Outstanding Forestry Related Allocation Issues – Further Analysis

Briefing for the Iwi Leaders’ Group and Māori Reference Group Executive
Prepared by the Emissions Trading Group (for) 21 February 2008

Overview

This paper provides further analysis of two key outstanding issues around the allocation of NZUs to forest sector participants in the NZ ETS:

  • options for targeting assistance to owners of pre 1990 forest land
  • the treatment of Crown Forest Licence Land

Both issues are analysed individually, and then a single allocation package discussed that captures a possible approach going forward.

We have previously provided briefing material on all of these issues (in November 2007). This paper refines that previous analysis and incorporates the results of various stakeholder engagement processes that have occurred in the interim.

An alternative approach (attached) for the targeting of assistance has been proposed by PF Olsen. Analysis of this proposal is underway. Officials’ recommendations on the targeting of assistance will not be made until this analysis is complete.

Allocation of NZUs to pre 1990 exotic forest owners

Objectives of Allocation Policy

It is important to reiterate that the government’s objective in providing a free allocation of NZUs to pre 1990 forest owners under the ETS legislation is to provide partial compensation for the loss in land value most forestland owners will have faced when forestry was brought into the ETS on 1 January 2008.

Two key implications of this objective are that the government:

  • does not intend to freely allocate NZUs to parties that are not expected to suffer any loss under the ETS
  • where possible, would like to give commensurately more NZUs per hectare to parties that suffer a greater loss.

These two key implications are reflected in the analysis provided later in this paper.

Interaction with CFL Land and the Treaty Settlement Processes

The Crown currently owns significant areas of Crown Forest Licence (CFL) land which it has committed to make available to future Treaty claimants who wish to take them as part of a settlement package. (The Crown has received legal advice that confirms that it is the clear owner of all Crown Forest Land that has yet to be transferred under a Treaty settlement package).

Where this CFL land is taken as part of a future Treaty settlement package it will be valued at the time of transfer. The introduction of the ETS will reduce the ‘price’ of the land, allowing claimants the choice of purchasing a greater amount of CFL land with their settlement quantum, where it is available. This has the added advantage of increasing the amount of associated accumulated rentals that claimants receive, over and above their settlement quantum.

Iwi that have yet to settle a Treaty claim involving CFL land will therefore not suffer any loss on introduction of the ETS. Further, those iwi that are able to take a greater area of CFL land, and therefore receive a greater amount of accumulated rentals, will benefit from the ETS’ introduction.

It would therefore not be appropriate to allocate NZUs to future successful Treaty claimants under its ETS policy package. It should be stressed that this position does not rule out the option of future Treaty claimants choosing to take NZUs as part of a future settlement package. The government has previously indicated that successful claimants will have the choice of taking NZUs as part of their settlement quantum where CFL lands are involved, and remains happy to pursue this option where claimants wish. The government therefore commits to making the necessary number of NZUs available (discussed further below).

However, it is important to recognise that where NZUs are given to future successful claimants as part of a Treaty settlement package, the NZUs would be being provided for a different policy rationale. The government does not want to confuse the ETS and Treaty policy processes, and their respective underlying objectives. Doing so would run the risk of delaying the introduction of the ETS and confusing both processes.

Allocation of NZUs to Crown Owned CFL Land

As noted, the Crown has clear legal advice confirming that it is the current owner of CFL lands that have not yet been transferred to successful claimants as part of a future Treaty settlement. The Crown has therefore suffered the loss in the value of these CFL lands that occurred when forestry was brought into the ETS.

Accordingly there is a clear argument for treating CFL land like any other privately owned forestland, and allocating the relevant number of NZUs per hectare to the government for the CFL lands it owns. This is the position the government has taken in its discussion of this issue to date.

However, concerns have been raised that this would see the Crown taking too great a share of the 55m NZU forestry allocation package. Further, stakeholders have pointed out that due to liquidity concerns, it would be preferable if the Crown did not keep too great a number of NZUs out of the market in the 2002-2012 period.

For those reasons Ministers are now willing to consider allocating a smaller number of NZUs per hectare to the Crown for its CFL lands than given to equivalent privately owned land. Those units the Crown no longer received could then be used to increase the level of allocation given to some or all private pre 1990 forest owners.

That said, the government is not willing to consider reducing the allocation of NZUs to the CFL lands it owns to zero under its ETS policy package. It is important that the government retain a sufficient value of units for use elsewhere, possibly for future Treaty settlement processes.

Increased Levels of Assistance to Owners that Purchased Land Before 2002

Several stakeholder groups, including the Maori Reference Group Executive (MRGE), have argued that the free allocation of NZUs should be weighted towards parties that purchased their land in or before 2002. The argument is that parties that bought their land after that date – when the government first announced its intention to introduce comprehensive deforestation controls – would have known that their land use choices were going to be restricted in the future, and would have taken that into account when assessing the land’s value.

One of the small number of allocation options officials previously indicated support for was therefore a ‘moderately targeted approach’ where 2/3rds of the allocation package is spread across all forestland owners, but the remaining 1/3rd only across those that purchase their forestland prior to 2002. The MRGE has also previously supported a similar approach (although they suggested that the 1/3rd tranche only go to parties that purchased their land before 2002 and were unable to deforest during the following 2003-2007 period).

The impact of that moderately targeted option of the number of NZUs received, per hectare, by different landowners is shown in Table 1 below.

Table 1: Impact of the Moderately Targeted Allocation Option

 

Owners with land acquired before Oct 2002

Owners with land acquired after Oct 2002

Retained by Crown

(and available for other uses)

 

(Units Per Hectare)

(Units Per Hectare)

(Units Per Hectare)

Approach set out in ETS Engagement Material

38

38

38

Moderately Targeted Approach

42

26

42

As previously noted, officials have some sympathy with the argument that parties that purchased their land in or before 2002 should receive a higher level of free allocation. However, after further analysis concerns about the use of the moderately targeted approach have been identified:

  • it would see the Crown receiving more units than previously suggested, as the Crown-owned CFL lands were all purchased prior to 2002
  • it would see owners that bought their land after 2002 facing a significant reduction in the number of units received relative to that suggested in the 2007 ETS engagement material
  • the increase in assistance to owners that bought their land prior to 2002 would be relatively modest

For these reasons, a simpler alternative to the moderately targeted approach has been identified. That alternative approach is discussed below.

Possible Alternative Allocation Package Targeting ‘Pre 2002’ Owners

Officials have recommended that the Crown propose a new, simpler allocation package to replace the moderately targeted approach discussed above.

Under this new approach:

  • the number of units allocated to ‘post 2002’ owners will be kept at the level previously discussed in the 2007 engagement material - 38 units per hectare
  • the number of units allocated to ‘pre 2002’ owners will be increased (to an appropriate new level that needs to be agreed)
  • the increase in units to pre 2002 owners will be funded by decreasing the number of units allocated to the Crown for its CFL lands
  • the Crown will continue to retain a relatively substantial number of units for use elsewhere, such as in future Treaty settlements

This impact of this revised approach is shown in Table 2 below. The example shown is based on the allocation to ‘pre 2002’ owners being increased to 50 units per hectare. However, a higher or lower level of allocation to pre 2002 owners would be possible. To allow comparison, the two options previously shown in Table 1 are repeated. The total value of the units held by the Crown under each option is also shown, so that it is clear what level of resources the Crown would retain for use in other areas, such as future Treaty settlements. Officials consider that this revised option achieves the positive aspects of the moderately targeted approach, while avoiding its downsides.

Table 2: Illustrative Allocation Package Options

 

Owners with land acquired before Oct 2002

Owners with land acquired after Oct 2002

Retained by Crown

(and available for other uses)

 

(Units Per Hectare)

(Units Per Hectare)

(Units Per Hectare)

Possible Value 1 ($m)

Approach set out in ETS Engagement Material

38

38

38

$465m

Moderately Targeted Approach previously discussed (with no re-distribution of CFL units)

42

26

42

$502m

Example of New Allocation Option

50

38

27

$331m

1  Assuming a price of carbon of $25 per tonne.