Farm Forestry New Zealand

Who would have thought? Advice to leave the ETS

Stuart Orme, New Zealand Tree Grower February 2014.

Once you are out of the ETS, the obligations against any forest planted after 1989 will be removed. Any units sold or still held become freehold.

For owners of larger forest the recommendation is to re-enter the ETS on the basis that if you have credits, you have options. There may be the opportunity to repeat the exercise again in 2015 and gain freehold credits for the 2013 and 2014 period as a new participant. The danger if you delay until 2015 is that the government may not be able to process your exit application and issue the required surrender notice before 31 May 2015. This is when the ability to use emission reduction units to defray your ETS obligation is expected to end.

What about small-scale forest owners, those with less than 25 to 30 hectares? Once they freehold their 2008 to 2013 credits, they will have the ability to monitor where the ETS goes between now and 2017. If they are happy with what unfolds they can re-enter and claim their credits back to 2013 for the 2013 to 2017 period.

How much longer will it last?

There is a large number of ‘pending eligible’ emission reduction units in Europe which may not be tradable there in the future. These pending eligible emission reduction units are the ones which have reached New Zealand recently. At the end of 2013, pending eligible emission reduction units were selling at 18 cents and eligible emission reduction units at 33 cents each.

Over the last six months we have seen the price as low as 12 cents and as high as 70 cents. The reasons always seems to be supply related – the fewer emission reduction units available, the higher the price. This may be simplifying the situation a little, but it is the advice we get from the wholesale buyers.

What does it look like?

The following tables on the next page look at various sizes of forest. The tables are based on a stand of radiata pine planted in 1995 in the North Island using MPI’s southern North Island region table for New Zealand Unit entitlement. There is a series of examples.

The column in the first table with the heading ‘6 years’ is the area in hectares of 1995 forest required to generate the number of New Zealand Units over the period 2008 to the end of 2013. The ‘1 year’ column
in the second table is the area required to generate the same number of units in one year. For example, approximately 4.5 hectares of forest will generate 1,000 units over the 2008 to 2013 period, whereas 27 hectares will generate around 1,000 units in 2013.

I have used $3.50 for New Zealand Unit and a price of 23 cents for an emission reduction unit or ERU. The surplus dollar columns estimate the how many dollars remain after costs are incurred to exit the ETS as well as to exit and re-enter the ETS if all the units are sold and the estimated costs taken from the amount paid.

The freehold New Zealand Unit columns indicate how many units might remain freehold if you sell a portion to pay for the transactions. Those remaining units are effectively freehold and have no ETS obligations attached to them. They can be sold at a time whenever it is most convenient to you.

Example of a stand of 1995 radiata pine planted in the lower North Island

Six years		Exit the ETS		Exit and re-enter ETS
Years 2008 to 2013	New Zealand Units	Surplus dollars	Freehold New Zealand Units	Surplus dollars	Freehold New Zealand Units
4.5 hectares	1,000	$2,111	603	$381	109
9 hectares	2,000	$5,611	1,603	$3,651	1,043
13.5 hectares	3,000	$9,111	2,603	$6,921	1,977
18.2 hectares	4,000	$12,611	3,603	$10,191	2,912
23 hectares	5,000	$16,111	4,603	$13,461	3,846
45.7 hectares	10,000	$33,611	9,603	$29,811	8,517
68.5 hectares	15,000	$51,111	14,603	$46,161	13,189
91.5 hectares	20,000	$68,611	19,603	$62,511	17,860

One year	Exit the ETS	Exit and re-enter ETS
One year 2013	New Zealand Units	Surplus dollars	Freehold New Zealand Units	Surplus dollars	Freehold New Zealand Units
27 hectares	1,000	$2,111	603	$381	109
54 hectares	2,000	$5,611	1,603	$3,651	1,043
81 hectares	3,000	$9,111	2,603	$6,921	1,977
108 hectares	4,000	$12,611	3,603	$10,191	2,912
135 hectares	5,000	$16,111	4,603	$13,461	3,846
271 hectares	10,000	$33,611	9,603	$29,811	8,517
405 hectares	15,000	$51,111	14,603	$46,161	13,189
541 hectares	20,000	$68,611	19,603	$62,511	17,860

The advantages of the options above will change on a client-by-client basis. We recommend that you contact a professional forestry advisor to discuss your individual situation.

Was it worth joining the ETS?

We have just worked the numbers for a client with the smallest area of forest to leave the ETS. They intend to do so in the New Year after they receive their 2013 credits. They have just over two hectares of forest and after all costs they will be cash positive with no ETS obligation on their land.

The ETS may have been a very disillusioning piece of legislation and an exercise in frustration for many from along the way. However, for those who have been involved it has the potential to be an exercise with a positive cash flow.

Emissions returns

Emissions returns for post-1989 forest which has been felled may have seemed a long way off back in 2008. But this year has seen several post-1989 forests felled to take advantage of good harvest revenues.

There is not time to go into how the diminishing credit allocation is handled in this article other than to say that it is different from what you have been used to. If you are doing your own emissions return for a stand such as this you may want to get advice before proceeding. Given that it is an important part of the ETS we will show some examples in the next Tree Grower article in May.

California issues first forestry offset credits

I recently met a Californian in New Zealand on a Fulbright scholarship looking at the ETS with a view to comparing it to the Californian model that went live this year. The United States now trades forestry credits in California. The following exerpt explains it a little more −

California businesses covered by the state’s cap-and-trade programme will soon be able to use forest conservation projects to offset the carbon emissions from their plants and factories after the state issued the first batch of credits.

Credits are issued to projects based on the number of tonnes of carbon sequestered in trees in the forest. To qualify for carbon credits, projects must store the carbon for at least 100 years, among other requirements. Carbon offsets act as a cost-containment mechanism in the carbon market because offsets generally cost less than state-auctioned carbon allowances. Carbon allowances were valued at about $12 each in the secondary market, while carbon offset credits were available in the $9 range.