Clarky's Comment - March 2010, Why Aren't New Forestry Planting Rates Burgeoning?

Why Aren't New Forestry Planting Rates Burgeoning?

It is widely acknowledged that having more trees planted is not only good for protecting steep hills from erosion and keeping streams clean and free of farm run-off pollution, but that it is one of the lowest-cost ways greenhouse gas emitters can meet their medium and longer-term emission liabilities under the Emissions Trading Scheme (ETS).

So why are so few new trees getting planted?

This month we had news of the default of an entrepreneur on commitments made to purchase land and treestocks for carbon farming. I do not know the details but suspect that access to investor funding was the primary cause. At PF Olsen we see uptake of the Afforestation Grant Scheme subsidy but little investment in unsubsidised new planting. This is despite the ETS legislation being in place and forestry projects indicating attractive double digit returns at $3,000/ha for land and $25/NZU. The returns are particularly attractive for existing pastoral farmers whose opportunity cost of land under extensive pastoral farming is far less than $3,000/ha. But even farmers are not planting trees. Demand for NZUs from NZ emitters cannot be fully met from forest supplies after 2012 under current legislation, so demand should not be putting farmers and investors off. So what are the blockages to material new planting?

  1. Uncertainty over the future demand and value of NZUs / AAUs. The Copenhagen meeting in December 2009 failed to achieve a post-2012 agreement. If no follow-on agreement from Kyoto is in place in 2013, the AAU could become a worthless unit, and that will take away a market option for NZ forest owners, and therefore devalue the NZU.
  2. Failure of Carbon Pollution Reduction Scheme (CPRS) in Australia. While the ETS and CPRS were not linked, the failure of the CPRS means that at-risk NZ industries with Australian competitors are now more at-risk. Business lobby groups are already calling for a suspension of the ETS, or at least additional taxpayer support for such firms. If granted this reduces the demand, and therefore price, for NZUs.
  3. Investor concerns over carbon loss from fire, wind or disease.
  4. Investor concerns over managing harvest liabilities, while still benefiting from the sale of some, or all, of the carbon credits. This is particularly a concern for the smaller investor that may have just one, or a few, age-classes.

What could be done to improve the environment for unsubsidised planting of trees, given that the NZ Government can only have very limited influence on the international or Australian regimes? I suggest:

  • Certainty of allocation of pre-1990 forest compensation units after 2012.
  • Clarity that international market options for forest owners will remain open, regardless of any linkage with a future Australian scheme.
  • Introduction of Offsetting. Offsetting is the term used to recognise that trees planted on new land may be treated as continuation of a pre-1990 forest, allowing the harvested area to be converted to a higher and better land use.
  • Introduction of Averaging. Under this concept those planting new forests would have the option to sell up to half the credits earned over a full rotation (with the other half retained by Government), and have no liabilities for harvest emissions provided the forest was replanted.
  • Introduction of a National ETS Insurance Scheme. Under this idea the Government would retain a small percentage (say up to 0.75%) of all forestry NZUs registered, and underwrite forest loss emissions arising from natural disasters or force majeure events (wind, fire, disease, volcano).
  • National works with Labour to agree on Stable ETS Legislation over multiple election cycles. Forestry is a long-term investment and requires long-term policy stability.
  • Introduction of a Forestry-Friendly National Environmental Standard. Investors planting on steep erodible land need to have certainty over consent conditions that will apply some 30 years later at harvest time. Variation in the rules contained in Regional Council Plans and in some cases complex and onerous compliance provisions are not conducive to new investment on such lands.

It is unclear to me, at this stage, that these measures alone would be sufficient to encourage new planting, but they will certainly go a long way. There are other measures that would have little fiscal impact but send a strong message of Government support for the forestry sector that could be added to a package of changes. These are around tax treatment of forestry costs, support for market access, wood promotion, R&D and skills training.