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Foresters grapple with devils in emission trading scheme's details

By Geoff Thompson, Consultant

First published in the NBR, 4 December 2009

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Owners of forests have learnt to be patient.  Thirty-year investment returns have been the norm but the proposal for an emissions trading scheme and issue of carbon credits seemed to change the numbers.

For owners of younger forests this may shortly become a reality with an ability to sell credits from growing forests to gain an advance payment on the harvest.

But for owners of older forests, benefits from the new regime could still be some time coming.

This has become clear from the Government’s two-pronged approach – by urgently passing the Climate Change Response (Moderated Emissions Trading Scheme) Amendment Bill, which includes changes for the forest industry and the issue of a new draft pre-1990 forest land Allocation Plan, which sets out the details for the provision  of credits to owners of pre-1990 forests.  The two provisions are intended to co-mingle and give Ministers a platform for presentations at the upcoming United Nations Climate Change Conference in Copenhagen.

The debate was intense as there are plenty of uncertainties but forestry was not the focus of those arguments.  In reality, forestry is the answer for New Zealand’s search for carbon credits and forestry’s concern is about the demand side of the business and whether new planting will be worthwhile for the dual return of credits and timber.

So what will this mean for the pre-1990 forest owners and where are we now?

1.  The much disputed Climate Change Response (Emissions Trading) Amendment Act, in force from 26 September 2008, introduced the deforestation penalty regime for pre-1990 forests.  The provisions have remained largely unchanged by the new law.

2.  In general, owners of the freehold of land forested before 1990 are automatically included in the penalty regime and the compensation system.  The following exemptions apply:

2.1  The area of deforested land must exceed two hectares.

2.2   If the area of forested land is less than 50 hectares, an application can be made before 1 July 2010 to claim exemption from the Scheme.  That means no penalty for deforesting and no credits being issued (there are some definition issues to be clarified about the 50 hectare limit).

3.   “Deforestation,” in general terms, means removal of the trees and not replanting within four years. Replanting requires at least 500 stems per hectare, expecting to provide a canopy of 30% coverage and a height of five metres after 10 years.

4.    The deforestation liability is calculated by reference to the age of trees when cleared.

This last provision is a “black hole” of uncertainty at this stage.  The references are made to surrendering units equivalent to the carbon lost on harvest.  This could be a very high cost.  Minister Nick Smith intends to raise with Kyoto parties proposals to moderate the penalty regime for harvested trees.  He argues that not all the sequestened carbon is lost on harvest,  it can stay stored in the downstream timber products.

5.    For any clearing after 1 January 2008, a return has to be filed with MAF.  There appears to be no obligation to file, if no “deforestation” has occurred.  As there is a period of four years provided to decide whether to replant, the harvested area can remain in “ETS limbo” for that time.

6.     In the meantime, though, the compensation provisions kick in.  The Allocation Plan deals with the issue of a block of carbon credits by the Government at the following levels:-

6.1   If you’ve owned the land since before 31 October 2002 (and if a company, the majority of the shares haven’t changed hands since then) 60 units per hectare of planted exotic forest will be allocated.

6.2   If you’ve bought the forest since 31 October 2002 (or the company share ownership majority has changed) the allocation is 39 units per hectare.

6.3   18 units per hectare will be allocated in respect of Crown Forest Land or Treaty settlement land acquired after 1 January 2008.

7.     The Allocation Plan is timed to come into force on 21 December 2009.

So is this the Christmas present?

It doesn’t look like it, because the Plan allows the actual transfer of units to be deferred and for the unit numbers to be changed.  For instance, the 60 unit owners may receive 23 units per hectare by 31 December 2012 and 37 units thereafter.  The 2012 date is the end of the Kyoto First Commitment Period.  What happens post Kyoto depends on international agreements being sought and the Copenhagen Conference is one of the major efforts to secure a post-Kyoto regime.  The Government concedes that if post-Kyoto allows other compensation mechanisms, like off-set planting, the unit allocation could be cancelled.  However, New Zealand could face a tough task in getting off-set planting accepted.

8.     Another area of uncertainty is around the person entitled to receive the credits.  Lawyers should now be alert to the conveyancing implications of sales of forestland where credit entitlement arises, but credits have not been allocated.  And the converse applies where the units are issued but the penalty provisions haven’t kicked in because of no harvest or the four year replanting window is still open.

Lawyers should also be alert to the new rules about timing of eligibility.

The Act refers to the “forest owner” as the owner of the freehold.  It is unclear whether the owners of a forest right receive the allocation.  It seems unlikely because the penalty for which the allocation is issued applies to the land, not the trees.  In effect, the penalty applies to the change of land use and the loss of carbon sequested in the former forest.  The issue of credits is a form of compensation for loss of land value, and is unique to the forestry sector.

There is plenty of new and difficult material to absorb. Foresters should be keeping pace with these changes and they will need to be ready to make some significant decisions.

Geoff Thompson is a consultant with national and trans-Tasman law firm Duncan Cotterill, which has a specialist Climate Change team. G.thompson@DuncanCotterill.com