Official website of the New Zealand Farm Forestry Association

Carbon gains, losses and risks

Piers Maclaren, New Zealand Tree Grower February 2008.

You own a forest. You have heard about the government’s new Emissions Trading Scheme (ETS) but it seems very complicated. There is a huge amount to read and absorb. Do you stand to gain or lose anything from carbon trading? If so, how much? What are the costs? What are the risks? You have decisions to make. What is the best thing to do, and by when?

This article may be first step in answering some of these questions. It has been checked for errors of fact by some key MAF staff. Do not blame them, however, if there are some mistakes – although the scheme has already started, the details are still being worked through. Most importantly, the amendments and regulations to the Climate Change Response Act have not yet been approved and may yet undergo modification, and there is as yet no post-2012 ‘Son of Kyoto’international agreement. At the recent indecisive conference in Bali it was agreed to postpone the all-important details for two years – until after the US presidential election.

Background information

First, you must understand some key concepts and terminology. The United Nations has drawn a line in the sand around the date 1 January 1990. Everything that occurred prior to that date is largely forgiven and forgotten, but signatory nations must take responsibility for everything that occurred subsequently – even though countries are not actually held to account until the First Commitment Period (CP1). Nations are expected to achieve certain specified reduction targets for the average of the five years from 1 January 2008 to 31 December 2012, relative to their 1990 emissions. In order to avoid complications,the New Zealand government has tried to follow the Kyoto rules as closely as possible in its domestic ETS.

Before or after 1990

Under the Kyoto rules, forests which existed prior to 1990 are treated vastly differently from those that were established subsequently. If a country wishes, pre-1990 forests need not be accounted for and New Zealand has elected not to do this. This sidesteps the cost and difficulty of quantifying all the carbon changes in pre-existing forests around the world, most of which are natural or semi-natural. The rule of thumb is that, on average, there is no change in the carbon stocks of such forests despite the establishment, growth and harvest cycles of some of the components. The important thing is to avoid deforestation – or conversion of a forest to a non-forest – because this accounts for almost 20 per cent of the global atmospheric gains in carbon dioxide. So you can harvest pre-1990 forests with impunity, but you must maintain that land in trees for ever, or else take responsibility for the implied carbon loss.

Carbon changes in post-1989 forests, on the other hand, must be fully tracked. Nations can take credit for any gain in carbon, and must bear responsibility for any loss – from whatever cause, be it harvesting, deforestation or act of God. The New Zealand government proposes giving owners of such forests the choice of whether to opt in to the scheme and to receive the credits and the liabilities, or else to opt out and leave the responsibility entirely in their hands.

Defining a forest

To fully understand the words afforestation and deforestation, you first have to define a forest. It is a block of land, of at least one hectare in area, where the average tree-covered width of the block is at least 30 metres − to exclude shelterbelts, and with a tree crown cover or equivalent stocking level of 30 per cent or more with species capable of reaching at least five metres at maturity in situ. That last expression can be important. Gorse, broom and matagouri clearly do not meet this definition of a tree and can be considered similar to pasture, whereas pines, mahoe and kanuka are clearly trees. Manuka, however, can reach five metres in some situations but not in others.

You could also argue, and the New Zealand government is considering doing this with its international accounting, that even if the scrub had the potential to reach the critical height, it would not have done so under normal business as usual practice. Some blocks of land were always destined eventually for pasture, despite intermittent scrub reversion. In New Zealand’s short history there have been many cycles of burn, graze, revert, and burn again.

Owners of pre-1990 forests

Sorry, it is too late. If you own pre-1990 exotic forests, your decisions have already been made – you are now part of the ETS, whether you like it or not. From henceforth, think carefully before converting any of your land to a non-forest use. You may need to pay a huge penalty, for example by buying carbon credits on the public market to equal the quantity of carbon in a mature stand of trees.

For radiata pine, that quantity has been determined by using regional averages based on yield tables. For example, a 28-year-old stand of radiata pine contains about 800 tonnes per hectare of carbon dioxide equivalents, the standardised units in which emissions are quantified. The corresponding amount for a similar aged block of indigenous scrub might be only 180 tonnes per hectare of carbon dioxide equivalents. Current prices are estimated to be around $20 per tonne, in other words you might pay $16,000 per hectare to convert the pines, or $3,600 per hectare to clear the native scrub.

Avoiding the penalty

How can you avoid this penalty? If you want to deforest no more than two hectares of your estate within the next five years, you can do what you like with it. The government does not even want to know. If the area you intend to deforest is between two and 50 hectares, you are obliged to register your intentions but will probably get permission to deforest it at no extra cost provided your total pre-1990 forest holdings are no more than 50 hectares. If my translation of legalese is correct, forest partnerships, where each partner owns less than 50 hectares in an undifferentiated share, count as a single unit.

You may think, ‘Stuff that, the government can’t tell me what to do. I’ll do it anyway, and they probably won’t even find out.’ Unfortunately, that is probably not the case. It is becoming increasingly difficult to hide from satellite imagery, and the penalties in the proposed new legislation include horrendous fines or, if you refuse to pay, even criminal charges.

One acceptable way out of the problem is to harvest your trees, replant with the minimum tree cover that constitutes a forest and then deforest that. But government have already thought of this loophole – you will be charged the full amount unless your new forest is eight years old or more. You will be considered to have deforested if your land has not been replanted or naturally re-established within four years of harvest, or if 30 per cent crown cover has not been reached within 10 years if exotic trees or 20 years if natives.

Free credits

Knowing that the deforestation tax is politically unpopular, 21 million tonnes of free credits will be distributed around the existing forest owners for use in CP1. This will be expanded at a later date by 34 million tonnes. Initial estimates are that it amounts to some 39 credits per hectare, approximately $780. It was too problematic to target the credits at those who were most likely to lose money, for example by reduction in land value, as a result of the new legislation. So we all get a slice. It is a nice gift, particularly for those of us who were never thinking of deforesting anyway, but a totally trivial amount for those who were.

Excessive

I think the deforestation penalty is excessively severe, and casts a shadow over the government’s intention to promote the establishment of an additional 250,000 hectares of forest. Farmers have always learned from the successes or failures of the crops grown in their neighbourhood. Who is going to stick more trees in the ground when they know that the result of pre-1990 plantings has been, in effect, to devalue and remove the long-term control over that land?

What guarantee is there that the present government’s current and well-meaning intentions to restrict liability to no more than the units issued for sequestration will persist? It is blatantly unfair to charge a penalty based on the highest peak in the sawtooth graph rather than the long term average, which is about half that amount.

Owner of post-1989 forests

For quantification of the carbon gain in your forest, four ways are proposed. Option One is to establish permanent sample plots and record the difference between the beginning and the end of a commitment period. This is the most precise and you will receive the highest proportion of your credits, but it is also the most expensive. You will never receive all your credits, because the government prefers to err on the side of conservatism to ensure it does not end up with a fiscal deficit. Obviously, nobody is going to be out there on the exact dates of 1 January 2008 and 31 December 2012, so there has to be a recognised way of extrapolating measurements to those exact dates.

Option Two is to establish temporary plots. This is quicker to do than permanent plots, and therefore cheaper, but it is less precise and you get proportionately fewer of your credits. Option Three is a single measurement, sometime towards the end of the commitment period. It is a very cheap option, but highly conservative because measurements are straight-lined forwards and backwards, or perhaps modelled, if an adequate model becomes available. Option Four is the cheapest of all. It would be suitable for those with small blocks or with young trees. It is a quick-and-dirty look-up table that uses national or regional averages.

Making the choice

Assuming you can intelligently choose one of these options, your decision-making is not yet over. You can choose to measure trees only, or to measure all biomass such as shrubs, bracken and grass as well as trees. Measuring just trees is the cheapest and easiest, but it may not do justice to the full extent of carbon sequestration on your site. In particular, reverting indigenous forest may go through several stages of scrub reversion before anything resembling a tree appears. And if you choose options one to threee you must still decide how many plots to use. The more plots, the better the data, and the more carbon you will have to sell. On the other hand, it will cost a lot of money to establish a large number of plots for just a small gain in precision. Forest inventory specialists are the best people to ask – they can usually judge a reasonable trade-off.

Paying its own way

The government is keen for the ETS to be self-supporting. Except for minor start-up funds, it wants the carbon trade to pay its own way. In other words, you will have to pay for all the costs, in the expectation of selling credits for a profit. How much the costs will be nobody knows for certain. It is somewhat unsettling to think that government can theoretically change the costs after you’ve boarded this train.

There will be some sort of registration fee, but the government is keen to keep that low, perhaps a hundred dollars. There will be measurement and certification fees probably costing thousands of dollars. There will be insurance costs. You need this, because if a forest is not insured, how can a buyer guarantee that the carbon will remain locked up in biomass?

Insurers already offer cover for fire and wind, but their premiums do not include the carbon liability of such events. They certainly do not deal with disease. They are currently investigating comprehensive carbon insurance for forests, but – unless I am mistaken or out-of-date – you cannot yet buy this. In other words, you will probably have to carry that risk on your own shoulders in the meantime.

Permanent Forest Sink

Another important point: there will come a time when your forest stops sequestering carbon. This is the case whether you choose to harvest it or whether to choose to leave it alone as a so-called Permanent Forest Sink Initiative forest. So the credits will eventually stop coming. But the liabilities will likely go on forever. At the very least you will need to maintain those insurance payments in perpetuity, and regularly pay for someone to check that your carbon still exists and register that fact.

So what sort of person incurs a relatively short-term benefit, for a long term cost? To answer that last question, consider an asset that you leave to your offspring− a house and section for example. It will cost your heir a continuing amount for maintenance and rates, but your heir would be unlikely to decline the gift.

The asset is capable of yielding an income such as rent that more than compensates for the costs. It is the same with the carbon earned by a forest – you could invest a certain proportion of your credits in a fund to cover all future costs. Nevertheless, we cannot make a sensible business decision until a reasonable estimate of costs and returns is known. That is not likely to occur until mid-2008.

Newly planted post-1989 forests

Suppose you intend to plant a block of trees on pasture or at least on non-forested land. Further suppose that you can instantly magic up the tree stocks and planting contractors to establish your forest in the winter of 2009. Is it worth entering the scheme at this stage? You must decide to register before 1 January 2010, or you miss out on any credits until 2013.

Radiata pine can sequester more carbon than most in the short term, so what will have been achieved by the end of 2012? The trees would be only 31⁄2 years old and might have absorbed about 10 tonnes carbon dioxide equivalent per hectare, provided that you did not need to deduct anything for initial land clearance, such as removal of the odd wilding pine or macrocarpa. This may add up to perhaps $200 a hectare in credits. Unless the block of trees is fairly large, costs will exceed benefits and you might actually lose money by entering the scheme. So it would be best to wait until 2013 and register then.

Older post-1989 forests

Trees eligible for credits may be up to 18 years old. They must have been planted on non-forested land although in many cases someone is going to have a headache working out just what the land looked like back then. Such trees will be packing on the carbon, and may have sequestered 180 tonnes carbon dioxide equivalent per hectare by the end of 2012.

That equates to $3600 a hectare just for five years of growth. But at harvest you will need to pay back or surrender the loss of carbon which will be about 570 tonnes per hectare for a typical 28-year old stand. Not all the carbon in a stand returns to the atmosphere on harvest, because some 240 tonnes remains behind in the form of roots, stumps and general debris. Only the wood removed on the logging truck is assumed to instantly volatilise. (No I won’t go there, but that is just another quirky Kyoto rule).

Fast forest fix

So you have gained 180 tonnes, but lost 570 tonnes. Not a good deal. But you are saved by the fast forest fix rule. The international accords state that no country has to pay more debits for harvesting trees than they earned during the first commitment period, and the New Zealand government has provided the same guarantee. You have gained 180 tonnes and lost 180 tonnes, but lose out overall because you have had to pay measurement and reporting costs. What if your harvest occurs during future commitment periods?

Under the ETS, forest owners will be allowed to bank their credits for future commitment periods. They will need to surrender some of them at harvest, or they may wish to delay selling credits anticipating a price rise. In the author’s opinion, it is extremely likely that, if the Son of Kyoto talks succeed, the price of credits will skyrocket. The easy credits are the first to be snapped up,whereas some governments are looking at 60 per cent emission reductions or more. The credits you get paid while your stands are growing may be worth a lot less than the credits you must surrender when your stands are being harvested. It would be very risky to sell all your credits. So how many credits can you afford to sell?

Selling the credits

You can afford to sell only the proportion of carbon that remains on the site after logging corresponding to the troughs in the graph. In other words this is about 240 tonnes per hectare, all the rest you should bank.

If a stand has already gained 240 tonnes per hectare by the start of 2008, there is no advantage in entering the ETS. You will get more credits but you should hang on to these for when you need them. In other words, there are no risk-free credits to anyone with a typical stand that is 10 years old or more.

So where has all your carbon gone? Unfortunately, the bulk of the most recent planting boom in New Zealand was during the critical years of 1990 to 1997. Nobody gains any credit for any sequestration that occurred up to 2008. That sequestration was a free gift to the planet, and New Zealand and you are the losers. I think you could at some cost in replanting delay regain these missing credits by allowing the post-harvest residues to decay to almost zero, using the government’s fast forest fix clause to avoid penalties, and then starting off from fresh.

Other solutions

What other ways are there around this problem? First, you can choose not to enter the scheme, leave the headaches to government, and concentrate on what you intended to do before you ever heard of the Kyoto Protocol – grow wood. Second you can delay harvest, pocket the credits, and leave the problem of the inevitable forest collapse to your successors. In the case of reverting indigenous forest, it may be 100 years or more before the forest ceases to grow, and in a mixed-species forest collapse may never occur. Lastly, you can pool stands of different ages to create a so-called normal forest.

A normal forest is a steady-state system with an even balance of age classes. In this idealised situation which never exists in reality, the carbon loss from harvesting any one stand is counterbalanced by the growth of all the other stands. There is genuine carbon gain in the establishment of such a forest, but its maintenance is carbon neutral and – except for the previously mentioned costs such as insurance, there is nothing to pay during the continuous harvest. One main advantage of such a system is that you can sell risk-free credits amounting to at least half of the carbon stocks that each stand achieves just before harvest. In other words, up to the red line in the graph below. Instead of only 240 tonnes per hectare being risk-free, the figure increases to about 370 tonnes per hectare.

But you need not achieve the idealised even-aged estate to gain some advantage from pooling. Combining the carbon in any two or more stands of different ages will provide some degree of benefit. An estate modelling approach is necessary to determine the maximum liability you are likely to encounter in any future year and the quantity of credits to keep in a bottom drawer.

Some commentators have advocated using the carbon pooling idea for large forest partnerships or even for the national estate. The trouble is, the 1990s boom-and-bust has left us with a highly unbalanced age class distribution – both nationally and within individual forest partnerships – and this will give us problems for generations to come.

Summary

Deforestation taxes will penalise anyone thinking of converting their land from forest to non-forest. It will also reduce the value of potentially convertible land even if you are not thinking of doing it. Free allocation of credits to pre-1990 forest owners provides a modicum of relief.

Awarding credits to post-1989 forest owners typically provides no risk-free benefit to anyone who planted pines before 1997, and limited benefit to new planters. Due to the strange Kyoto accounting rules which account for changes in each commitment period, the risk free benefit of post-1997 planting is restricted to the residual carbon left on the site after harvest. Having said this, there are considerable advantages in carbon pooling of stands of different ages.

Unless the ETS rules change, the forest sector is not likely to get the stimulus it needs from this initiative. The risk of eventual loss of control from tree planting will act as a powerful disincentive against new afforestation. Because of the necessity to retain a large proportion of the theoretical credits, financial advantages are modest, and will be partly lost from capitalisation into higher land prices for plantable land.

Next: Carbon updateNew Zealand Tree Grower November 2008

Piers McLaren is an independent forestry consultant

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