Forest carbon lease

Forest owners who own more than 100 hectares of first rotation forest planted since 2008 (or yet to be planted) have an opportunity to obtain an annual income from lending the post-1989 forest land carbon credits to a subsidiary of NZ Forest Leasing Ltd. This company is associated with New Zealand Carbon Farming Ltd.

These two companies and their subsidiaries:

  • Own about 9,000 hectares of forest, land and trees; and
  • Lease about 45,000 hectares of established forest land mostly planted in the 1990's.

The carbon leases transfer the right to participate in the emission trading scheme (ETS) from the forest owner to a subsidiary of NZ Forest leasing Ltd. The forest owner receives an annual rental for the term of the lease. NZ Forest Leasing removes the forest from the ETS when the lease terminates. To balance its leasing portfolio, NZ Forest Leasing is currently seeking leases over forests planted since 2008 on post-1989 forest land. They are also interested in leases over post-1989 forest land yet to be replanted. Land that has been planted under the Afforestation Grant Scheme (AGS) does not qualify.

NZ Forest Leasing offers owners of post-1989 forest land an annual lease income without the associated carbon credit liability at harvest time. The proposed lease addresses the credit liability issue.

In the event of non-performance or default (including receivership), the proposed lease gives the lessor the right to remove the forest land from the ETS before terminating the lease. Once the forest land has been removed and a final emissions return filed, the liability for surrendering credits remains with the lessee (and its directors!). NZ Forest Leasing has obtained legal opinions from Simpson Grierson to support this, but any party willing to enter into such a lease would need to obtain its own independent legal advice. PF Olsen checked with the Ministry for Primary Industries (MPI) and they responded as follows:

"If the lease expires or is terminated, the landowner becomes the ETS participant as shown in section 192 (1) Part C of the Climate Change Response Act. The landowner will then become responsible for its own obligations and liabilities as participants. The landowner's risk of prosecution under the Act is in relation only to the landowner's liabilities since becoming a participant. The Crown would pursue the landowner only in respect of any breach of the Act by the landowner as a participant."

The upside of this offer is payment for the carbon trading opportunity without having to worry about the value of the future carbon liability at harvest time. The downside is a limitation of forest owner flexibility: the ability to harvest before the end of the lease term. The minimum lease term is 20 years. Another possible perceived downside is the inability to claim and sell the "safe carbon" stock volume if leasing the carbon to NZ Forest Leasing. This latest carbon lease has an option for participation in the ETS to be transferred to the land owner at the end of the lease period. If the land owner exercises this option, then NZFL will transfer the units claimed in respect of the forest during the term of the lease to the forest owner. In that event, the forest owner can sell the "safe carbon" portion of the credits claimed and surrender the remainder of these credits following the harvesting of the tree crop. A forest owner would only exercise this option if they wished to replant the forest land.

As to the lease rental offered by NZ Forest Leasing, this increases from $20/ha when the tree crop is one year old to $205 per ha per year from age six onwards (CPI indexed).

NZ Forest Leasing has leased the carbon rights from several PF Olsen clients and has met its obligations to date. It claims to have paid $30 million to date to the owners of these carbon lease forests.

Following are links to two website links for the two companies:

If you are an existing PF Olsen client or wish to become a PF Olsen client and require assistance evaluating this opportunity, then please contact Theo Vos on 07 921 7210 or theo.vos@pfolsen.com