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Forestry in the Emissions Trading Scheme (ETS)

You will be aware that the ETS legislation that was passed last year, the Climate Change Response Act 2002, while currently the subject of a parliamentary review, remains in force. This Act creates two classes of forestry land: pre-1990 and post-1989 forest land.

Pre-1990 Forest Land

If you own pre-1990 forest land, then you are, by default, in the ETS and you will need to report and account for deforestation of areas that are not exempt. Harvesting a pre-1990 forest area is not deforestation if you replant the cutover or allow it to regenerate into a forest after harvesting. Deforestation of areas that are not exempt carries a liability depending on the age, species and location of the forest. Partial compensation for the impact on the value of your land is provided through the free allocation of NZ Units (NZUs). You need to apply for these units before the end of July 2009 (to be confirmed) if you have pre-1990 forest land. Any units allocated to owners of pre-1990 forest land can be sold and the proceeds from such sale will not be taxable income.

The definition of pre-1990 forest land generally includes more land than the forest net stocked area. We can allow for the growth of the tree crop edge as trees grow older and we can include stocking gaps of less than one hectare. We have to exclude areas outside your legal boundaries.

Decisions to be made by pre-1990 forest land owners[1]

If you own pre-1990 forest land, the key decision you need to make now is whether to:

  • apply for an allocation of NZUs as partial compensation for the imposition on this land of deforestation liabilities pursuant to the Climate Change Act - from April 2009 to 31 July 2009 (to be confirmed); or
  • if you are eligible, apply to have your land permanently exempt from the NZ ETS (under the "50 ha threshold exemption" or the "tree weed exemption") - from April 2009 to 30 June 2009. Pre-1990 forest land that is exempted does not qualify for an allocation of NZUs, but it is possible to exempt parts of your pre-1990 forest land and claim an allocation for the remainder.
  • Any deforestation of pre-1990 forest land > 2 hectares in 2008 should have been notified to MAF by 31 January 2009. Deforestation since 2008 must be notified to MAF within 20 days of the deforestation. Note that deforestation is harvesting, followed by a change to another land use (e.g. to grazing).

PF Olsen has familiarised itself with the Regulations that govern this process and consulted with MAF to clarify issues. We can undertake the whole process of applying for and registering (on your behalf) pre-1990 forest land free allocation units. Our mapping expertise and understanding of the requirements puts us in a strong position to ensure that application deadlines are met and the claimed area is maximised (without breaking any rules). As part of this service we will advise you of the areas we have assessed before we make the application.

You have the option of making these applications yourself. Alternatively, you can appoint PF Olsen to manage this process on your behalf. We have put together competitively priced service packages that will:

  1. Ensure clients fully comply with ETS legislation and regulations.
  2. Maintain client ETS transaction, measurement, calculation and other required records (through our management systems and disaster recovery processes) for the minimum 20 year period as required by law.
  3. Maximise the benefit and returns legally available to forest-owners from the ETS.

Post-1989 Forest Land

PF Olsen also offers a service in respect of any post-1989 forest land you may wish to enter into the ETS and claim changes in carbon stock.

While it is possible to join the ETS with post-1989 forest land now, we suggest that you defer this decision until:

  1. It becomes clear if there are likely to be significant changes to the ETS from the current government review affecting the rules for post-1989 forest land owners;
  2. There is a greater understanding of the likely depth of the NZU/AAU market and greater price discovery;
  3. Instruments and strategies to reduce, or eliminate, the NZU price risk are developed and made commercially available. PF Olsen is currently working on such a strategy.

If you delay joining the ETS, you do not forgo claiming carbon stock changes for 2008. These can be claimed retrospectively any time up to March 2013.

Arguments we have heard supporting joining the ETS now (rather than delaying joining as above) are:

  1. You achieve a higher price for your NZUs now than later. This seems very unlikely since there will be no demand for NZUs until the emitters join the ETS.
  2. Being first-in to convert NZUs to AAUs before the 10% threshold is met. We consider it very unlikely that the threshold is met in year one, two or even three (of CP1). It may well not prove advantageous to convert NZUs to AAUs.
  3. You will achieve a higher price for AAUs now than later. This seems unlikely considering recent steep fall-off in global economic activity, big falls in commodity prices in general and steep falls in carbon price in particular (CERS currently down to 10 Euros).

We suggest you be vigilant evaluating claims by any party advocating joining the ETS now to capture some market advantage in selling NZUs or AAUs currently. Is there an ulterior motive?

Pooling of NZ Units

PF Olsen has the ability to pool NZU credits allocated to their clients and sell these credits on their behalf. This could confer scale, pricing and brokerage benefits.

PF Olsen clients will shortly be receiving personal letters with more detail on what to do and service options available from PF Olsen. If you would like to receive similar information, or you are a PF Olsen client but did not receive your letter, please contact your local PF Olsen representative or call FREEPHONE 0508 PFOLSEN (0508 736 5736) or e-mail us at info@pfolsen.com.

[1]Source: Draft Allocation Plan, 11 October 2008