Clarkys Comment - November

We need more trees – what will it take?

The understanding that New Zealand needs more trees to support improving freshwater quality and to help meet our Paris Climate Change Accord commitments is now well accepted. How will this be achieved?

  1. Given the past volatility in NZU prices and the outlook for surplus units in some markets, especially Europe, a higher domestic NZU price alone will not do the job. Investors will be wary of the NZ government increasing supply of domestic units to depress the price via either auctioning or allowing cheap international units into our NZ ETS. Clarity from government on its intent and cross-party support for that would provide certainty for both foresters and emitters on which to base investment decisions. One scenario might be that our domestic policy is de-coupled from our international obligations such that the government may import low-cost units but would not use these to depress the domestic carbon price.
  2. Even with that clarity, the harvest liability limits the utility earning NZUs to improve investment returns. Under the current rules carbon stored in trees is treated as instantly oxidised on felling. We know that does not happen in reality. Currently the government utilises the international accounting for carbon stored in Harvested Wood Products (HWP) in reporting New Zealand’s net emissions. Devolvement of the HWP deferred liability to those investing in planting trees would de-risk the harvest liability, and also the risk of any catastrophic forest loss, very much enhancing the investment case to plant trees.

To invest in planting trees one must own, purchase or lease land. Let’s look at those that own land – farmers and Maori groups. Both have choices as to what to grow on their land.

  1. Maori will be looking for a better return than past forest leasing deals have delivered, and ultimately to be in a position to invest in their own right on their own land. Joint ventures with the Crown, that sees the Crown plant trees on a shared return basis is worthy of examination. It could be structured such that any taxpayer input is temporary and generates a good return to the taxpayer. Removal of the arbitrary Kyoto split between pre-1990 and post-1989 would help the case for replanting Maori land that has been or is being returned after its first crop of trees is harvested.
  2. Farmers are coming under increasing pressure in many catchments to limit stock access to streams and the adverse environmental effects of intensification of stocking and fertiliser application. Trees on parts of the farm offer a means to focus dry stock intensification on the best quality land to meet overall catchment limits. Trees also offer financial resilience through diversification. Some farmers have done very well from harvesting woodlots in recent years. What is most needed, in my view, is an education and extension service that illustrates the benefits of tree crops to farmers, both from a ROI and risk management perspective. An early signal that the agriculture sector will have to play some part in the NZ ETS and exclude stock from hill country streams would encourage tree planting on farms now, and mitigate the risk of a harder adjustment at a later date if that signal is delayed.

There are also a number of relatively low-cost or net taxpayer positive initiatives the government could implement to boost confidence with forestry investors. These include:

  1. Support for use of engineered timber in commercial and multi-storey buildings. A strong domestic wood processing sector that in turn relies on a vibrant domestic construction market matters for confidence in tree planting.
  2. Support for careers information and trades training for the forestry and wood processing sectors. In the short-term we are also likely to need improved access to migrant labour for planting trees.
  3. Investment in regional roading to safely access existing forests.
  4. Changes to the Cost of Bush tax treatment to improve the liquidity of immature forests.
  5. A national LiDAR dataset that would be of value to all rural land planners.
  6. A focus on Non-tariff Trade Barriers in key overseas markets that limit access or returns from the export of processed timber products.