Unlocking the cash in carbon credits

By Oliver Roberts, Partner

Forest owners who join the ETS should be cautious in deciding what proportion of carbon credits to sell and what to do with any cash proceeds.

Oliver Roberts, a Partner with law firm Duncan Cotterill, said that one of the most difficult aspects of the ETS for forestry is how to sell down current credits received yet hedge the future carbon liability.

“At prices around $18 to $20 per credit, it is a very attractive revenue stream to sell down forestry credits received now through the ETS. Many forest owners are keen to participate in such revenue streams and see carbon as attractive additional revenue to longer term timber revenues.”

“The sting in the tail, though, is how to balance short term income gains against future liability? What will carbon credits cost to replace?” Roberts asked.

Banks also see this as a good source of income for leveraged clients, allowing them to reduce lending and improve debt to equity ratios. However, they may not have fully considered the impact that carbon liability may have on their clients’ financial security in the long term, he said.

“Some view it as a long term contingent liability so are happy to ‘take a punt’ on future prices of carbon and accept some risk. But the danger is that as living assets, forests are susceptible to natural disasters such as weather and disease. These can cause unexpected carbon liabilities to occur well before any timber is harvested.”

He said that as maturing assets, the health of a forest may become compromised if trees are left standing where timber value declines or the susceptibility to wind-throw increases.

“Coupled with a constantly variable carbon price, it is very difficult to quantify carbon liabilities moving forward. Harvest decisions must also now balance the cost of carbon liability which is dependent on carbon prices at that time.”

Roberts said that solutions are likely to emerge as the New Zealand carbon market matures. This may consist of forward carbon supply contracts with operators selling carbon credits now for a discounted price against future delivery in, for example, 10 or 20 years. Insurance companies may extend fire and wind policies to include carbon liability. Farmers may seek to convert their more marginal land for new forest plantings to cover their own carbon liabilities moving forward.

“As these solutions come to the market it will be much easier for foresters to cover their carbon liability,” Roberts said. Until that time ETS forestry participants will need to proceed with caution.

For further information, please contact:

Oliver Roberts, partner, Duncan Cotterill, 03 379 2430, 021 860 041, o.roberts@DuncanCotterill.com

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