New Zealand Tree Crops Association

Emissions Trading Scheme (ETS)

(see Climate Change index for latest official documents, LINKS, NZTCA contacts)

To the best of our understanding, updated 2007 October 27:

ETS Applies generally to any land over one hectare that has 30% canopy cover, on which the trees will grow more than five metres tall, in a block wider than 30m.

Any land planted ‘pre-1990’ that conforms to the above, over two hectares and under 50ha, will be automatically included in the emissions trading scheme unless the owners apply for an exemption.

“Pre-1990 Forests” over 50ha will automatically enter the emissions trading scheme, no exemptions.
(The ‘pre-1990’ period was formerly referred to as ‘non-Kyoto’.)

‘Forest’ presently includes orchard, woodland, arboretum and possibly indigenous forest.

Starting date for carbon trading is the 1st January 2008.
From 1 January 2008, the person who owns the forest land on 1 September 2007 will have to apply for an exemption within 18 months of the legislation being passed.

How does this apply to Tree Croppers?

Obviously walnuts, pecans, chestnuts, hazelnuts, macadamias, avocadoes, olives, indigenous (native) trees, alternative species trees, may all qualify, plus other tall tree varieties.
[‘Otherwise, orchard land will “generally” be considered a “cropping” activity, not forestry’ - Rotorua engagement meeting notes - also see Gisborne engagement meeting notes]

Such orchard (forest) will not earn carbon credits, but if it is deforested (the land converted to another use like agriculture, grazing, housing, roading) after 1 January 2008 its owners will be liable for the carbon dioxide emitted by deforestation.

This could be harsh for retiring owners of dense orchard/woodland/forest hoping to convert or dispose of low value land for a modest economic return. A preliminary estimation for carbon valuations is 39 NZU per hectare, or approx. $585 per hectare. With carbon sharks already circling, this could change rapidly.

A change of Government is unlikey to make any difference to the legislation, as it is by international 'agreement' – the big Kyoto abstainers (to date) having significant input recently. It looks Here to Stay. But since Canada had a change of heart, corporate interests in NZ have intensified opposition to it.

NZTCA Management Committee may consider setting up a small team to co-ordinate carbon assessment, in the interests of economy and uniformity. Watch for updates in TreeCropper magazine.

[“Post-1989 forest”– ETS participation is voluntary – if you do nothing, then you're not in the ETS – owners of land that became “forest” after the beginning of 1990 can join the ETS if they wish, and will gain credits and incur liabilities if they do so. They will also need to report on carbon stock changes to the administering agency.]

– selected Questions and Answers from the MAF document

(see LINKS for full current document)

1.   What is the New Zealand Emissions Trading Scheme (ETS)?

The Government has agreed in principle to introduce an economy-wide emissions trading scheme (ETS) covering all greenhouse gases in New Zealand. It will require specific people and companies to surrender emission units (NZUs) or other Kyoto Protocol emission units to match the level of emissions for which they are responsible. Various sectors of the economy will be brought into the ETS at different times. The NZUs will be able to be bought and sold by the private sector. Many details of the scheme design remain to be decided. (Back to Questions)

2.  Why is forestry entering the ETS on 1 January 2008?

Since foresters can bring deforestation forward easily, resulting in increased emissions, it is important that they are required to factor the cost of carbon emissions into their decisions as soon as possible. Delay by one year could result in 12 to 24 million tonnes of additional emissions if landowners brought forward their deforestation to ‘beat’ the future controls. This could result in $180–$600 million in additional costs for the taxpayer to meet the increased CO2 liability. The Government has previously consulted the forestry sector and signalled the need for forestry to be subject to deforestation measures from 1 January 2008. (Back to Questions)

9.  What will forest owners have to pay for?

Forest owners will have to pay for:

10.  Will an owner who quickly cuts down his or her trees before 1 January 2008 avoid deforestation liabilities?

Deforestation will be treated as if it was completed prior to 2008 (and therefore will not face any liabilities) if, by 1 January 2008:

11.  What do owners have to do if they want to deforest pre-1990 forest?

The core obligations for people deforesting Pre-1990 forest land will be to:

16.  How can feedback on the inclusion of pre-1990 indigenous forest be submitted?

Forms will be available to download from the MAF website, www.maf.govt.nz/climatechange and will also be available at scheduled regional meetings and hui. (Back to Questions)

17.  What forest areas will be exempted from the ETS?

Landowners with less than 50ha of pre-1990 forest on 1 September 2007 can apply to be exempt from the ETS. People who deforest less than two hectares of their total pre-1990 forest land holding during the first five years of the ETS will not have to report this to the administering agency.

Landowners with weed trees affected by the ETS can apply for an allocation of units for weed control purposes and this will be allocated from a fixed weed control budget.

The Government is considering an exemption to the ETS for pre-1990 forest on Mäori freehold land that is deforested for the purposes of papakainga (housing), see below.

Landowners required to deforest to make way for public utilities such as roads or transmission lines will be compensated by the entity requiring the deforestation. (Back to Questions)

18.  When can owners apply for an exemption?

From 1 January 2008, the person who owns the forest land on 1 September 2007 will have to apply for an exemption within 18 months of the legislation being passed. (Back to Questions)

20.  Why has the Government now decided to give forest owners the carbon credits?

Earlier in the policy formation process, the Government was considering devolving carbon credits only for new forests planted since 2007. However, stakeholders expressed a strong desire to receive credits (and associated liabilities) for all forests planted since 1990. Now that the Government has agreed in principle to the ETS covering all sectors and all gases – which will essentially devolve Kyoto Protocol responsibilities and costs broadly throughout the economy – there is a much stronger case for also devolving the opportunities and benefits that arise from Kyoto, including the carbon credits. (Back to Questions)

21.  What are carbon credits, sink credits and NZ Emission Units (NZUs)?

As a forest grows, it removes carbon dioxide (CO2) from the atmosphere and stores it as wood. New forests that were established post-1989 on eligible land can generate Removal Units (sink credits) under the Kyoto Protocol. A Removal Unit equals one tonne of carbon dioxide. Under the New Zealand ETS, participants will be awarded New Zealand Units (NZUs) for growth that occurs from 1 January 2008. As with Removal Units, NZUs are equivalent to one tonne of carbon dioxide.

Only forests established on non-forest land (for instance, agricultural land) since 1989 can be counted for emission units, and only in relation to the carbon they absorb after 2008. (Back to Questions)

22.  What about carbon credits that build up from 1989–2008?

There are no Kyoto credits associated with the period 1989–2008. Consequently, the ETS does not recognise credits from growth during that period. (Back to Questions)

23.  What post-1989 forest can be entered into the ETS?

To be eligible for entry into the ETS, post-1989 forest land must have been non-forest land as at 31 December 1989. Acceptable evidence of eligibility includes aerial photographs from around 1990, current photographs, land management records and acceptable demonstration of forest establishment dates. (Back to Questions)

24.  What do owners have to do to have their post-1989 forest entered into the ETS?

Owners of post-1989 forest will need to apply to enter the ETS. Those who join will have to report to the administering agency, at least by the end of the period 2008–12, any carbon stock changes in the relevant post-1989 forest areas.

Owners will have to calculate, using guidelines provided, the removals (that is, increased carbon stocks) and/or emissions (decreased carbon stocks) associated with this forest. (Back to Questions)

25.  What happens if post-1989 forest is harvested – will the owner have to pay liabilities even if he or she replants?

Yes. Forest owners will be required to surrender a number of NZUs equal to the calculated emissions. However, as the trees grow they will steadily earn new credits. Forest owners will have to pay costs associated with administration of the scheme. (Back to Questions)

26.  What if the liabilities exceed credits?

The liabilities associated with each post-1989 forest will not exceed the number of the credits that are earned from that forest. However, the value of credits and liabilities may change over time, so there is no guarantee that they can be bought back for the same price later when the owner wants to harvest or deforest. (Back to Questions)

27.  What are NZUs worth?

The value of NZUs will be determined by the market and what people are prepared to pay for them. It is not possible to put a value on them yet. Their price will be influenced by the price of Kyoto Protocol Units on the international market. (Back to Questions)

28.  How many NZUs will forest owners get per hectare of forest?

Owners of both pre-1990 and post-1989 forests will be able to receive NZUs, though in different ways.

Pre-1990 forest landowners will be gifted NZUs. An example in the Forestry in a New Zealand Emissions Trading Scheme Engagement Document estimates that they will receive about 39 units per hectare of exotic pre-1990 forest.

Owners of post-1989 forest can receive NZUs in recognition of the carbon being stored in the forest as it grows. A radiata pine forest absorbs around 30 tonnes of CO2 per hectare, per year on average over a typical rotation. On harvest, roughly two thirds of this will be lost and will need to be repaid. If the forest is not replanted after harvest, then virtually all the units issued will eventually have to be repaid. (Back to Questions)

29.  How is carbon in forests measured?

The Government is developing methodologies for assessing the amount of carbon stored in a forest, and the changes in carbon stocks over time, for the purposes of allocating units and liabilities. The methodologies will enable carbon emissions and removals to be measured, with effect from 1 January 2008. They will cover both emissions from deforestation, and emissions and removals from post-1989 forests.

The Ministry of Agriculture and Forestry (MAF) has engaged a team of experts from the forest industry to design a carbon accounting system for both ETS and the already established Permanent Forest Sink Initiative (PFSI). The final design is to be completed by the end of October 2007, and the tools for measuring carbon are expected to be fully available for use by July 2008.

The entitlement to units of the owners of post-1989 forest will be based on a carbon stock assessment certified by a Registered Carbon Certifier, using carbon accounting methodology that is still under development. The key elements of the carbon accounting methodology for post-1989 forests are likely to be:

31.  Will it be more difficult to convert forest land to dairying or other uses?

The ETS will make it relatively more expensive to convert land from forestry into another use, such as dairying. However, conversion can and will occur where the benefits are sufficient to meet all the costs involved, including the relevant deforestation liability. (Back to Questions)

32.  Will forest land lose value as a result of the inclusion of forests in the ETS?

In some cases, where conversion from forestry to other activities becomes more expensive, land may lose value. However, the allocation of free emission units to owners of pre-1990 forests may mitigate some, if not all, of this loss. In other cases, marginal land unsuitable for uses other than forestry may increase in value because of the extra economic value that can be derived from new planting under the ETS. (Back to Questions)

33.  How can foresters be expected to enter the scheme early and comply with the scheme without any legislation setting down what to monitor and record?

While the ETS legislation is not expected to be passed until after 1 January 2008, the Government will provide the guidance necessary to allow forest owners to fulfil their obligations from the date they enter the scheme. This guidance will cover questions on what constitutes a forest and deforestation, as well as appropriate accounting and tax treatment for firms that have balance dates in 2008, before the legislation is finalised. (Back to Questions)

34.  Where will forests owners hold their units?

Landowners will open an account at the New Zealand Emission Unit Register (NZEUR) into which NZUs can be transferred – see the document The Framework for a New Zealand Emissions Trading Scheme. (Back to Questions)

35.  Who will pay for participating in the ETS?

The Government is proposing that the owners of post-1989 forest who choose to enter the ETS be required to meet the direct costs of their particular involvement in the scheme.

The costs of administering and auditing the participation of pre-1990 forests and related decisions will not be recovered. (Back to Questions)

36.  What will be the ETS administering agency? Will it be MAF?

It has not been decided what or where the overall ETS administering agency will be. It is likely that the day-to-day administration of the forestry components will be administered by MAF under a memorandum of understanding with the administering agency. (Back to Questions)

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Notes from the Rotorua engagement meeting, 10 October, 2007.

Among the 100 or so in attendance at short notice were many representing forest owners, farm foresters, farm and forestry consultants, and carbon market traders.

Documents were made available at the registration table. For many attendees this was their first sighting of these MAF policy publications, which included:
1. New Zealand's climate change solutions: Sustainable land management and climate change - Plan of action – A partnership approach (September 2007)
2. Forestry in a New Zealand Emissions trading Scheme – Engagement document (September 2007); the notes below refer mainly to this document.
3. Afforestation Grant Scheme – Draft guidelines (October 2007)
4. Sundry related pamphlets.

The 3 hour session included -
Welcome and introduction to the NZ ETS,
Administering the ETS,
Complementary Forest measures, and the
Plan of Action.
Between each topic was a Question and Answer period, and at the end a review of the listed topics raised by those present.

Administering:
Carbon credits, ETS and existing schemes (ECFP, PFSI), newer Afforestation Grants Scheme (AGS) and Sustainable Land Management (SLM, for hill country erosion planting).
A Trading scheme was preferred, rather than regulation.
Administration central agency is yet to be agreed.
Q: What happens to Kyoto sinks in 2012? A: NZUs (NZ ETS Trading Units) will persist.
Q: Bureaucracy system? A: Minimalist was the goal, electronic, internet, not fully defined as yet.

Post-1989 Forests:
ETS participation is voluntary - if you do nothing, then you're not in the ETS. There are costs and risks for farm foresters who elect to join ETS.
Expect demand to buy your credits from oil companies, electricity generators, carbon sharks etc. Qualifications for Registered Carbon Certifiers - in review?
Policy “low audit, high penalties” expecting landowner high honesty for minimal auditing and low compliance costs with the added incentive of substantial penalties for misrepresentation.
Clear-felling harvesting - carbon fluctuations, big liabilities but never more than the initial NZU credit.
Sustainable managed harvesting with continual forest cover – constant carbon and NZU.
Do nothing (opt out of ETS) forfeits all credits and liabilities.
The presenters commented on the many stunned faces. Some of the questions:
Q: status of harvested wood? A: assumed to be lost to the atmosphere, but there is concern over this inaccuracy, also in the EU.
Q: policy permanence? A: (Sovereign risk, eg. 2017) “No government can bind a future government”.
Q: Maintaining liquidity in market, eg. large single-aged forest? A: ability to go offshore and buy units, or for government to do so. Internationally the AAU (assigned Amount Unit) is the “core” unit upon which the NZU is based.
Q: status of post-1989 scrub (regenerating indigenous forest – not always possible to regenerate eg. East coast)? A: as at 1990, compared to pre-1990 forests -

Pre-1990 Forests:
Deforestation (NOT harvesting) will enter ETS on 1 January 2008;
55 million NZUs available;
participation is compulsory;
some exemptions are possible.
Preliminary estimation valuations – 39 NZU per hectare, approx $585 per hectare.
Q: Indigenous forest treatment? A: use the Feedback Form provided for this topic by 31 October 2007!
Q: returning wood into land quickly? A: possibly “pyrolyse” unwanted wood (pyrolysis) into charcoal then put back into the land...
Q: (John Dean, NZTCA President) status of trees of estimated 30,000 tree croppers/orchardists? A: Tree Crops will be “generally” considered “cropping”, not “forest”, (unless over 5m tall with 30% canopy cover?).

Shapefiles of land held in GIS database (Global information system) at MAF of all Forest.
Tax, credits, offsets, Kyoto, liabilities – much in discussion still.
IRD: ETS tax matters arising document at www.taxpolicy.ird.govt.nz , submissions invited.
Feedback and submissions deadline 31 October 2007.
There had been much criticism taken on regarding the small incentive for the East Coast Forestry Project (ECFP) compared to the agricultural favourably-late entry date.
Q: how rules could change? eg. Canada. A: complex and ongoing, but reminder that ETS/Kyoto immediate intent is to encourage carbon sinking and discourage carbon emissions.
It was claimed that in 2002 government gave notice warning of deforestation issues, and some have taken great advantage of this, but see questions below.

Plan of Action:
Refer to Peak Group in this document and the opportunities it affords –
greenhouse gas foot-printing;
ETS technology research;
sustainable building strategy (more wood used in building);
Lots of investment in planning, research.
Acknowledgement that “turning the supertanker” will take time...
Q: re 2002 notice, “Garbage!” “Now only 2 weeks to do tax, carbon submissions!” “and is retrospective taxation” with some animation. A: sticking to 2002 stance, even if details were scarce until recently.
Q: (disturbing circumstances of some land being retired from unsuitable forestry recently bought innocently by buyers not intending to finance replanting unaware of carbon liabilities they will incur as a result of deforestation?) A: [silence]; get all wood off land before 1 January 2008... mere weeks away.
Q: dispute handling? A: dealt with as per tax issues, in a single “binding resolution” system.

A tentative conclusion – there exists a somewhat indecent rush to lock up as much woody greenery as possible before 2008, with a small percentage of its carbon value offered to the owner now rather than none, before so much of the ETS administration is even established.
Forest owners, rights holders and tree croppers of tall trees with significant canopies have very little time – an unfairly small opportunity – to study their options, make submissions or prepare their land for the future, before the end of 2007.
We need the full answers to Question 33 now.
Tree Croppers with pre-1990 areas of large trees with significant canopy cover could be in for a rude shock from carbon liability at some time in the future.

Les Gruebner

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Notes from the Gisborne Engagement Meeting, 29 October 2007

About 70 attendees.
MAF team led by Brian Smith (BS)

Qu: Definition of an “Orchard” compared to a “forest”
Ans: If the tree is a “cropping” tree (i.e. carries a harvested food crop) then it is an orchard. They are not interested in trying to involve non-forest trees as the amount of carbon sequestered is low.
If Tree Croppers wanted to involve their plantings in carbon trading then they could approach the ETS Forestry administering body to get an area declared a “forest”.

It appears that Tree Croppers can be assured that our plantings will not be involved but we should still look at the legislation when it is drafted to ensure that we do not get included. I got the impression from BS that MAF are only really interested in the big forest areas (for practical administration reasons) and are doing everything possible to do exclude small plantings, unless the landowners want to be involved.

Post 1989 Forests:

Only carbon sequestered in the first commitment period (2008-12) can be sold. Pre-2008 remains outside the ETS under international rules.

Joining the ETS is entirely voluntary – if you do not join, then you get no carbon credits but can do whatever you like with your forest.

If you join then at harvest there is a carbon liability but that liability cannot exceed the number of carbon credits earned.
However, if you have sold all your credits then you may have to buy more at harvest to cover the shortfall at that time.

One forester urged all forest owners to join and take their credits to hold for the future. He pointed out that even though the present govt. has said that foresters who choose not to join the ETS will have no liabilities at harvest or deforestation, the rules may change in the future so having the credits “in the bank” will ensure that liabilities at harvest can be covered.

Agroforestry: MAF does not want to involve grazed agroforestry systems with wide spacings (e.g. 100 sph ) unless landowners want to have them involved – pointed out areas are usually small, there is a high possibility of deforestation at harvest, and the amount of carbon is at the lower end of the scale. Similarly with poplar/willow plantings for soil conservation.

Pre-1990 Forests:

No tradeable carbon credits based on carbon in forest.

If area remains in forest then there are no commitments at harvest or need for credits at that time. It is assumed that the carbon balance over the whole forest and the whole rotation will stay the same.

The only liabilities arise when an area is deforested i.e. a change of land use. In that case carbon credits equal to that of the deforested area are required.

Govt. recognises that this will cap the value of land under pre-1990 forests so is allocating carbon credits to pre-1990 forest land owners in compensation. These are based on the average deforestation rates for the 10 years prior to 2005 and will be allocated on the basis of land area.
These can be sold or used to cover the deforestation of forest areas.

No decision on indigenous forests has been made. There have been low rates of deforestation of indigenous forest and it is tightly controlled by the RMA.
One person thought that indigenous forests should be involved – it was only fair that indigenous forest owners have their carbon credits if pre-1990 pine forest owners were allocated credits.
It was pointed out that there would be very few credits allocated to indigenous forests because of the low recent rates of deforestation.

Liability for fire/ windthrow – BS pointed out that the carbon loss is low in these cases. Fires seldom burn trees to the ground – tend to kill the trees standing so most of the carbon remains unless the trees are harvested. Similarly with wind throw. Any lost carbon rapidly re-sequestered as the forest is replanted or regrows.

Up to 2 ha. can be deforested 2008-12 without any penalty.

Landowners with less than 50 ha. of exotic forest can apply to be excluded from the database within 18 months of legislation being passed. Aim is to exclude the average farm forest unless land owners want to be involved.

Manuka/kanuka – manuka not regarded as a forest tree, kanuka is. If the land at 1990 was grazed (i.e. no fences excluding stock from the manuka/kanuka) and it has an open understory, then it is classed as farmland.
Pre-1990 forest areas will be mapped using aerial photos, landowners can then check.

I think that most Tree Croppers will not get caught up in the rules. A few with large plant collections planted pre-1990 may need to apply for exemptions. I would suggest that we give members a summary of what is happening and ask for feedback from anyone who thinks they may be affected. We should check the legislation when it is drafted and submit at the select committee stage if the rules do affect our members.

Murray Redpath

Disclaimer: The views expressed within these web pages do not necessarily represent the policy of the New Zealand Tree Crops Association Incorporated, nor the web site management. Any advice offered does not imply warranty of any kind.

 

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