F1. What do you consider are the strengths and weaknesses of the NZ ETS forestry settings?

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1 This addendum addresses the questions asked in the FORESTRY TECHNICAL NOTE of the New Zealand Emissions Trading Scheme Review 2015/16 dated March From: Hamish Levack for Dean Satchell, president of the New Zealand Farm Forestry Association, Level 9, TheForestWood Centre, 93 The Terrace, Wellington 6011 PO Box , The Terrace, Wellington Tel: F: E: W: EXISTING STRUCTURAL DESIGN SETTINGS F1. What do you consider are the strengths and weaknesses of the NZ ETS forestry settings? Answer: Strengths include allowing the growers of post 1989 forests to choose to participate or not as it suits their circumstances and abilities. Not everyone wants their land use choices constrained by the ETS; and some find the prospect of compliance outweighing the perceived future benefits. the exemption for deforestation liabilities for the owners of less than 50 ha of pre-1990 forest land. Weaknesses include the Field Measurement Approach (FMA) in forestry. It is complex and expensive, and a charge against commercial forestry that is not matched by similar charges on other sectors. All participants with 100 ha or more of post-1989-forest land registered in the ETS are currently required to use the FMA to determine carbon stocks for emissions returns. This generally obliges the forest owner to employ a forest consultant, apply to MPI for the number of plots required, define their locations, get the plots established, collect the relevant information, submit it to MPI and fund the creation of participant-specific tables. While a forest owner with 100 ha would have to pay over $10,000 to get this done an owner with 99 ha would be allowed to use MPI s free look-up carbon sequestration tables. The 100 ha cut-off is arbitrary, and the compliance cost imposed by the FMA is not imposed on any other sector. The FMA process does not need to continue. MPI should now have received more than enough plot data - at no expense to the Government - to generate adequately reliable regional look-up tables for owners with medium sized forests who wish to register or re-register under the ETS. F2. Do the NZ ETS forestry settings discourage deforestation? If not, what settings do you think would? Forestry Technical Note response 13 April

2 Answer: Wrong question. The settings do not discourage deforestation, nor should they. The point of the ETS is not to constrain the rights of landowners, but to encourage emissions reductions. The present settings already impose costs on pre forest landowners seeking to move to higher and better land use, even with the offset provisions (which simply move forests off productive, easily accessed land on to steeper and less accessible land with higher costs for management and freight). Forest owners want the government to reduce gross emissions, not dodge their responsibility by adding more constraints to forestry. F3. Do the NZ ETS settings incentivise afforestation and replanting? If not, what settings do you think would? Answer. The ETS settings probably have little impact on afforestation and replanting compared to land prices, carbon prices and log prices. While the government has little influence over log prices it has some influence over land prices through its foreign investment policy, and a lot of influence over carbon prices through its ETS policies. In particular, over the last 8 years NZU prices fell by a factor of 10 (from $20 to $2) then rose again by a factor of 6 (from $2 to $12) in response to the government manipulating the supply of low-integrity East European carbon credits as substitute for NZUs. Without the benefit of adequate carbon income, commercial forestry has been seen as sufficiently unprofitable by enough people over this period for a significant loss of national net stocked forest area. Professor Bruce Manley of Canterbury University reported recently that: Carbon price is currently being suppressed by the 2 for 1 concession to emitters and the 4 million NZUs allocated each year to EITE industries. The $25 fixed price surrender option has the potential to suppress carbon price in the future. Removing these factors would be viewed positively by the forestry sector and lead to greater afforestation. Manley has also developed a convincing model that forecasts limited afforestation beneath a carbon price of $15/NZU but a level of 13,900 ha/year at $15/NZU increasing to 50,500 ha/year at $50/NZU. Some encouragement could be given to afforestation and replanting through averaging and harvested wood products as described below. F4. Does the NZ ETS provide effective incentives for smaller foresters to participate in the scheme? If not, what settings do you think would? Answer: As less than half of the planted area of post 1989 forests is registered under the ETS, clearly the scheme does not provide effective incentives to participate. Small forests are often unprofitable, and high ETS compliance costs combined with low carbon prices have discouraged many owners from joining. The impact of carbon prices has been noted above. Lack of scale reduces the profitability of small forests, and those landowners probably need greater incentives under the ETS to plant trees than corporate landowners. If it were easy for small forest owners to aggregate their forest rights, and if they could be persuaded to, this problem could be greatly reduced. However Forestry Technical Note response 13 April

3 an important barrier to forest aggregation exists in the current treatment of income tax on the sale of immature forests, and a case is being prepared for IRD arguing that aggregation without change of ownership should be exempt from the cost of standing timber provisions of the Income Tax Act. At present the illiquidity caused by this provision dissuades people not only from aggregating forests, but also from investing in forestry. More detail can be found in appendix one. Some encouragement could be given to afforestation and replanting through averaging and harvested wood products as described below. F5. Does the NZ ETS work well alongside other forestry programmes? If not, how do you think these programmes could be better aligned? Answer: The other forestry programmes offered by the government are relatively minor in scale and impact. Whether or not the ETS works well alongside them is practically irrelevant and has no bearing on reducing gross emissions. F1. What changes could be made to NZ ETS forestry sector provisions to improve the scheme? Answer: From the answers above, in summary: Remove the Field Measurement Approach requirements as soon as MPI has adequate data to develop suitable lookup tables for carbon sequestration. Support a case to IRD to exempt the aggregation of small forests from the cost of standing timber provisions of the Income Tax Act Reduce the risks for forest owners as described in averaging and harvested wood products below. Don t meddle with: the ETS settings to discourage deforestation. Focus on changing behavior to reduce gross emissions, not on taking away landowner rights. the ETS settings to encourage afforestation, replanting, and participation. The main drivers for these decisions are land prices, carbon prices and timber prices. carbon prices: allow them to rise. minor forestry programmes operated by the government for regional purposes. They are really not germane. FUTURE ACCOUNTING APPROACHES F7. What are important factors when considering changes to forestry accounting settings in the NZ ETS? Answer. ETS-registered forest owners are concerned about the risk that the price of NZUs will have risen greatly by the time they have to face their carbon liabilities at harvest. Of course some risk free credits can be sold: either the approximately 350 tonnes per ha for radiata pine of harvest residues that remain on the site after logging; or the average carbon stock in a stand that is part of a normal forest. Owners are also concerned about the possibility of being faced with sudden unscheduled liabilities caused by catastrophes like fire, windthrow, snow damage or Forestry Technical Note response 13 April

4 pathogens, and their inability to recover useful logs in such an event. Some growers in the ETS hold unsold NZUs in their accounts to hedge against that possibility. F8. Do you think a different forestry accounting approach in the NZ ETS would change the scheme s incentives for afforestation? Answer. Certainly, if you made the accounting more difficult it would reduce the scheme s incentives. Otherwise the question was covered in F3 above, i.e. the major constraints on afforestation and replanting are land prices, carbon prices and log prices. A discussion on the embedded carbon in wood products is given below. Outside the ETS, some form of collective protection against carbon liabilities arising from natural disasters could be attractive, subject to cost. This could involve either third party insurance, or self-insurance through pooling investments and carbon credits. AVERAGING F9. Do you think averaging should be introduced for post-1989 forests? If so, why, and do you think it should it be optional or mandatory? Answer: It is not clear exactly what the Government means by averaging but however they define it the NZFFA is opposed to averaging being mandatory. If averaging means that ETS-registered forest owners forego their current right to sell carbon as it is sequestered and pay for the carbon oxidized at harvest time, in return for the right to sell much lower levels of carbon with no liabilities at harvest time, it might be attractive to some risk-averse forest owners. Others who understand the time-value of money and believe that by the end of the forest rotation the price or carbon may not have increased much, or who own or are part of a collective that owns a normal forest, will prefer to manage their own liabilities. Averaging as a way of managing harvest risk will be less important if the Government devolves to growers the embedded emissions in harvested wood products. F10. Should there be limits on the types of forests that can use an averaging accounting method? For example, new forests only or forests under a size threshold. Answer. If the government wanted to use averaging as an incentive for afforestation, it might limit its use to new forests only. However the obvious use of averaging is to reduce the harvest liability risk as perceived by the grower, and so encourage both afforestation and replanting. There is no obvious need for any constraints on its use. F11. How might averaging impact on your business decisions? Answer. Averaging would help provide confidence and certainty. This would facilitate business planning. HARVESTED WOOD PRODUCTS F12. Do you think deferred liability for emissions from Harvested Wood Products (HWPs) should be recognised domestically? If so, how? Answer. Certainly. The NZFFA has contributed to researching the question and developing a Wood Council position paper on how this might best be done. Forestry Technical Note response 13 April

5 Basically, the carbon stored in harvested wood products per hectare should be devolved to post 1989 ETS forest growers on harvest, and then oxidised from the growers ETS accounts according to the average decay curve for HWP. This would not require the growers to adopt HWP accounting, as the liability could be debited from the ETS accounts automatically by MPI on an annual basis using a simple computer algorithm. The direct debit would be modified by the government from time to time as the national product mix changed. While this would take time to set up, it would add no compliance costs to the growers and would be cheap to run once established. No-one in the forest growing and processing sector appears to favour devolving HWP liability to the wood processors, as it would be complex to set up and costly to administer. Instead the processors would like to receive some benefit from the government s HWP accounting for post 1989 forests that are not in the ETS. A copy of the WoodCo position paper is attached. F13. How might the options for deferred liability for emissions from HWPs impact on your business decisions? Answer. If the approach favoured by the NZFFA was adopted it would substantially reduce ETS-registered forest owners anxieties about carbon liabilities at harvest time. This would facilitate the following desirable behaviours: (a) To plant more forests on under-utilised and vulnerable land; (b) To improve returns and grow the wood processing sector with products that displace less benign competitors, and (c) To reduce the risks of catastrophic forest loss from climate change through encouraging growers to harvest and replant, rather than hold forests past maturity. Devolving the benefits and liabilities of HWP to processors would not give the same benefits, nor would expanding peripheral and largely irrelevant programmes such as the Afforestation Grant Scheme. F14. Do you have any other comments or things you think are important? Answer. The Ministry for the Environment stated the obvious when it admitted recently that since the ETS was set up in 2008 it has made practically no difference to business investment decisions, and probably has not affected household expenditure either. Plenty of other commentators, e.g. Brian Fallow, former economics editor for the New Zealand Herald, and Rod Oram, columnist for The Sunday Star-Times, and a regular broadcaster on radio and TV, have been saying this for years. Reputable International Climate Action watchers have mocked New Zealand. They note that while our country has an ETS, it has done little that is meaningful to reduce its carbon footprint. In fact, from 1990 to 2013, New Zealand s gross emissions actually increased by 21% making it one of a handful of developed countries that did not achieve actual emissions reductions. Only after including market sleight of hand, i.e. by letting almost worthless, low-integrity, East European carbon credits substitute for NZUs and claiming the carbon fixed by already-existing forests, was Forestry Technical Note response 13 April

6 New Zealand able to report emissions reductions in line with its original target of diminishing emissions to 1990 levels by Over the last eight years low carbon prices have discouraged forestry investment, as evidenced by the deforestation and new planting rates recorded by MPI. At the same time land prices have risen as the agricultural sector, exempt from the ETS, has continued to pass its environmental costs on to NZ taxpayers. We expect the ETS review to produce real results for controlling New Zealand s carbon emissions, not simply a least cost way for the government to meet its international obligations. Forestry Technical Note response 13 April