• News & Events
• News
• News Archive
• Media Contact

The Money Tree and the ETS

How does the ETS apply to forests?

The scheme distinguishes between forests planted before 1990 and those planted after. Kyoto is about reducing carbon dioxide from 1990 levels so basically existing older forests are out and new forests are in.

Pre-1990 forests are automatically in the ETS and are essentially locked in to remaining forests for good, you can get a one-off allocation of credits but that is it.

For 1990 forests onwards, however, the rewards are much greater. You can choose to join the scheme and are then entitled for credits for each year of growth starting in 2008. For example, for exotic species such as a 10 year old pinus radiata forest planted in the 1990s, the credits could be worth around $600 per ha per annum at today’s carbon prices.

What’s in it for farmers? What are the pros and cons for a farmer or forest block owner of joining the ETS?

The cash revenues can be around $600 per ha each year if you sell all credits you receive. Older forests can get up to $1,080 per ha but only as a one-off allocation. That is good return where previously only timber revenue was available.

One interesting point for younger forests is that they are eligible to receive credits from 1 January 2008 onwards so you could sit around $1,800 per ha for the last three years of growth alone.

The downside is managing the carbon liability. While you can sell all credits now, they may cost you more to purchase back at a later stage when you need them. At the moment, you are liable to surrender credits on harvest or due to a natural loss of trees such as wind-throw, land-slip or disease.

There is also a risk that while forests are an asset, you could compromise their value if you sell down all credits received now and future generations or a new purchaser is left to deal with that carbon liability.

How can these liabilities be managed but still allow credits to be sold?

That is the key question. My advice to forest owners would be to have a clear carbon strategy. By all means participate in the ETS but make sure you can meet any liabilities going forward. Essentially that means getting hold of considerable credits at some future date in a market that fluctuates. I’m advising forest owners to consider multiple strategies to manage this.

What are those strategies?

The market will develop its favourite solutions in time but right now I see them as follows:

(a)  Can you sustain a forest as a permanent forest and never cut it down? The longer living species such as douglas fir or redwoods could be a good option there;

(b)  You could retain a number of credits each year in your holding account, building up a bank of credits just in case;

(c)  Plant some new forest on more marginal land where other returns are low, start to accumulate credits there for future use or to pay for ETS emissions from other farm activities from 2015 onwards;

(d)  Engage a carbon broker to help you buy and sell credits with the market movements aiming for sales at a high price and purchase back when the price drops;

(e)  Purchase a forward contract for future delivery of credits. For example, you sell credits now for $18 but buy a forward contract for delivery in say 10 years at a price of say $12. In that case you have fully covered your liability and made $6;

(f)   Consider joint ventures with carbon foresters. A number of larger players will emerge who will offer to pay for your planting costs and split the revenue from timber and carbon. Just check their credit worthiness before you commit;

(g)  Insurance. This will develop to cover carbon liability but the price will likely reflect the higher risk of moving prices and a new product. It will probably not be a total solution to cover all liability but may be sufficient to cover unexpected liabilities, say from a run of trees lost to a storm;

(h)  Timber revenues on harvest could be used to purchase credits back at that stage.

How does it work in practice?

Say you have two forest blocks, one planted in 1985 of 27ha and one planted in 1994 of 20ha.

The older forest has been owned since before 1 November 2002 so it is entitled to the full 60 units per ha as a one-off allocation. That’s a total of 1,620 credits and at $18 per unit a value of $29,160. That seems like a good free allocation but once taken you are locked into the ETS and cannot deforest. So it may be better to seek an exemption (under 50ha) if that land has good value for alternative uses post harvest.

The newer forest is a better candidate for ETS. It will receive credits for each year of growth after 2008. It has around $1,800 per ha from the years 2008, 2009 and 2010 so totals $36,000 at $18 per unit. It should continue to grow for another 14 years to a 30 year harvest age. That could generate $12,000 each year or $168,000 in total. However, you will need to meet the return of majority of credits at harvest so not all that cash is bankable unless, of course, you never harvest which is one solution. 

If you didn’t want to participate in the ETS is there any way to opt out?

For pre-1990 you can opt out if you have less than 50ha. Like anything, the devil is in the detail but opting out in the next 12 months could be the right choice.

You can also take out up to two hectares every five years without liability. That may assist harvest decisions or cover some minor forest loss through wind-throw. There is also exemption for removing tree weeds such as wilding pines.

For younger forests it is entirely your choice whether to join the ETS. Once in you can exit the scheme provided you return the same number of credits received.

This seems fairly complex, what should farmers and foresters do to understand more?

Unfortunately it is as complex as tax legislation and it is a brand new product and market. Duncan Cotterill has been working on this area for some time to better advise our clients.

The MAF website is also a good starting point, it has some useful guides.

Good advice on the legislation and the tax and accounting side are essential. Some ill-informed choices now could lead to significant loss at a later stage and compromise the value of your land. It will take some time for the general market and professional advisers to get familiar with transacting carbon as a product and catering for carbon liability on land sales and acquisitions.

For further information, please contact:

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