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Clarky's Comment - June 2010, Farming for Carbon a Viable Option

Over the last month we have seen quite a lot of negativity from the pastoral farming leadership about the damage and cost of the Emissions Trading Scheme (ETS) to farm businesses. We are not sure how widely these views are held by farmers. Regardless it seems to us that of any business group pastoral farmers, in particular sheep and beef, are in the best position to capture the upside from the forestry provisions of the ETS. The following recent press release from New Zealand Forest Owners Association articulates this view very well:

Carbon forestry is a viable option for land owners looking for new income streams, say forest owners

"Two recent studies indicate that plantations grown on hill country could be used to offset farm emissions and to improve overall farm profitability," Forest Owners Association president Peter Berg says.

"Many farmers already grow woodlots and small plantations, however much land suited to forestry has not been planted, because trees don't provide an annual cash income.

"Carbon forestry changes this model - providing an annual stream of carbon credits starting about five years from planting. The credits, in the form of NZ Units (NZUs), can be sold on the open market or kept in the bank."

Farm Forestry Association president John Dermer says a lot of comment about the ETS has been very negative and he suspects this has put most farmers off.

"My advice to farmers is that they should take a close look at the opportunities and to make up their own minds whether they can make some money out of it. I suspect many hill country sheep and cattle farmers and dairy farmers with run-off blocks will be pleasantly surprised at what they discover," he says.

"Having said that, you need to get it right. The ETS is complicated and there are risks that need to be managed, so it's very important to take expert advice."

Canterbury University Professor Bruce Manley and forest researcher Piers Maclaren have examined the financial returns and risks associated with carbon forestry under the New Zealand ETS.

In an article[1] to be published in the academic journal Forest Policy and Economics, they explain that the main financial benefit of carbon forestry comes from the "time value of money". In other words, income from the sale of carbon credits earned as the forest grows can be invested in more trees, something else, or used to pay off debt.

When the trees are harvested, about 75 per cent of the credits earned have to be returned to the government. This is because about 25 per cent of the carbon from the trees, in the form of stumps, roots and other plant material, remains with the land until the new crop becomes established.

"Manley and Maclaren's studies show that radiata pine is a better investment than Douglas-fir or shining gum (Eucalyptus nitens) and at higher carbon prices, it's best not to thin or prune the trees," Mr Berg says.

"However, the highest carbon regimes also involve the highest NZU repayment risk when the crop is harvested. So many carbon foresters are likely to continue pruning, or planting Douglas-fir, so they have a high value timber crop to sell at harvest.

"Other ways to manage this risk include spreading forest establishment and harvest dates, deferring harvest and planting a portion in long-lived species such as Douglas-fir or redwoods."

A recent AgResearch-led study[2] looked at the potential to use new forests to offset farm emissions and what this meant for farm profitability and cashflow.

Results showed that when carbon values reached $30 to $40/NZU over 60 years, forestry plantings were a cost-effective option to hedge carbon price risk. Farms with existing post-1989 forestry benefited most from additional plantings as they were able to make immediate use of carbon being sequestered in existing plantations.

Mr Berg says that at a conservative carbon price of $22 a tonne it is possible to make an 8% return on capital from hill country forestry. Not only is this much higher than can be achieved from sheep and cattle, it is often possible to plant trees on parts of the farm where livestock productivity is low.

"The ETS also provides an opportunity for farmers on erosion-prone farmland to make their properties much more sustainable. There is good evidence to show that forestry prevents 80-90 per cent of soil erosion.

"Carbon forestry, like all investments, has associated risks and opportunities that need to be carefully considered. But there is now quite a large body of research information available for land owners wanting to make an informed decision."

Sources:

[1] Manley, B., MacLaren, P., Potential impact of carbon trading on Forest management in New Zealand, Forest Policy and Economics (2010), doi:10.1016/j.forpol.2010.01.001

 

[2] Sinclair, S., Turner, JA., Schnell, J., Smeaton D., Glennie, S., Management of Carbon Price Exposure - Agricultural Sector using post-1989 Forestry, February 2010, Report prepared for MAF Policy, Management of Carbon Price Exposure