A ‘hot’ topic at the moment that everyone has heard about but few actually understand is the Emissions Trading Scheme or the ‘ETS’.

Background

The ETS is what New Zealand has put in place through the Climate Change Response Act (“the Act”) to meet its requirements under the Kyoto Protocol.  This article deals with the effects of the ETS on Forestry. 

Key Points

• The Act creates Carbon Credits (called NZUs) to recognise the carbon stored in standing forests;
• If you collect carbon credits then deforest then you will have to pay back these carbon credits (also known as deforestation tax); and
• The Act treats pre-1990 forests and post-1989 forests differently.

Will look at:

1. What is a forest and deforestation?

To qualify as ‘Forest Land’ the forest must:

• Be at least one hectare in area;
• Be planted in trees that are capable of reaching five metres in height at maturity;
• Have crown-cover of more than 30% on each hectare; and
• Have an average crown-cover width of at least 30 metres.

Deforestation is when forest land is cleared and converted to another use.  For example, clearing forest and converting that land for use as a dairy farm will qualify as deforestation.  Harvesting and replanting or simply allowing regeneration of native or exotic forest will not usually equal deforestation PROVIDED at four, 10 and 20 year intervals after clearing the forest the land achieves minimum stem numbers or percentage of tree crown cover.

2. Pre-1990 forests

Pre-1990 forests are forests planted in exotic species (eg pine) prior to 1 January 1990 and not deforested as at 31 December 2007.  These forests are automatically captured by the ETS. Also, in most cases, land that on 31 December 1989 was covered in indigenous forest (eg manuka or kanuka) and replanted in exotic forest after 1 January 1990 is classed as pre-1990 forest.

As a pre-1990 forest owner, if you deforest more than two hectares of land in any five year period from 1 January 2008, you will automatically become a participant in the ETS ie to pay deforestation tax if you do not replant.  There are exemptions available if the forest is legitimate tree weed forest or less than 50 hectares.

All pre-1990 forests are captured by the ETS.

In recognition of the effect it will have on land values and potential liability, free allocation units (or carbon credits) are available to forest owners that can be traded on the emissions market or banked for future use or trading.

3. Post-1989 forests

Post 1989 forests are exotic or indigenous forests established after 31 December 1989.  These forests are eligible to earn NZUs (carbon credits) from 1 January 2008.  In order to receive NZUs then the forest owner must ‘opt in’ to the ETS. 

If you opt in to the ETS, you will have to return NZUs at harvest or if the forest is destroyed by fire, disease or other natural event but will be able to reclaim them if you replant as the new forest grows.

If you do not ‘opt in’, you can deforest your post-1989 forest without any liabilities and there is no obligation to participate in the ETS.

What do I do with my NZUs/carbon credits?

NZUs can be surrendered if you deforest land that is subject to deforestation tax or be traded for money on the carbon markets (much like a share on the stock market).

4. Key dates

a)  Pre-1990 forests

If you do not apply for an exemption or allocation of NZUs then you will not get them!

b) Post-1989

A land or forest owner may decide to ‘opt in’ to the ETS at any time, however, in order to claim NZUs for the five year period from 1 January 2008 to 31 December 2012 the land or forest owner must apply prior to 31 December 2012.

Summary

• An NZU (carbon credit) is like a share on the stock market - you do not get money until you trade your credits.
• If you collect NZUs then deforest (pre-1990) or harvest or lose the forest to disease, windthrow or fire (post-1989) you will have to return carbon credits (deforestation tax).  If you have already sold your NZUs you will have to buy them on the market for the then market price.
• If your forest is pre-1990 forest land and you do nothing, you are still liable for deforestation tax if you deforest, so it seems in your best interest to claim the available carbon credits unless you get an exemption.
• If your forest land is post-1989 you have a choice as to whether you join the ETS.  If you do join the ETS you can claim NZUs and hold them until you deforest or trade them on the carbon markets.  If you don’t join the ETS you can deforest as much as you like without any liability.
• Liability for repaying the NZUs lies with the landowner.  A purchaser of land must very thoroughly check if land has been deforested or harvested prior to purchase as a liability may be incurred.  Likewise it is important to check whether a forest on the land is part of the ETS.