New Zealand Celsias

With the ETS looming and a bad press seemingly outweighing the good, some top forestry owners look at the positives of the ETS in regards to marginal farmland.

ETS opportunities for rural landowners

By Peter Weir (Ernslaw One), Phil Taylor (Blakely Pacific Ltd), Grant Dodson (City Forests), and Paul Nicholls (Rayonier).

The Emissions Trading Scheme (ETS) presents unique opportunities for many rural landowners in New Zealand.

Carbon forestry will allow rural landowners to use the ETS to their advantage and gain a new income stream. 

Marginal farmland throughout the country can be converted into forestry and as long as any conversions are undertaken in an informed manner, then landowners potentially have a lot to gain.

Forests can offset farm emissions and improve overall farm profitability. About five years after planting, carbon forestry can provide an annual stream of carbon credits, in the form of NZ Units (NZUs), which can be sold on the open market or kept in the bank or used to meet potential onsite emission obligations associated with farming at some point in the future.

At a conservative carbon price of $22 a tonne, it is possible to make an eight percent return on capital from hill country forestry. This is higher than the returns from sheep or cattle plus trees can be planted on areas of low livestock productivity – both on and off farm site.

It is estimated that there are about 2 million hectares of such land in New Zealand; land that is suited more to forestry than agricultural farming but has not yet been planted. In addition, forestry provides additional benefits for farms such as erosion control and biodiversity and, eventually, a potential alternative income source.

The forestry industry has been operating under the ETS since January 1st 2008, despite the scheme having numerous downsides for forestry owners. For example, any forests planted before 1990 (i.e. before New Zealand signed the Kyoto Protocol) are not eligible for carbon credits but are eligible for liabilities if the forest area is cleared without replanting.  A limited level of units set at around five percent of projected emissions liabilities is proposed as compensation i.e. enough carbon credits to cover at most 13 percent (average <seven percent) of the liabilities incurred  if the forest area is cleared without replanting. 

Forest owners have had to make significant concessions to operate under the ETS and we would, of course, prefer that it was more advantageous to forestry, but we also understand the Government is choosing a middle of the road course while the developing international carbon markets strengthen.

Other land users need to also adapt and look to the future rather than just criticising the scheme. The opportunities through carbon forestry are there for the taking but will require forethought and strategic planning as the ETS is complicated.  

Essentially, the ETS requires businesses to ‘pay’ for their greenhouse gas pollution, which is measured in units equivalent to a tonne of carbon dioxide. Under the Kyoto protocol, New Zealand is required to reduce its carbon emissions to 1990 levels by 2012. The ETS is a way to encourage emitters to reduce their emissions or pay the difference.

Forests store carbon, therefore those who own forests can take part in the ‘trading’ part of the ETS. Forest owners can sell the carbon credits earned as the forest grows. When the trees are harvested, about 75 percent of the credits earned have to be returned to the Government. This is because about 25 percent 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.

To offset the liabilities incurred when plantations are harvested, large forest owners ensure they have a mix of harvest dates and species. As some plantations are due for harvest, others generate carbon credits.

Farmers could also maximise their opportunities this way. By working together under expert advice, farmer groups could aggregate their forests to share and/or trade the credits and offset the liabilities. In this way, farmers can generate credits and become active traders rather than just emitters.

Recent research has underlined the potential rewards for farmers from forestry under the ETS.

In an article [1] to be published in the academic journal Forest Policy and Economics, Canterbury University Professor Bruce Manley and forest researcher Piers Maclaren, have examined the financial returns and risks of carbon forestry.  They say the main financial benefit comes from the “time value of money”, i.e. income from the sale of carbon credits earned can be invested in more trees, something else, or used to pay off debt.

A recent AgResearch-led study [2] looked at the potential to use new forests (post 1989) 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 would benefit most from additional plantings as they are able to make immediate use of carbon being sequestered in existing plantations.

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

Another reason for farmers to get into forestry is the significant range of additional benefits that flow out of planting, apart from carbon and carbon credits. Forestry, as part of an integrated rural land use with farming, can provide erosion control, shelter and increased biodiversity.  

Forestry requires relatively little care and attention. Trees can be planted and virutually forgotten for years. Those landowners who don’t want to risk any short term harvest liabilities can plant species such as Douglas-fir, which take 50 years to be ready for harvest. In the meantime, they can collect the carbon credits.

Currently, there are about 28 countries that have an ETS in place. It is only a matter of time before the global carbon market becomes a true force and influencer.

Even the United States, previously against any form of carbon pricing mechanisms to combat climate change, is increasingly awakening to the fact that climate change is a major issue and that some form of disincentive to “pollute” is required. Indeed, President Barack Obama used his recent address to the nation to renew calls for the US to embark on a future of clean energy and concluded that this necessitated "putting a price on carbon pollution"..

New Zealand is not operating in isolation and being an ETS leader can only enhance our clean and green brand and prove to overseas visitors that we take our role in climate change seriously. Our size shouldn’t dictate whether we take action or not.

For the farming sector this strong green brand is critically important for future marketing opportunities and farming, as much as any other sector, stands to benefit in the long term from initiatives to curb green house gas emissions.

The ETS provides a myriad of opportunities for those operating in the rural sector but to exploit them some landowners need to change their mindset and look at the positives rather than the negatives.

It is acknowledged that there are real costs associated with an ETS; as a forest owner we have experienced these.  But equally, there are real opportunities for those landowners prepared to embrace the ETS.  

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

 For a copy, please email twalton@wham.co.nz

[2] Sinclair, S., Turner, J.A., Schnell, J., Smeaton, D., and Glennie, S.,  Management of Carbon Price Exposure – Agricultural Sector using post-1989 Forestry, MAF POL 0809-11193, February 2010.  

http://search2.maf.govt.nz/search?q=MAF+POL+0809-11193+&site=maf_climatechange&client=maf&output=xml_no_dtd&proxystylesheet=maf&x=8&y=11

 Image: Flickr - Jon McGovern