Clarky's Comment - September 2013

It is clear from comments made by Climate Change Minister, Hon Tim Groser, on Radio New Zealand's Rural News programme (19th August) that there remains a lack of understanding about both the level of forestry investment (and divestment) taking place in New Zealand, and the direct link of that to domestic climate change policies.

It appears Minister Groser was drawing data from the LUCAS database, compiled by the Ministry for the Environment and used to report NZ's net position under the Kyoto Protocol. Reporting under the Kyoto protocol uses gross forest area, based on the definitions used in the protocol (and imported into NZ's Emissions Trading Scheme). Gross area for plantation forest includes land not stocked with plantation trees – roads, landings, riparian strips, gaps and other non-productive land. More importantly, it also includes areas that have been harvested and which may or may not be replanted.

Using data collected and reported by the LUCAS database, Minister Groser correctly concluded that over the 4-year period 2008 to 2012 afforestation has exceeded deforestation and the national plantation estate is growing.

Examination of the Ministry for Primary Industries (MPI) National Exotic Forest Description (NEFD) database tells a different story. Here is the chart in data form:

Apart from the obvious net deforestation that has taken place in the past 10 years (we expect net deforestation for 2012/13), the key observations I would make from our company dealings with forestry investors, supported by the chart above, is that changes in land use in or out of forest has been closely linked to Government policies on climate change. Note the increased deforestation activity following the announcement of the introduction of an ETS and how it accelerated up to its introduction in 2008. Imposition of a large carbon emissions penalty on 1st January 2008 reversed this trend while carbon was above $20/NZU (this reflects in 2009 emissions returns and deforestation data), but has picked up pace again now that the carbon price has fallen dramatically.

New land forest planting (afforestation) picked up in response to a higher carbon price from 2009 and has continued right up to 2012. There is at least a year lag in the pick-up or fall-off of new planting in response to a change in the investment environment as land, site preparation and treestocks are all arranged in the previous year. The impact of much lower carbon prices and signals that the Government has no appetite to address that anytime soon will be reflected in new land planting from 2013. Any nurseryman will verify that.

The positive to take out of the link between our national plantation forest estate area, and how responsive it is to Government policies, is that in the ETS the Government has a very effective tool to quite quickly reverse our current deforestation trends, if it wished to do so, using private sector rather than taxpayer funds.

I regularly hear our politicians and officials refer to the fact that emitters under the NZ ETS are paying the "international price" of carbon. The idea is that anything above that "international price" would disadvantage our trade-exposed businesses. So what is this mythical international price? The chart below shows the price businesses are paying in some of our trading partner countries. The relativity with New Zealand emitters is a bit misleading. The chart overstates what NZ emitters are paying as other than forestry sector emitters, our NZ emitters are only required to pay for 1 out of 2 emission units in excess of their free allocations.

The key point is that there is no international market price for the trading of carbon units. There is a series of many different regional prices, all of which are higher and more credible than ours.

At the end of the day it's all very easy to talk about "the global market" but where there is no global market local rules set by politicians determine the price. We need a national dialogue about domestic mitigation/abatement potential and the relative costs of those options. Only then will it become obvious what sort of carbon price is a credible carbon price, i.e. one that will actually drive some kind of greenhouse gas reduction and economic transformation.

As climate-related natural disasters gather pace, so too will international pressure to reduce emissions. Unless we do adopt a credible price on greenhouse gas emissions, we can expect that over time New Zealand businesses will be disadvantaged. Those nations and businesses that have been first movers to adapt to a greenhouse gas constrained business and trading environment will emerge as the most competitive. Furthermore our major exports and tourism to some extent depend on the world's perception of New Zealand as "Clean and Green". Credible policies that show we are doing our bit to reduce greenhouse gas emissions are part of that story.

The forestry sector has the capacity to make a major contribution to meeting the New Zealand Government's Economic Growth Agenda. Such growth would also add to economic resilience by diversifying away from over reliance on agricultural intensification, especially in dairy, for that growth. But the forestry sector targets will only be realised if there is investment in wood processing. That investment will only take place if investors have confidence that forest will be replanted. Right now there is considerable deforestation and certainly no new land planting.

To suggest that forestry investments must stack up without carbon is fine, provided that other land uses are not having their pollution subsidised by the taxpayer, as such subsidies flow quickly through to land value. Land value is the single largest cost input that determines whether forestry is profitable or not. The way to address this and level the playing field is to have an ETS that meets its original design criteria – All Gases, All Sectors. If trade exposed emitters are to receive taxpayer protection, this must be achieved in a way that does not also devalue the NZUs generated by forest owners. A restriction on the use of low-cost imported credits is an effective way to do this.

The pastoral farming sector will of course continue to lobby against inclusion of on-farm emissions on the basis that no other nation has included agriculture. But the impacts of the ETS on pastoral farming are not fully abated until 2030+. The near-term financial effects are minor compared to other farm operating costs. MPI's modelling studies several years ago, at lower milk prices than today, clearly showed this. Further, trees are an important source of income for hill country pastoral farmers. Indeed they were a key to viability for a number of sheep & beef cattle farms last year during the drought.

The Government has a range of levers it can pull to manipulate the price paid for emissions after free allocations. Apart for the retention or removal of the 1 for 2 rule and the inclusion, or not, of agriculture, the Government can impose restrictions on imported units to raise the price and either a price cap or printing and auctioning of NZUs to lower the price. A fair question to ask is "What price band is the Government comfortable with?" So far we have not had any official information about this important number or range. Clarity would provide both business and potential forestry investors with some certainty to plan emissions reduction initiatives (or not) or tree planting (or not).

I guess these and other questions will form part of the next review. But that is not until 2015, meaning that any business reaction to any change in the operating environment will not be effective until 2016 or beyond. I sometimes reflect that as a small nation, not encumbered with a dual Federal and State legislature, nor with an upper and lower house, that we miss out on the opportunity to be a little more fleet-of-foot when it comes to decisions that impact on our economic performance.