and storms.  All of these effect people and people, in most countries, vote politicians in and vote out. Politicians ignore the effects of climate change at their peril.  Even if the scientific case to make any short-term change is weak, the political and economic value of being seen to do something is real. New Zealand in particular relies on trade access and a clean-green image for our national wealth. We really have no option but to join international efforts to attempt to reduce greenhouse gas emissions.

Now let's look at how forestry might play a part in NZ. New forest planting can only buy time to reduce our reliance on use of fossil fuels. But in NZ we have an almost unique situation of land with good soil nutrition and plentiful rainfall that is not competing with high intensity crops for food production. Some estimates say up to 3 million hectares of pastoral land could be converted to forestry with positive economic and environmental benefits. The reality is that only a portion of this will be made available over the next 20-30 years unless there is a major driver for existing farmers to change land use.

Conclusion – My Opinion

My expectation is that climate change is not going to go away, and that politicians in most western countries as well as in China and India at least, will rise to the challenge of attempting to do something about it. There may be delays in agreeing the rules for any follow-on international treaty after 2012, but that does not mean the issue has gone away. NZ will continue with an ETS in some form for the foreseeable future. Plantation forestry will play an important role in offsetting expansion of NZ's agricultural and industrial emissions over the next 30 years at least.

Land will be the biggest constraint to expansion of the forest estate. Once the ETS review is completed in a few months it is likely that competition for land to grow trees will intensify, but that will be for planting in 2010 and beyond. In the next few years, at least, access to tree seed of the best genetics will also be a constraint. Seasonal labour to plant and release the trees from grass competition will also be a real challenge – meaning labour costs will rise.

Trees planted in winter 2009 will not sequester much carbon between now and 2012, but will be sequestering carbon for the next 30 years at least. Planting trees in 2009, when there is little competition for land, tree stocks are available and labour is not under pressure seems to have some attractive early-mover advantages to me.