NZ ETS Opportunities Forestry Sector (Version 2)

[Peter Clark, CEO PF Olsen Ltd. 21st May 2008]

Purpose

This short paper identifies and gives a rough-order estimate of the quantum of some of the key business opportunities in the forestry sector arising from the introduction of the ETS.

The paper is in response to Stephen Tindall's request to Leadership Forum members for comment on the Draft NRS Consulting paper dated 08/04/08. It adds some substance to the observations made in that paper in respect of the forest sector.

I also identify some of the blockages to fully realising the forestry sector opportunities that should be addressed as complimentary measures alongside the ETS implementation.

New planting and flow-on activities

One of the lowest-cost ways to offset CO2 emissions, and the dominant business opportunity in the forestry sector, will be establishing new forests on non-forest land; primarily low-producing or erosion-prone pasture.

The scale of this opportunity is large. The government has suggested a target of 250,000 ha of new planting by 2020 but Landcare has estimated in excess of 1.0 million hectares of existing pastoral land is either uneconomic or not being sustainably farmed under existing systems and would be better off under some form of woody cover.

Using only the government target of an annual rate of afforestation in the order of 20,000 ha/annum would generate:

  1. Investment in a mix of land purchase and lease (assuming 50:50 mix) in the order of $26 million/annum. To the extent that much of this will be new capital injected into the rural pastoral economy (some will be farmers doing their own planting), this is a transfer of funds to pastoral farmers that would not be available without the ETS. It gives farmers a viable alternative cash stream from land rent, or a way out of unsustainable or unprofitable land management.
  2. Investment in planting, assisted regeneration and pest control in the order of $20 million/annum.

With the right ancillary measures the actual planting could easily be doubled to 40,000 ha/annum (it averaged 60,000 ha/annum in the early 1990s).

CP2 CO2 impact

The 2007 New Zealand net position report from MFE estimates a deficit of 45.5 million tonnes of carbon dioxide equivalent over the first commitment period compared to the Kyoto target. This was revised downwards in May to around 21.7 million tonnes.

Planting just 20,000 ha/annum each year from 2009 to 2020 (220,000 ha total) would add just 300,000 tonnes of CO2 to our national CP1 carbon balance, but a massive 24 million tonnes to the CP2 (2013 2020) balance.

The sooner we get started with this afforestation activity the better the CP2 result, regardless of the timing of the introduction of an ETS.

Near-term flow-on opportunities

Near-term flow-on business opportunities from investment in afforestation includes:

  • A major expansion of the manuka honey industry based on retirement and reversion to manuka/kanuka of steep skeletal soils in the Southern North Island, King Country and East Coast.
  • Expansion of the production of genetically improved seed and of vegetative production of clonal treestocks[Good genetics is essential to make the most of both the carbon and the timber outputs from new forests.].  
  • Expansion of forest tree nurseries.
  • New businesses in the organisation and provisioning of housing, transport, feeding and supporting large labour crews for winter (seasonal) planting and for releasing and thinning operations.
  • Expansion of forestry business investment management and property management services.
  • Expansion of forest measurement (inventory) and auditing services.

Costs avoided

Significant and permanent costs associated with flood relief and recovery are avoided by government, local authorities and individuals allowing greater return on infrastructure and alternative investment opportunities.

Diversified species

A large afforestation effort provides the opportunity to establish an industry in higher value timber species that would complement our main production species of radiata pine and Douglas fir, and reduce reliance on imported timbers (presently in the order of $30 million/annum)[Success requires good matching of species to site and focus on just 2 or 3 different species to provide the scale to support processing and distribution. Candidate species are redwoods, cypress and eucalypts.].

Timber processing

New Zealand badly needs investment in timber processing to make the most of our existing plantation forests. Security of log resource is a key consideration for new timber processing investors.

The lack of planting since about 1999, following a planting boom in the early 1990s has created an age-class distribution issue that can still be addressed by expanding planting now. Without new planting now, much of the early 1990s planting will not attract the required new processing investment due to lack of on-going supply security.

Making It Happen - What are the Blockages?

Delay in ETS

Any delay in the passing of the ETS legislation means a delay in the commencement of new planting. This is a lost opportunity if not addressed in another way.

One way would be to devolve some of the AAUs held by government to encourage afforestation. It would require a clear multi-party commitment to devolve AAUs for afforestation activities out to at least one full rotation, or until such time as a working ETS replaced the need to devolve government AAUs.

Deforestation tax

The removal of the deforestation tax or the provision of an adequate level of compensation to all foresters via a multi-party agreement is important to restore confidence in tree planting.

It is acknowledged that some short-term controls on deforestation may be needed. Our suggestion is that a forest offsetting scheme would go a long way to reducing the risk of losing large areas of forest to agriculture.

Land availability

By far the single biggest constraint to achieving 20,000 40,000 ha of new planting/annum over the next 12 years will be availability of suitable land at a price that supports a commercial return on investment.

Pastoral land values (and owner expectations on sale or lease) have more than doubled in the last 5 years. At these values, and given the risks associated with carbon/forestry investment, very little new afforestation will take place outside of farmers own planting to cover their own onfarm emissions.

The preferable policy to achieve afforestation objectives would be to treat all land uses equally in respect of the ETS. The extremely generous treatment of agriculture compared to forestry simply serves to maintain the status quo of land use.

In the absence of more equitable treatment or the earlier entry of the agricultural sector into the ETS, for suitable land to be made available for larger-scale afforestation the following must be put in place:

  1. A widespread (and urgent) campaign to disseminate information on the ETS impacts on farm profitability.
  2. A strong and unequivocal message that there will be no softening of agriculture s already generous timing for entry or phase-out timetable.
  3. A National Environmental Standard to which all Regional Councils must adhere in respect of treating pastoral farming as a conditional use in areas where such farming is clearly resulting in adverse offfarm environmental impacts such as excess sedimentation during heavy rain or excess nitrification of fresh water systems.

Labour availability

Most of the new planting will be on steep hill country in remote rural locations. It is already difficult to attract fit young workers to such jobs, as all our primary production sectors will attest.

Planting 20,000 to 40,000 ha of new land over a 3-month winter period will require in the order of 350 700 planters. Immediately following planting spot release spraying of grass is required during early Spring for a 6 week period. This will employ about two thirds of the number of people for that period.

As this work is of a short-term duration these jobs are not permanent new jobs.

Such a concentration of work suggests that temporary work permits for imported labour will be required. The Department of Immigration will need to address this as a matter of policy.

OIO consent process

Overseas Investment Office consents for purchase of farmland can be very protracted (6 - 12 months). To the extent that foreign capital is needed to invest in new planting, this will be a barrier unless addressed.

This is not just an issue for the foreign investor. It is also emerging as an issue for NZ farmers seeking to exit from pastoral farming as it adds considerable uncertainty to their exit strategy and subsequent plans for using those funds.

Clearance of indigenous scrub or bush

Concerns have been raised that the ETS will promote the large scale clearance of indigenous bush or regenerating scrub. I disagree.

  1. Land that has remained under bush or reverted to scrub following earlier clearance is generally the lowest productivity land for commercial plantation forest or carbon sequestration, and is not likely to be targeted by forestry investors for that reason alone.
  2. Clearing of scrub or bush adds a lot of cost to the investment. Investors would rather pay more for low quality pastoral land.
  3. There area number of existing instruments that would capture most commercial investors and prevent such clearance (other than by farmers) i.e. NZ Forest Accord, NZ Forestry Environmental Code of Practice, Forest Steward Council certification, and vegetation clearance provisions of District Plans.

Non-Wood Forest Products

Bio-char

Bio-char can sequester carbon cheaply.[Refer to: www.carboncommentary.com/2007/11/11/52; and http://www.css.cornell.edu/faculty/lehmann/terra_preta/TerraPretahome.htm]

Charcoal can:

  • Act as a powerful fertiliser in soils, reducing reliance on energy intensive fertilisers and avoiding harmful nitrous oxide emissions.
  • Persist in soils for many centuries acting as a permanent C storage facility.
  • Generates hydrocarbon gases and liquids during manufacture that can be burnt for energy.

Bio-energy

EECA is leading grants into feasibility studies and more importantly helping facilitate and de-risk conversions to bio-fuel, led by replacement of old school coal boilers with wood pellet burners.

This work is very positive and should continue to be supported. It will in due course lead to increased demand for forest-based skid and cutover residues as fuel sources.

Work carried out at Scion to use wood for ethanol production should also be supported.

Other Complimentary Measures

Wooden structures

The technology and connectors exist to build multi-storey commercial buildings from wood. The government has recognised the opportunity and is requiring all publicly funded buildings to present a wood construction option.

Extension of this concept to private sector buildings would save a lot of energy and reduce emissions nationally.

Growing timber

Unless carbon prices move very high ($50/tonne +) it is not sufficient to rely upon carbon values only to drive afforestation investment. The profitability of growing trees for timber must also be restored. Key profit drivers are:

  1. International focus on illegal logging and/or payments for deforestation avoided.
  2. Removal of trade access barriers, especially on processed timber products.
  3. Increased weights and dimension for heavy trucks and concurrent upgrading of the national highways and rural roading network to accommodate larger, heavier trucks.
  4. R&D investment, especially into harvesting of steep hill country and diversified species.