Outstanding Pre 1990 Forest Issues

Briefing for the Climate Change Leadership Forum
Prepared by the Emissions Trading Group
30 November 2007

Overview

  1. This paper discusses a number of issues relating to the treatment of pre 1990 forest in the NZ ETS.  The first section considers different options for targeting assistance to owners of pre 1990 forest land; one of the key areas of concern that has been expressed around the current proposals for inclusion of pre 1990 forest in the ETS. 
  2. The second and third sections consider how Crown Forest Licence Land should be treated from the perspective of allocation, and whether pre 1990 indigenous forest should be brought into the ETS.  These issues are more technical in nature, and have been provided primarily for your information only. 
  3. All three sections include discussion of options that have been suggested by key stakeholder groups, especially Maori. 

Section 1: Targeting of assistance to pre 1990 Exotic forest owners

Context

  1. Under the ETS Bill owners of pre 1990 forest land will receive, in total, a fixed overall level of assistance equivalent to 55Mt of emissions.  The bulk of this assistance will be provided through the free allocation of NZUs (with the remainder provided through the granting of two exemptions from the deforestation requirements – a 50 hectare exemption and 2 hectare deforestation allowance).  While not stipulated in the Bill itself, the government’s current proposal is to allocate these units to landowners on the basis of land area [This discussion deals with plantation forests only.]. 
  2. The government estimates that, once the cost of the two exemptions has been taken into account, landowners covered by the scheme will receive a free allocation of allowances of approximately 39 units per hectare.  This is considerably smaller than the provisional estimate of deforestation liabilities for mature Radiata forest of approximately 800 units per hectare. 
  3. This approach has been relatively heavily criticised by elements of the forestry industry.  The key concerns expressed are that:
    • That the proposed level of compensation per hectare (through free allocation) is insufficient where landowners have viable alternative commercial land uses available;
    • There is no recognition that some landowners will suffer significantly greater losses than others;
    • Some owners either were not aware these changes were coming, or were unable to deforest prior to 2008 due to being tied into long term forest contracts.

Discussion

  1. The government considers that it is the proposed targeting of assistance for pre 1990 forests, rather than the overall level, that is most validly open to criticism. 
  2. The overall level of assistance proposed for pre 1990 forests is relatively generous to that proposed for other sectors.  The total level of assistance of 55Mt is equivalent to the industry’s full historic rate of emissions for 28 years.  Further, the forest industry is unique in having had six years forewarning of the likelihood of policy changes of this nature, and the ability to bring forward their deforestation to avoid liabilities.
  3. Under the proposed targeting approach the 55Mt of assistance will be allocated equally across all landowners regardless of the quality of their land.  However, the costs of the ETS will not fall equally on all landowners.  Those with high value alternative uses will be significantly more heavily affected.  As a result, those parties wanting to deforest their land will be required to surrender a significantly greater number of units than they have been freely allocated. 
  4. The following sections discuss a number of possible options for targeting the proposed assistance more tightly. 

Selection Criteria

  1. None of the available targeting options is perfect.  To guide the choice between the options it is therefore important that the government has a clear understanding of the different qualities that their chosen option would ideally have, and the relative importance of each criteria where tradeoffs between them are necessary.  A ‘perfect’ approach to the targeting of assistance would ideally:
    • See the assistance going to the groups the government is most concerned about;
    • Protect the price signals provided by the ETS;
    • Be relatively easy and cost effective to operate;
    • Not impose unduly high fiscal costs or risks on taxpayers.
  2. The first two of these criteria are discussed further below.

Groups of Greatest Concern

  1. The government considers that the parties with the strongest claims for greater levels of assistance are those who:
  1. Have land which is most suitable for conversion to another commercial use
  2. Purchased their forest land before 2002 when the government announced its intention to introduce some form of deforestation controls
  3. Were unable to take advantage of the 2002-2008 period to deforest key areas of their land due to:
    • Having ceded control over the forest over that period through some type of long term agreement, such as a lease or forestry right;
    • Having less ability to access the resources needed to deforest, such as owners of relatively small areas of forest.
  1. In practice it is unlikely to be possible for the government to equally target all of these characteristics; some choice between them is likely to be necessary.  The above list is set out in the government’s suggested order of priority.
  2. Maori are particularly heavily represented in this group of landowners of concern.  While they are large owners of forest land, they are not large owners of the forests themselves.  We understand that a number of iwi groups have not had an opportunity to deforest prior to 2008 as their land has been covered by long term agreements such as Forestry Rights.  In addition, many Maori groups have expressed the view that they are less able to sell their landholdings, so are more heavily affected.  Further, some perceive that they were actively encouraged to plant trees on their land by previous governments, so have expressed concern about being ‘locked into’ a land use which is potentially less profitable than alternative options.

Protection of ETS Price Signals

  1. Probably the most effective way to target assistance to the parties that have land with commercially viable alternative uses is to tie the provision of assistance to the act of deforestation.  In this way, only parties that actively demonstrate their willingness to incur deforestation costs will receive assistance.  There are a number of different ways that this can be done, but all work on the principle of encouraging the parties to reveal their desire to deforest.  Such options are therefore sometimes referred to as ‘revealed preference’ approaches.
  2. While revealed preference approaches are effective at targeting assistance to those who will be most affected by the introduction of the ETS, all have an important inherent weakness: they work by reducing (but not removing) the cost of deforestation and therefore necessarily undermine the price signals the ETS was designed to establish. 
  3. The government therefore faces a key choice between targeting assistance to the parties that will be most heavily affected by the ETS on the one hand, and maximising economic efficiency by preserving the price signals created by the ETS on the other.  This is a particularly important choice in the case of deforestation, as reductions in the rate of deforestation have been identified as one of the key, lower cost options for reducing emissions in New Zealand over the short term. 
  4. The government’s current view is that it should avoid undermining the ETS price signals unless there are strong reasons for doing so.  

Description and Discussion of Generic Options

  1. Officials have identified a range of generic options for targeting assistance to pre 1990 forest owners, including several options that have been suggested by industry stakeholders:
    • Targeting on the basis of land use capability;
    • Targeting on the basis of other characteristics of concern;
    • A progressive obligation;
    • A subsidised offset regime;
    • A subsidised auction;
    • A (criteria based) application process.
  2. In practice, the government may choose to introduce a mix of these different generic options. 

Targeting on the basis of land use capability

  1. The option of targeting assistance on the basis of Landcare’s land use classification (LUC) database was considered in some depth during the initial policy development phase.  It was ultimately rejected because of imperfections in the available data.  Landcare’s land use classification system was never intended to be used to target assistance in this way.  If it were used it is inevitable that the quality of some parties’ land would be assessed incorrectly and as a result they would be over or under compensated. 
  2. That said, while not perfect it is clear that this approach would be more successful on average at targeting assistance to those groups that will be most heavily affected by the ETS than the current pro rata approach.  The government is also relatively confident that despite its shortcomings, the use of LUC data to target assistance could be done in a way that avoided the risk of legal challenge. 
  3. In summary, while imperfect, this approach is workable and could be re-considered if it was considered fairer than the simple pro rata approach. 

Targeting other characteristics of concern

  1. As noted, there are a number of different characteristics that define the group of forest land owners that the government is most likely to want to target assistance to.  The suitability of that land for conversion to alternative uses is one key characteristic.  But the government would ideally also target those who purchased their forest land before 2002, and/or were unable to take advantage of the 2002-2008 period to deforest, and/or only own relatively small areas of forest land.
  2. The government could make eligibility for receiving some, or all, of the 55Mt assistance package conditional on these additional criteria.  This could need to be done through an application process, or through a declaration-based approach where the administrator reserved the right to audit a suitable number of declarations. 
  3. Preliminary analysis suggests that around 55% of the pre 1990 forest estate was either purchased by the current owner after November 2002, or is Crown Forest Licence land currently owned by the government (which will likely be sold in time to successful Treaty claimants at a price that reflects the impacts of the ETS – see discussion in section 2 below).  Limiting the free allocation of NZUs to private sector groups that purchased their land before November 2002 would therefore see the number of eligible owners reduced by over half, and therefore see them receiving in excess of twice the number of units per hectare than they would have been given under the simple pro rata approach. 
  4. Similarly, the size of holdings of owners of pre 1990 forests is highly skewed.  While there are roughly 4,000 owners of pre 1990 forest land, the top 10-15 firms hold the bulk of the estate.  Any decision to target the allocation of NZUs to smaller landowners would therefore see those eligible receiving a significantly increased level of units per hectare. 
  5. The government does not have good information on the number of parties that have been unable to deforest in the 2002-2008 period due to having delegated the forest management function to a third party. 

Progressive obligation

  1. Under this option the size of the deforestation charge would be increased in steps as greater areas of land were deforested.  Building off the existing threshold, the first 50 hectares of deforestation could be made free for all participants, the second 50 ha charged at 1/3rd of the normal rate, the third 50 ha at 1/3rds the normal rate, and then the full charge levied on any deforestation over and above 150ha. 
  2. This is one form of the ‘revealed preference’ approach discussed above.  However, the degree of targeting is constrained by the fact that assistance for any one participant is limited to the deforestation of 150ha.
  3. One of the weaknesses of this option is that it would make it difficult for the government to control the total level of assistance provided, as that cost would depend on the level of deforestation that ultimately occurred.
  4. Another key weakness of this option lies in its administrative implications.  The differential charges could either be tied to individual parcels of land as was proposed for the existing 50ha threshold, or to individual participants.  The option of tying them to the land would necessitate the creation of two more different classes of partially exempt land, which would need to be taken into account when land was bought and sold, and tracked through the MAF forestland database.   Alternatively, tying the differential charges to individual participants would increase incentives on parties to deforest prior to selling their land, and for parties who owned less than 150ha of pre 1990 at the time of the scheme’s introduction to buy more in order to take advantage of their ability to deforest it more cheaply than the previous owner could. 

Subsidised offset regime

  1. Under this option the participants would be allowed to ‘shift’ areas of their pre 1990 forest after harvest by planting an appropriate area of forest in a new location.  The government would meet the cost of the deforestation liability and retain the credits for the new forests as they grew.  To reduce the costs to the Crown, and maintain incentives on forest owners to only shift their forests where the original areas had a truly higher value alternative land use, it would be sensible to require a greater area of land to be re-planted in the new location; say 2-3 times, or more, the original area of forest.  This is another ‘revealed preference’ approach.
  2. Depending on the number of hectares of new forest that had to be planted for each hectare deforested, this option would be potentially costly for the government.  The deforestation liability involved would be incurred by the government immediately, but the bulk of the replacement credits would not be earned until 2-3 decades later.  This option would therefore need to operate under a fixed annual budget and application process.  This option would also see the Crown facing relatively high levels of fiscal uncertainty for an indefinite period of time, as it would continue to carry the liability for all harvesting and replanting of the new offset forests in perpetuity. 
  3. Lastly, it should be noted that this option may not lead to substantially greater levels of new planting than were otherwise likely to occur (in other words ‘additionality’ can not be guaranteed).

Subsidised Auction

  1. Under this option the government would auction deforestation-specific units, and would subsidise their cost so that they sold at a discount relative to the normal domestic market price for NZUs.  The actual price paid would be determined by the level of demand for the deforestation units, ensuring that there was no unmet demand.  This is another example of use of the ‘revealed preference’ approach. 
  2. As noted, the units auctioned would need to be deforestation-specific, not generic NZUs.  They would be freely tradable domestically, but would only be able to be surrendered to cover emissions from deforestation. 
  3. If this option was taken a decision would need to be taken about how to treat Crown Forest Licence (CFL) forests.  It would be likely to be necessary for the Crown, or Crown Forest Rental Trust, to participate in the auction process. 

Deforestation assurances issued through an application process (Ngai Tahu option)

  1. The property division of Ngai Tahu has written to the government suggesting an alternative approach to allocation for pre 1990 forests.  In essence that proposal is for the government to agree to fund deforestation of 35,000 hectares of pre 1990 forest during CP1 (equivalent to approximately 28Mt of emissions) and for individual forest owners to apply to have the costs of their deforestation met from that deforestation pool.  They have not suggested what criteria the government should use to determine which applicants to approve in the event that applications exceed the 35,000 hectare limit. 
  2. This option shares the key weakness of all of the ‘revealed preference’ based approaches in that it will reduce the effectiveness of the price signals provided by the ETS.  It would also leave the government to determine how to prioritise between applicants, which is likely to prove administratively difficult and contentious.  It should also  be noted that the suggested level of deforestation of 35,000 ha in CP1 would lead to emissions of 7 million tonnes more than the government’s previous commitment to meet the cost of 21 million tonnes of deforestation in CP1. 

Possible Allocation Packages

  1. Officials’ advice is that none of the individual options discussed above is likely to be preferable, when used on its own, to the currently proposed pro rata approach.  A complete shift away from the pro rata approach would risk leading to too great a change in the distribution of the assistance package, thereby creating a new set of winners and losers. 
  2. Officials recommend Ministers express a tentative preference for continuing to provide the bulk of the assistance package through the pro rata approach, but using one or possibly two of the more highly targeted approaches to provide the final, say 33%, of the value of the package. 
  3. However, there are some individual options, and package approaches, that officials recommend should be rejected altogether:
    • Subsidised Offset: The level and nature of targeting of assistance achieved under this option can be provided more easily through the subsidised auction approach.  But the subsidised offset option has the disadvantage in creating an ongoing fiscal risk for the Crown.
    • Progressive Obligation: The limited degree of targeting provided by this option can be achieved through a mix of the current pro rata approach and targeting on the basis of land use capability (see below).  But the progressive obligation has the disadvantage of having an uncertain total fiscal cost, imposing higher administrative costs, and undermining the effectiveness of the ETS price signals.  
    • Deforestation assurances issued through an application process (Ngai Tahu Option): The key weakness of this option is that it fails to address the crucial question of how to determine which landowners to give priority to in the highly likely eventuality that the demand for deforestation assurances exceeds the available supply. 
    • Avoid Combining Too Many Options: While possible in theory, in practice combining too many of the individual approaches discussed above is likely to be confusing and administratively difficult. 
  4. If a shift away from the current status quo approach is to be made, the government therefore has a preliminary preference for one of the following three allocation packages:
    • Moderately targeted: Use the currently proposed pro rata approach to provide 2/3rds of the assistance, and allocate the remaining 1/3rd to those who purchased their land prior to 2002.  (This package could be refined further to limit the 1/3 rd additional assistance to those that purchased their land prior to November 2002 and were unable to deforest their land during the 2002-2008 period – the approach proposed by the Maori Reference Group – or owned less than, say, 150ha of forest land).
    • More strongly targeted on basis of objective criteria: Use the simple pro rata approach to provide 2/3rds of the assistance, and allocate the remaining 1/3rd on the basis of Landcare’s land use capability classifications.
    • More strongly targeted on basis of revealed preferences: Use the simple pro rata approach to provide 2/3rds of the assistance, and allocate the remaining 1/3rd through a subsidised auction.

Moderately targeted package

  1. The impact of this option would be to increase the total assistance given to those parties who purchased land prior to November 2002 from the current 39 units per hectare to 83 units per hectare (an increase of 214%).  However, those groups that purchased their land after November 2002, and government owned CFL land, would see their allocation reduced from 39 units to slightly over 16 units per hectare. 
  2. The targeting under this option could be tightened further by limiting the 1/3 rd additional assistance to parties that were also unable to deforest during the 2002-2008 period, and/or owned relatively small forest holdings.  The government does not have sufficient information to estimate what additional impact these additions would have.
  3. The key strengths of this package are that it:
    • Takes account of the fact that parties that purchased their land after 2002 are likely to have seen the cost impact of the ETS at least partially reflected in their purchase price;
    • Does not create any fiscal risk for the Crown.
  4. In turn its key weaknesses are that it:
  5. Does not take account of differing levels of land quality, and therefore the likely size of the impact of the introduction of the ETS on land values.

More strongly targeted package through use of Land Use Criteria

  1. This option would lead to the owners of higher quality land receiving a higher level of assistance.  The degree of differential of assistance that resulted would depend on the allocation weightings attached to different land use categories.  The key strengths of this package are that it:
    • Has a clear focus on the likely impact of ETS on land values and profits;
    • Does not create any fiscal risk for the Crown
  2. In turn its key weaknesses are that it:
    • Is likely to lead to some landowners being under or overcompensated due to imperfections in the LUC data;
    • Will provide assistance to landowners that purchased their land after 2002.

More strongly targeted package through use of a subsidised auction

  1. This option would see those that had a desire to deforest, as well as the financial and analytical resources needed to participate in the auction process, receiving a higher level of assistance.  The level of price-discount of the subsidised deforestation units, and therefore the value of the assistance package, would depend on the demand for deforestation relative to the number of units the government is willing to pay for.  The key strengths of this package are that it:
    • Is effective at targeting assistance to those parties that have demonstrated a desire to deforest;
    • Does not create any fiscal risk for the Crown.
  2. In turn its key weaknesses are that it:
    • Is likely to be hard to understand (especially for less sophisticated, non-corporate owners);
    • Requires parties to incur spending ‘up front’, in advance of the deforestation (some parties may lack the necessary financial resources);
    • Will lead to higher levels of deforestation than the current simple pro rata approach (up to the full number of deforestation units auctioned);
    • Creates difficulties around the treatment of Crown Forest Licence forests.

Conclusions

  1. Officials advise that the choice between these options should ultimately be based on preferences in two key areas:
  • The relative degree of concern about giving too much assistance to parties that:
    • a. purchased their land after 2002 or
    • b. have land that is not suitable for conversion
    • The level of concern about weakening the price signals provided by the ETS.
  1. If the greater concern is to avoid over-compensating parties that purchased their land after 2002 (including CFL land that has yet to be transferred) the first package – combining the pro rata approach with an additional allocation for those non-government parties that bought their land prior to 2002 – is likely to be best (either with or without the additional targeting towards parties that were unable to deforest during the 2002-2008 period, and/or own relatively small forest holdings). 
  2. In contrast, if the greater concern is to avoid over-compensating parties that have lower quality land, their choice between the other two packages should be based on the strength of their concerns around maintaining the price signals provided by the ETS.  The second package – combining the pro rata approach with an additional allocation for parties with high quality land (as assessed by Landcare’s land use capability scores) is likely to be preferable where there is a strong concern to maintain the price signals to reduce deforestation emissions.  And the third approach – combining the pro rata approach with a subsidised auction – is likely to be preferable where government are comfortable to see some increase in deforestation levels. 

Section 2: treatment of cfl land for allocation purposes

  1. In its ETS engagement material the government indicated an initial preference for providing a notional allocation of NZUs for Crown Forest Licence (CFL) forests to provide options in the likely event that those lands were subject to a Treaty claim, or used as part of a Treaty settlement.  This is because any future owners are not in a position to apply for an allocation of units on their own account.   Maori leaders have proposed an alternative approach for allocation to CFL, which is discussed below. 

Background

  1. Under the Treaty settlement process, claimant groups negotiate a quantum of settlement with the Crown.  They can then choose to take that quantum in cash or assets. 
  2. Since 1989, and the passage of the Crown Forests Assets Act, these settlement assets have included CFL land.  The Act resulted from negotiations between the Crown and Māori following a legal challenge by the New Zealand Māori Council to the Crown’s proposal to transfer Crown-owned land to State-Owned-Enterprises.  The CFL lands are owned by the Crown, but have been set aside for Treaty settlement purposes. 
  3. There are strong incentives for those claimant groups that have CFL land in their area of interest to use their entire quantum to purchase land.  This is because when CFL land is purchased as part of a settlement, the CFL rentals that have accumulated against that land since 1989 also transfer to the claimant group. 
  4. These accumulated rentals are not considered to form part of the quantum, nor are they reflected in the transfer value of the land (as they can essentially be seen as providing compensation for lost profits during the time taken to settle).  Depending on the particular CFL, these accumulated rentals can significantly enhance the total value of a settlement.
  5. After introduction of the ETS, pre-1990 forested land values will fall, reflecting some loss of land use flexibility imposed by the deforestation provisions.  In general, this will allow claimants to purchase more CFL land, and receive more accumulated rentals, than would otherwise have been the case.  However, there will be some groups that face limits on their ability to benefit in this way, due to do not having sufficient CFL land in their area of interest.

Maori Leaders’ Proposal

  1. An alternative approach to the allocation of NZUs for CFL land has been proposed by the Iwi Leadership Group (ILG) and the Maori Reference Group Executive (MRGE).  At a national hui covering the proposed NZ ETS on 26 October 2007 and at a national Maori foresters hui on 8 November 2007, participants agreed to:

    “support allocation of New Zealand Units (NZUs) aligned with Crown Forest Lands (CFLs) to an approved Maori body for immediate use on the condition that the value of the equivalent NZUs will be made available when claimants settle CFL lands;  and

    Tag part of the use of CFL NZUs specifically for ongoing Maori education and research on the Maori economy as determined by Maori including wananga, Maori carbon trading, Maori science etc.”

  2. Central to this proposal is the Crown agreeing to transfer the value of the CFL related NZUs to successful claimants, without the value of these units being counted against their quantum of settlement. 

Comment

  1. Under the government’s current in-principle decisions, successful claimants considering taking CFL lands would have such lands valued at that land’s highest and best use.  With the introduction of deforestation liabilities, this is likely to be forestry in all but a handful of cases.  This, combined with the effect of not having as much flexibility over future land use, is likely to mean lower land valuations per hectare for CFL lands. 
  2. Generally then claimants will receive more CFL land for a given settlement quantum (and more accumulated rentals as a result).  In addition, because claimants will be fully aware in advance of the effect of deforestation liabilities there does not appear to be a case to provide ‘compensation’ to such claimants in the form of additional gifted units.  The units would be purely windfall gain[We note that other landowners may receive some windfall gain from the allocation of units where they have no intention of deforesting.  However, even in such cases the landowners are still likely to lose some land value due restrictions future land use flexibility. ].
  3. In considering this issue it is important to keep sight of the underlying rationale for the provision of free allocation under the ETS.  The government’s free allocation proposals are underpinned by a mix of equity-based, economic, and environmental objectives. The key economic issues which went into decisions to have free allocation are:
    • Regrets associated with economic leakage—these arise where firms close because of the early introduction of an emissions price but would not have done so if it had been introduced later;
    • Adjustment costs, particularly those associated with concentrated job losses;
    •  Reputational issues for New Zealand around the destruction of capital value (stranded assets) and the extent to which it is achieving domestic emission reductions.
  4. Other issues are:
    • Equity issues, particularly around the loss of value of stranded assets;
    • Environmental concerns, particularly emissions leakage (ie if a firm closes, or reduces production, but production simply increases elsewhere to meet global market demand, there may be no emissions benefit). 
  5. In the case of pre 1990 forests, equity considerations are particularly important.  The allocation of NZUs recognises the loss of value of existing foresters’ land.  There is no ‘inalienable right’ for forest landowners to receive units, and no rationale to provide a free allocation to landowners that, for any reason, will not see their land values affected by the introduction of the ETS.
  6. As they do not currently own the land in question, future successful claimants will not suffer any loss in value if they opt to take CFL land as part of their settlement quantum.  In this way they will be in the same situation as any future purchaser of pre 1990 forest land; the price they pay for the land will reflect the fact that it is covered by the ETS and has restrictions on its future use.  The government is not proposing to provide any compensation to other parties in this situation, so any additional payment to claimants opting to take CFL land as part of their settlement would raise questions of intra-sector equity. 
  7. The ILG and MRGE have asserted that a free allocation to this land is justified on the basis that for many other landowners who do not wish to deforest, the NZUs received will be a windfall gain, and it is therefore equitable to also allow claimants to receive windfall gain. 
  8. However, officials do not agree with this argument.  Officials consider that all existing owners are losing some value (at least some future option value) whereas new purchasers of land - be they claimants or any other forest purchasers - will be aware of the deforestation restrictions and the effect of these on future options value, and will factor these issues into their decision making.
  9. Officials advice is that the government confirm its current proposed approach; to maintain a notional allocation of NZUs for CFL land and leave successful claimants with the choice over whether to take some of those NZUs as part of their settlement quantum.  However, it is willing to explore options for providing greater assurance to Maori that those NZUs will be available, if wanted by claimants, when settlements occur in the future. 

Section 3: inclusion of indigenous pre 1990 forest in the ets

  1. This section discusses whether deforestation of pre-1990 indigenous forest should be included in the New Zealand Emissions Trading Scheme (NZ ETS) and, if so, on what basis.  The government is yet to finalise a preferred position on these matters and has sought feedback from stakeholders.
  2. New Zealand has large areas of pre-1990 indigenous forest – over 7.5 million hectares – of which officials estimate 2.4 million hectares is in private ownership.  Deforestation of the private indigenous estate is estimated to be 1,100 hectares, or 0.04 per cent of the total area, each year. 
  3. These relatively low levels of deforestation are expected to continue in the near term, mostly in the regenerating scrub classes of indigenous forest (for example, manuka-kanuka scrub) as part of a normal hill-country pastoral farming cycle.  There is also some conversion of taller indigenous forest on the West Coast of the South Island for dairying.
  4. Over the longer term, higher deforestation rates are possible if the economic drivers for clearance of indigenous forest change. 
  5. We do not believe there is currently any practical and defensible way of delineating pre-1990 regenerating scrub from post-1989 regenerating forest.  This - combined with the relatively low levels of carbon per hectare; the quite strong economic disincentives to deforest; and the likely level of resistance of landowners to the inclusion of scrubland – means we recommend that deforestation of regenerating scrubland forest is not included in the ETS.
  6. Arguments in favour of including tall indigenous forest (excluding regenerating scrubland) in the ETS are as follows:
  • some deforestation of tall forest is occurring and the forest has high carbon densities;
  • while regulatory controls exist in some district plans, effective controls are not complete at a national level;
  • subject to final confirmation, it appears practical to delineate these taller indigenous forests from regenerating scrublands by applying previous land use maps
  • it would provide a once-and-for-all solution to the ongoing risks of deforestation of these forests;
  • many landowners would welcome this move, since any units allocated to them would almost certainly be a windfall gain.
  1. The alternative view is that there is little to be gained from bringing deforestation of the remaining indigenous forests into the ETS since:
    • there are regulatory controls already, which while incomplete, appear broadly effective;
    • there is some risk of Treaty claim;
    • the cost of bring these forests into the ETS is roughly equal to the benefit – since the government will allocate NZUs equal to the expected level of emissions that would occur if deforestation had not come under the regime. 
  1. The government is currently of the view that the inclusion of deforestation of taller indigenous forest (ie. not regenerating scrub) in the NZ ETS is desirable assuming that there is a final confirmation that it is practicable, and assuming that the cost in terms of levels of free allocation is not overwhelming.  This is primarily a risk mitigation strategy.  Further investigation is needed into the issues implicit before a firm decision on this matter is made.  This work is underway.
  2. The possible inclusion of indigenous forest in the ETS has been flagged by government since 2002 but has not received great attention in some quarters until recently.  Emerging (anecdotal) evidence suggests that there is a likelihood of relatively significant levels of deforestation of taller indigenous forest, particularly on the West Coast, if this forest is not included in the ETS.  As such, it would be preferable to include this forest in the ETS as soon as possible, assuming final confirmation of the practicalities of such an approach.
  3. In terms of levels of free allocation, the engagement material suggested that an appropriate level of free allocation would be 8.1 million units in total (and 3.1 million units in the first Kyoto commitment period); this was based on historic rates of deforestation.  The climate change Maori Reference Group and the Maori Leadership Group suggested a higher level of compensation (21 million units in the first Kyoto commitment period) would be more appropriate. 
  4. Officials remain of the view that the appropriate methodology for assessing levels of compensation is through an estimation of historic rates of deforestation.  Given this, and given the proposed exclusion of regenerating scrubland from the ETS, if indigenous forest is to be included in the ETS then (theory would suggest that) an allocation of less than 8.1 million units would be appropriate to maintain equity with land-owners of pre-1990 exotic forests.