Forestry rights and the ETS
Stuart Orme, New Zealand Tree Grower November 2010.
The advent of the ‘forestry right’ some three decades ago has allowed land owners, along with someone without an interest in the land, to invest and own forests together in a handy and usually economic legal mechanism. From time to time, variations have been made on a forestry right by those involved. These variations would be to modify the terms, usually to reflect an alteration in how the final revenues would be worked out, because of a change in the initial investment intentions or other circumstances.
With the arrival of the Emission Trading Scheme, forest right holders should be aware of how they are affected. This is for both pre 1990 Forest Allocation Plan (FAP) and for areas planted on eligible post 1989 forest land.
Pre 1990 forest land
The land owner, known as the grantor in the forestry right, has the responsibilities and obligations now associated with the pre 1990 forest land. They can apply for an exemption to allow change of land use in the future, if they own less than 50 hectares of pre 1990 forest land, or claim the compensation credits available for that land.
There are multiple exclusions that may allow land owners with a change of ownership title after November 2002 to still gain the 60 units per hectare.
Those with shares in the forest but not the land, known as the grantees in a forestry right, have no input or obligation unless they are actual land owners of the land beneath the trees. This has raised issues around the landowner now having to replant forest which at first they may not have intended to. It is introducing a potential cost to partners or shareholders who expected to not be involved the forest once it was harvested but then find they have replanting and potential management obligations to fulfill.
|Summary of key Forest Allocation Plan dates|
|Entity to get the pre 1990 allocation of compensation credits||Land owner on 20 July 2010|
|Land ownership to gain 60 NZUs||Land purchased on 31 October 2002 or before|
|An exemption can be applied for if the owner on the 1 September 2007 owned less than 50 hectares of pre 1990 forest||1 September 2007|
|Exemption to deforest land||Closes 30 September 2011|
|Allocation of credits for pre 1990 forest||Closes 30 November 2011|
Post 1989 forest land
For land forested after 1989, anyone with their name on the land title can make an ETS application to register a block of land into the ETS. Anyone with their name on the land title can open an NZEUR account to receive credits which accrue from that land. When making the application anyone with a registered interest in the land, for example with their name on the title, is required to sign an interested parties form which is submitted as part of the process.
Interested parties may be a person or entity with a registered lease, access arrangement or forestry right that enables them to use the land, or be the owner of the land. This is a process which is partly to make sure that anyone who has a registered interest is aware of what is happening and to allow them to ‘make a call’ if they will be affected by an ETS application.
The above five comments in summary say that the land owner, the tree owner or a mixture of both can apply for the credits. Therefore it is possible for those involved in a forestry right to apply for the credits together and enjoy the benefits and obligations that the ETS makes available.
Example for forestry after 1989
In 1994 two parties created a forestry right to reflect a 40/60 split on future tree revenues. This was based on the grantor providing the land and the grantee supplying the cash to plant and tend the trees. The termination of the forestry right is in July 2024, which is 30 years from planting.
With the emergence of the ETS, forest now growing on land which was planted after 1989 can attract an annual allocation of carbon credits that can be traded on the open market. The above participants could now look at applying a variation to the existing forestry rights that allows both parties to take advantage of this eventuality in an informed way.
|Species||Year planted||Area in hectares||Silviculture||Forest Right expires|
|Radiata pine||1994||50.0||Prune and thin completed||2024|
The current carbon profile for the forest is outlined in the table below. The profile assumes that the forest will be grown through to 2024 on a 30 year rotation and sequest 28,050 New Zealand Units over this period. Of these, 9,100 are available this commitment period from 2008 to 2012. The carbon sequestration numbers are determined from the MAF sequestration tables for the lower North Island region, but the concepts are transferrable across the country.
|Year||Carbon units on the 50 hectares||At a price of $20 a unit|
|Potential harvest revenue from 50 hectares at $20,000 a hectare||$1,000,000|
|Potential credits available between 2008 and 2024||28,050 carbon units|
|Less credits not required to be surrendered||Zero carbon credits|
|Nil credits to be surrendered||28,050 carbon units|
At an assumed market price of $20 for each carbon unit there is potentially, in the period 2008 to 2024, a total of 28,050 carbon units, which at $20 a unit comes to $561,000. For 2008 to 2012, the first commitment period, there would be 9,100 units which at $20 a unit comes to $182,000.
If this is all registered in time, in other words by 30 March 2011, there would be enough credits to amount to $107,000 which would be allocated in March and April 2011.
Different split of revenue
If the allocation of carbon is different from the logging revenue split, and if you are looking to buy back credits with harvest revenues, a disproportionate revenue and obligation split will occur. For example, assume that the 50 hectares of forest has a net revenue of $20,000 a hectare in 2024.
If we divide the potential harvest revenue of $1,000,000 by the 28,050 credits to be re-purchased at forest harvest, we have potential buy back revenue available of up to $35.65 per credit. If the grantor has 40 per cent of the carbon allocated, this comes to 11,220 carbon units valued at $20 a unit. This is a total of $224,400 over the 2008 to 2024 period, but there would be $400,000 of potential harvest revenue to buy back the credits at harvest.
What if the grantor has more land available for planting that would be better in trees than its current use? Then, assuming it is still in the lower North Island or Hawkes Bay region, they would need to plant approximately 35 hectares of land to generate the credits required to surrender by 2024.
Put simply, it is very easy for those involved in a forestry right to apply for and receive their credits. However, there may be a number of unrelated individual or groups involved. Therefore time and thought needs to go into the variations involving a forestry right to make sure everyone is aware of the obligations that will arise and that they can honour them.