Pre-1990 Forests and the ETS - A Solution?

Peter D. Clark
[CEO, PF Olsen Ltd. Paper compiled to provide information and views to the Climate Change Leadership Forum. Compiled with input from others in the forestry sector but time available prohibits full consideration and endorsement of this position by all forestry sector participants.]
1st December 2007

Context

The issue

The treatment of pre-1990 forests in the proposed NZ ETS:

  1. Is based on the Kyoto Protocol, not on the impact of these forests on the atmosphere or climate change:
  2. Is not aligned to the environmental outcomes of planting and harvesting plantation forests, nor of using the wood generated from those forests.
  3. Creates a significant long-term destruction of land value for some forest owners, including many Maori forest owners, and smaller land value losses for others.
  4. Permanently limits land use flexibility, even if full REAL environmental costs are fully accounted for.
  5. Creates distortions between the economics of pre-1990 and post-1989 forestry that can be expected to lead to some perverse management decisions which are not in New Zealand's best interests. The idea that we have good and bad forests is wrong.
  6. Is retrospective. Forest owners have been caught out by rule changes midway through their investment that make a big difference to the investment, and can potentially wreak some people's retirement plans.

Why are we doing this?

It appears the primary driver of the ETS proposals for pre-1990 forest is to meet New Zealand's CP1 Kyoto obligations at least cost to the taxpayer. The Forum has been told as much. This least cost objective is achieved by mirroring closely the Kyoto forestry policies in our own domestic policies.

But it is widely acknowledged that the Kyoto artificial cut-off date of 1990 in respect of forests is flawed in respect of the environmental contribution of New Zealand's plantation forests. So why would we lock in place a long-term domestic policy that mirrors a flawed 5-year international policy?

New Zealand is likely to become the only country in the world with a land-use change tax on forestry at a time when international consideration is being given to providing payment to developing countries to avoid deforestation.

What can NZ contribute to global climate change?

As a tiny emitter of greenhouse gases New Zealand's greatest contribution will be leadership in rational domestic policy instruments and fighting hard for those types of instruments to be adopted internationally.

The present CP1 Land Use Land Use Change and Forestry rules (LULUCF) only hold for the first commitment period and are highly likely to change after 2012.

New Zealand has already shown leadership by being the first Kyoto country to include agriculture and forestry in our domestic climate change policies.

If these policies are to form the basis of our LULUCF negotiations and leadership role post 2012, then our CP1 policies must be rational from an environmental perspective and acceptable to private landowners. Only if these criteria are met can we expect similar policies to be adopted in Australia, Canada, US or in South America or Asia that in turn could facilitate the next set of international agreements to cover these key sectors.

To be acceptable to the private sector, any government should be seeking to create a positive environment for retention of existing forest rather than penalties for removal of that forest. This concept is consistent with the trend towards rewarding avoided deforestation in developing countries that we also want to see included post-2012.

Our forests are carbon neutral at worst

NZ plantation forests were first established to provide timber needs without further destruction of our indigenous forests. Unlike many countries, this outcome has been achieved with stunning success. Most of our early forests were established on the scrubby CNI volcanic plateau, sand dune coastal strips and cleared but reverting farmland, or cleared but eroding hill country on the East Coast. In the 1990s a further 600,000 ha was established mostly on low-producing hill country pasture land throughout New Zealand.

When a forest is harvested it simply releases CO2 that has quite recently been captured from the atmosphere. Even if it is not replanted some of that carbon is stored in long-life applications like buildings, fences and furniture. At worst our forests are carbon neutral and to the extent that we plant new forests, extend the rotation age or increase the rate of tree growth per hectare we create additional carbon sinks that can buy time for the world to adjust to a lower fossil fuel economy.

Plantation forests also provide one of the greatest opportunities we have as an international community to provide a low cost biofuels feedstock (via conversion of lingo-cellulose to ethanol ) to substitute for fossil fuels without impacting on global food supply, and to replace more energy intensive building materials.

Proposal

Full carbon accounting

Our proposal for ALL New Zealand forests is FULL CARBON ACCOUNTING and the removal of the distinction between pre-1990 and post-1989 forests.

By full carbon accounting we mean that:

The carbon either sequestered since the planting of the current forest crop or held within the forest crop as at 1st January 2008 may be utilised as an offset against carbon emitted on harvest or deforestation. In effect the maximum emissions liability on harvest or deforestation would be the credits earned through additional forest growth since 1st January 2008.

AND

Carbon accounting for forests be over much longer time periods (>25 years) reflecting that carbon stock changes in forests relate to rotational cycles over multiple decades.

NZFU

  1. A new class of NZU, called a NZ Forest Unit (NZFU) would be created. This NZFU would be able to be purchased by domestic emitters and surrendered to government to meet any emission obligations, and domestically would have equivalent status to the NZU (after all it is equivalent one tonne of Carbon is a tonne of Carbon as the atmosphere sees it).
  2. Given that a NZFU would not mirror Kyoto obligations, its status and value for international trade would be determined by the international marketplace and recognition or otherwise by other Kyoto signatory governments.

NZ CP1accounting

Post-1989 forest carbon changes from 1st January 2008 would still be tracked and accounted for separately from pre-1990 forest carbon changes for those post-1989 forests that enter the scheme.

This is to assist the Governments CP1 reporting in 2013.

Option to enter scheme

If one accepts that at worst NZ's plantation forests are carbon neutral, then there should be no obligation for any forest or forest landowner to enter into the NZ ETS. Carbon stock changes arising in forests not included in the ETS would be to the government's account.

Liabilities capped

For those who chose to enter into the ETS, no forest owner would ever have to surrender more NZFUs than they had earned. This principle is consistent with:

  1. Our forests being carbon neutral at worst; and
  2. The principle that under full carbon accounting sequestration credits and emission liabilities go together as is currently the case with post- 1989 forests.

Equity and Fairness

Who signed Kyoto?

The forest sector did not support NZ ratifying the Kyoto Protocol given that the rules applying to forestry are wrong and unfair. Now individual forest owners are being asked to bear the cost of those rules.

Transition provisions

The government has chosen to transition other sectors and modify the rules in its domestic policies. Intensification of emissions due to land use changes from sheep and beef to dairy is being absorbed in the national interest. Why not changes from forestry to higher and better land use?

Credits and liabilities go together

The government has (correctly) recognised that credits and liabilities should go together for any new forest planted. Why not for existing forests (other than because the flawed KP rules say so)?

Benefits of Proposal

Eliminates distortions

This proposal removes the differences in treatment between pre-1990 and post-1989 forests. It effectively creates a one-off transitional arrangement for pre-1990 forests that moves them to a situation where all forests are treated the same. The removal of that distortion is likely to be important for the adoption of forestry into the domestic climate changes policies of our major trading partners and competitors. It will also restore investment confidence in the NZ forest sector.

The widespread international adoption of climate change policies that are similar to New Zealand is very important for our international competitiveness.

Environmentally robust

The proposal is environmentally robust and defensible. All forests would be treated the same, i.e. effectively left neutral with only the time value of money benefit, unless the forests were never harvested in which case there is a one-one carbon credit gain. This is entirely consistent with what the atmosphere sees.

Land use flexibility retained

The proposal would ensure that land use flexibility was retained. In particular the ability to relocate forests without a net penalty could occur.

Land use flexibility has been a cornerstone of New Zealand's wealth creation since the first European settlements.

Supply of Domestic Emission Units

Increased supply

Addition of pre-1990 forest NZFUs as domestic trading units from 1st January 2008 would presumably increase the supply of credits available to domestic emitters, although nearly all could be expected to be held to offset emissions on harvest.

However the 21 million NZU s allocated to pre-1990 forest land owners would no longer be needed. These could be retained by government to help cover any deforestation liabilities created as a result of the Kyoto provisions relating to pre-1990 forests.

Government's Present Position

Decision made?

The ETG December 2007 document excludes full carbon accounting as an option, primarily on the grounds of a cost to the taxpayer under the KP rules arising from deforestation of 200,000 ha (17%) of the 1.2 million ha of pre-1990 forest.

Is 200,000 ha a reasonable estimate?

  1. The reference to deforestation liability should only be to CP1, given that the KP LULUCF rules are likely to change after that. So what is the official s estimate of deforestation liability under KP over CP1 only?
  2. The government set aside 21 million NZUs as assistance for historical deforestation over CP1, and argued that the higher levels since 2005 are a result of landowners talking advantage of the opportunity to bring conversions forward. 21 million NZUs at 800 NZUs/ha for deforestation of a mature forest equates to 26,250 ha (or 5,250 ha/annum), not 200,000 ha (40,000 ha/annum). Even taking the total 55 million NZUs over all future periods the compensation equates to deforestation of 68,750 ha, not 200,000 ha.

Clearly either the claim that deforestation of 200,000 ha will take place is excessive, or the 55 million NZUs is woefully inadequate in respect of compensation for stranded assets.

A Couple of Big Questions

What instrument/s should be used to discourage deforestation?

Deforestation would be significantly discouraged if:

  • The alternate land use (primarily dairy) was to face its full environmental costs of both atmospheric emissions and water pollution sooner rather than later; and/or
  • Policies were put in place to reward deforestation avoided (the approach more likely to be adopted internationally post 2012); and
  • Supplementary policies around biofuels, transport weights and dimensions, port infrastructure, labour and skills, domestic wood use etc were aggressively pursued.

Who should pay?

In the event that the current policy is retained, who should pay for KP deforestation liabilities, given that:

  1. Forests don't emit CO2 at all, and even when deforested have only emitted the very same amount of CO2 recently absorbed from the atmosphere (less any held in long-term solid wood products or in soils and undergrowth).
  2. The liability on deforestation only arises because the government (despite forestry sector warnings) ratified the Kyoto Protocol that includes flawed rules for our plantation forests.
  3. The signing and ratification of the KP has been deemed by the government to be in the best overall interests of the nation (general taxpayer).
  4. The taxing of pre-1990 forests on deforestation represents a retrospective tax that is not even based on principles of polluter pays or matching of credits and liabilities.