Carbon farming has hidden consequences

New Zealand’s Zero Carbon Bill is based on the assumption that carbon farming through forestry provides a climate-change solution, at least until the arrival of new technologies that allow New Zealand to move away from fossil fuels.

In contrast, Environment Commissioner Simon Upton has suggested that using forestry for carbon-dioxide offsets is not the away to go. He contends these should only be used to offset the shorter-lived agricultural gases.

The Government does not agree with Commissioner Upton for reasons that can be readily appreciated. Without carbon sinks provided by new forests, there are no big tools in the kitbag to get anywhere near zero carbon.

Accordingly, carbon farming of forests is going to remain of fundamental importance for as long as the Government is aiming to reduce net emissions of carbon dioxide. Some of the consequences have not been foreseen.

New Zealand already relies on forestry to reduce its net emissions of carbon dioxide. In 2017, forest sequestration of carbon dioxide was assessed at 24 million tonnes compared to gross emissions elsewhere in the economy of around 40 million tonnes. Note, here I am focusing just on carbon dioxide and not the other greenhouse gases. For a discussion on the specifics of short-lived methane go here.

The starting point for carbon farming is to recognise that credits can only be claimed for one rotation of trees, typically around 28 years under New Zealand conditions for radiata pine, or longer for slower growing natives.

At the end of the first rotation, the carbon credits that have been claimed throughout the growth cycle are a liability attached to the land title.  This means that the land can in all likelihood never be used for any other purpose than carbon forestry. This is because the carbon unit liabilities associated with the previous carbon credits would have to be repaid based on current value thereof.

Whether or not it is actually worthwhile harvesting the trees at maturity time will depend on the value of sequestered carbon at that time relative to log prices, combined with specific rules relating to repayment of the carbon liability.

Until recently, carbon credits were seen as a nice little cash-flow earner during the growth cycle but the main game was still the harvest value of the logs. That is now all changing.

The key reason is that the value of carbon within the NZ Emission Trading Scheme has been increasing rapidly. In 2014 the price was well under $NZ5 per tonne. Right now, it is between $24 and $25 per tonne

Under current legislation, there is a carbon price cap of $NZ25 per tonne, but there is a very good likelihood of this being removed within the next three years – that is the current Government plan. The price of carbon would then be likely to rise in line with rising international prices

The carbon price could in time go to $100 or even higher. Even if it only goes to $40 per tonne, or even less, then the forests may never be harvested. The EU price is already over $40.

Most of New Zealand’s forests have foreign owners. With current policy settings for ownership of forestry land, this foreign ownership will increase further. Here is the reason why.

For big foreign entities, the notion of having within their portfolios some New Zealand forests for carbon farming looks very attractive.  As part of a balanced portfolio, any risks can be managed. In relation to the low returns on equities that can be earned elsewhere in the global economy, the returns look truly stunning.

An overseas entity can buy the land, plant it in trees, receive some Government subsidies, and then sit back and take the stream of income from carbon credits over the next 28 years. And then write off the original investment in the same way that a spent mine is written off.

If I were advising any such foreign entities, then that is exactly what I would be saying to them. Governments have set the rules, and now here is the opportunity to play the game.

Of course, it does not require me to tell them that. Their own advisers are telling them, and the game is now on.

At the end of the 28 years, the land can simply sit there, with its unharvested forest, with large carbon liabilities attached to it, and providing no further income to either New Zealand or anyone else. From the investors perspective that is fine – it has served its purpose and been a great investment.

The option of harvesting the forest might still be considered, but in the context of a bonus. In any case, given that many new carbon forests, as a cost saving measure, will not be thinned or pruned, the harvest value may well be limited.

From New Zealand’s perspective, this does not seem quite so flash. In effect, New Zealand has had an initial benefit from the inward flow of funds to purchase the land, and then has spent the next 28 years paying the foreign owners for the forestry carbon credits to balance off its own emissions elsewhere in the economy.

As for future generations of New Zealanders, they will have some green trees to look at, but the land itself can no longer be used for anything because of the crippling carbon liabilities attached to the land title.

In debates about foreign ownership of farmland, it is sometimes claimed that the foreign owner cannot export the land. It is still here earning an export income for New Zealand. But in the case of carbon forestry, the foreign owner can effectively capture in one rotation the economic benefits in perpetuity.

Another key insight is the recognition that the equilibrium price of carbon needed to ensure that emitters change their behaviour is much bigger than the price required to make carbon forestry profitable. For example, at a carbon cost of say $100 per tonne, a motorist purchasing 1000 litre of petrol per annum would still see their costs only rising by about $5 per week and hence make minimal behaviour changes. That same price of carbon could see a liability attached to a hectare of mature forests of between $60,000 and $90,000.

So, what is the solution?

The first step it to remove the OIA exemption that allows foreign entities an automatic right to buy New Zealand farms as long as they put it into forestry.  There needs to be a brake put on.

The second step is to place limits on the price paid for forestry carbon credits. That would mean keeping a cap on the selling price to the Government by forest owners for carbon credits, but could also mean the Government then selling those credits to emitters elsewhere in the economy at a higher price. That could be a nice Government earner.

The third step would be to pause and take a deep breath.  Let’s quietly work through the hidden consequences and the solutions.

Now, all of this is going to be controversial. Given the conflicting interests of the various parties, it can be no other way.

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About Keith Woodford

Keith Woodford is an independent consultant, based in New Zealand, who works internationally on agri-food systems and rural development projects. He holds honorary positions as Professor of Agri-Food Systems at Lincoln University, New Zealand, and as Senior Research Fellow at the Contemporary China Research Centre at Victoria University, Wellington.
This entry was posted in carbon farming, forestry, greenhouse gases, Land and water. Bookmark the permalink.

29 Responses to Carbon farming has hidden consequences

  1. worth reading and sharing

  2. Pingback: Perverse consequences of forestry subsidies | Homepaddock

  3. Simon Redmond says:

    Very good insights. Lots of long term thinking needed. Also we are assuming that all the trees release carbon when harvested. There are lots of long term options for trees that can hold onto the sequestered carbon for many years.
    I hope the policy makes understand this article and think it through.

    • Keith Woodford says:

      Simon,
      I agree that the subsequent use of the log component of the trees is relevant. But somewhat tricky to deal with.
      KeithW

      • Ian Davis says:

        A good read Keith, thank you.

        In policy implementation such as this it is often the “tricky to deal with” aspects of the issue that determine whether it meets it’s long term goals or not.

        Al9 government policy initiatives are subject to “the law of unintended consequences” and this is clearly yet another good example. It seems to be a well intended but poorly thought through policy.

        Ian.

  4. Peter Weir says:

    Prof Keith Woodford point is relevant with MPI’s policy change in Carbon accounting to “Averaging” as of 2019: “At the end of the first rotation, the carbon credits that have been claimed throughout the growth cycle are a liability attached to the land title. This means that the land can in all likelihood never be used for any other purpose than carbon forestry. This is because the carbon unit liabilities associated with the previous carbon credits would have to be repaid based on current value thereof.” BUT he is wrong when he says: “Even if it only goes to $40 per tonne, or even less, then the forests may never be harvested”. Not so with Carbon Averaging in place, cash flow from NZU sales for radiata plantations cease at around age 20 (the age where a radiata stand reaches the long term average in continuous rotations) and importantly there is no emissions liability at harvest (no credits to replay, unlike under current settings where the ETS has a big sting in its tail )

    • Keith Woodford says:

      Peter,
      You are correct – as long as the forest owner chooses the averaging system and takes lower credits. But the numbers that I have run tell me that an investor may well choose not to take the averaging option and will prefer the enhanced annuities. And a prospective investor would probably make his or her decision, and hence the price that can be paid for the land now, on the enhanced annuities because these have the least uncertainty associated with them.
      KeithW

      • David Janett says:

        Prof Woodward is correct on options but as Peter Weir states you have options of harvest. In essence you have choices. Logically the long term price of carbon is Zero if the goals of emission reductions are achieved – A lot of investors understand this and tempers there decision making I can assure you. The key point is you need land to do this. The assumption is that only overseas investors will do this. Logically existing land owners, farmers, should be jumping on this opportunity – as Prof Woodward noted the returns are amazing. Beef and Lamb figures show @50% of all hill country farms earn 0% or less as a ROR. The top 20% make 3 – 5% ROR. We have a number of farmers doing this with trees both Permanent (Native and Exotic) and Averaging for timber – they are in neither of the return groups above but have created a new category, 8 – 12% ROR. They are still farming but 30 – 50% of the farm are in trees and as they admit making the highest return per ha is from Carbon and/or timber. As one farmer said to me ” This is the largest wealth transfer from Urban NZ to Rural NZ – I cant understand why my fellow farmers cant see this”. On fibre – assuming you cant burn coal what will drive boilers? Renewable electricity – Synlait has gone down this route. Biomass – We will need large volumes and trees can provide some of this. The point I’m making is this is a perception/belief issue of landuse – Forestry is now not just about fibre for building things – its in the energy business and this is an opportunity for existing landowners to move some income from the food industry to the energy industry which is much more profitable. The farmers we have doing this now have beautiful farms as they can afford to invest and have good cash profits, Succession is sorted, Mum and Dad can retire without stress.

      • Keith Woodford says:

        David
        I will pass over the spelling of my name. These things do happen.
        I think the logic of your statement about the long term price of carbon being zero is flawed. The only caveat is that it does depend on the current dominant perspective of CO2 as a driver of climate change.
        Please note I have not argued against farm forestry, either for production or environmental reasons, – definitely not – , but I have attempted to point out some rather large unintended consequences of large scale carbon farming.
        The transfers are not so much from urban to rural, although that is correct, but from foreclosing future land options from future generations once carbon liabilities are attached to land. Hence it is a transfer from future generations to current generations. This issue is of much greater importance where whole farms of productive land are converted as seems to be now happening in part of the North Island. Given current policy settings this will increasingly happen. I agree that carbon farming can greatly assist with farm succession problems.
        KeithW

      • David Janett says:

        Apologies on Name. Its a fair debate on landuse change but we could also argue the large scale landuse change in CNI and Canterbury from Forestry to Farming was concerning. If we look at Simon Uptons report it still comes to the conclusion we need 1.5 million ha plus of new forest. The point is whether it should be whole farms or parts. I believe personally that in reality it will be a mix of the 2 – The moot point is that some people perceive this “productive” land to be good forest land in perpetuity – others believe it needs to be retained for food production in perpetuity. Whether the area planted is in parts or whole areas will to a large extent be driven by existing land owners decisions – if they plant more land it will reduce the need for whole farm conversions. Of interest we have been involved over many years buying land to convert to forestry (most just for timber). In all cases but 1 the land has been on the market for a number of years before we bought it. No farmer wanted to by it or could buy it and some is very easy “Productive” land. This again is the fundamental issue – a lot of this land can’t produce satisfactory economic returns farming. From a timber perspective good “Productive” land has lower establishment, management costs, grows more timber, cheaper to harvest and get to market and allows us to meet all the new environmental regulation we have to adhere to. Even from a timber return with no carbon we are better to pay more for land and have lower running costs, higher yield, lower compliance and economic risk. No easy answer or solution and as usual in NZ with any land use change drivers there will be some strange outcomes.

      • Harvey Bell says:

        I think you’ll find that for any plantings after 2021, averaging for a commercial forest is the only option. Furthermore, from the analysis I have undertaken, I think under long-term averaging the maximum claim age will be 17 or 18 years for a forest on a 30 year rotation, less if on a shorter rotation.

        On the subject of Overseas investors (or even unscrupulous NZ investors), the worst case scenario is even more dire than described.

        If a forest in the ETS is owned by a single purpose entity, once all the revenue potential has been extinguished, with those revenues distributed to shareholders one way or another, the company can be placed into liquidation either formally or struck-off because of neglect. That means all the on-going commitments such as feral animal control, fencing, rates etc will not be met. Then there is the potential liability in relation to the sequestered carbon, from fire, disease or storm damage. Local authorities will be left out of pocket for rates with the Crown in the gun for everything else. The land will have negative value at this point, a scenario those promoting carbon farming are not explaining to their clients! Nor is anyone highlighting the fact that a planting consent granted today gives no guarantee that a harvesting consent will be granted in (say) 30 years time!

        It should be noted that when an overseas owned NZ entity it given permission to invest in NZ there is no requirement for the overseas owner (usually leading to an ultimate holding company) to guarantee any of the financial obligations pertaining to that approval. [I flagged this as being unsatisfactory last year in a submission to the OIO in relation to investment in forestry on Maori land.]

      • Keith Woodford says:

        Just an acknowledgement that the comments here have been very valuable in adding to the debate, and will influence my thinking going forward.
        KeithW

  5. Harry M says:

    Nothing wrong with re foresting as a concept .
    BUT NZ produces less than .02 C02 NZ is not the problem.

    The Foreign land ownership in NZ is a problem.
    Auckland is like a Chinese city now. With kiwis that can’t afford rent pushed out of the city by the housing boom created by the govts immigration increases( while demolishing State housing supply) and bankster over inflated housing values for Mortgaging profits.

    Man’s emissions of CO2 are not the climate drivers( sun, planet , oceans and water vapour) so all this Climate nonsense( Carbon trading) is not going to change the climate.

    • Keith Woodford says:

      Harry M,
      These issues you refer to are important but somewhat off-topic. My focus here is to take our commitment to the Paris Agreement as a given, and to then lay out the consequences of specific policies.
      KeithW

  6. Jack lumber says:

    I think you raise a good point except that your wrong in saying that overseas entity can buy the land, plant it in trees, receive some Government subsidies…. The govt. grants are not being given to overseas investors. Nor are they intended too.

    • Keith Woodford says:

      Happy to be corrected on that. Can you lead me to a source which shows overseas entities will be excluded from Government grants?

  7. Glenys Perkins says:

    Great discussions guys. did your realise that you are paying the price of carbon on your every day food items consumed? when will the price of carbon drive our economy to a stand still? that is a more relevant debate.

  8. Stephen Jack says:

    Hi Kieth,
    I struggle to see a carbon price above $25 in the medium to longer term. Certainly in the short term (10-15years) a higher price is likely.
    What I foresee is that as the Crux of population growth and loss of land combines with a realisation of the futility of tree planting as a mitigation, nation’s will turn to the deep oceans of the world and the photosynthetic potential and indeed sequestration potential they hold as a means of getting to climate cooling.
    1kg of Iron in the High Nutrient Low Photosynthetic Zone of the southern ocean has the potential to absorb 81 tonnes of atmospheric CO2, as phytoplankton.How much is ultimately Sequestered permenantely is indeterminate but not beyond measurement.
    Surely sequestration at less than $25/t and at a potential scale to be globally transformational.
    A study was recently done off the Coast of Australia. What they found was that adding Phosphate and Nitrogen to deep low Nutrient waters meant permenant CO2 sequestration at less than $25/t also via stimulating phytoplankton.
    I’m certain you’ll be up with the play in these areas.

  9. Bert Hughes says:

    No disagreement with your article in general Keith but I disagree about Government “rent seeking” from margin on carbon sales. Once Government is in the business of buying and selling, and making what you’ve described as a nice little earner where will that end? Should Government be making a nice little earner from buying and selling livestock?, kiwifruit? butter? Be careful what you wish for.

    • Keith Woodford says:

      Fair enough. But carbon trading is already a totally regulated market in an intangible, governed by a maze of regulations as to equivalences.
      KeithW

  10. Bryan McKay says:

    Well written Keith and you did not even mention the disruption of rural economies

  11. Martyn ebbett says:

    Thanks Keith. So does this mean the current rules are potentially allowing trees to be planted on land that realistically can never be harvested even if you wanted to? Eg landlocked blocks with no road access.

    • Keith Woodford says:

      Probably. But that does nor necessarily matter. However, if they are landlocked, would probably be better if they went into natives. Carbon cash flow from natives will be slower and may be less desirable investors driven by high discount rates.
      KeithW

  12. James Macphee says:

    Thanks Keith. A great article for someone returning to the family farm and looking to plant trees on marginal land (we have no intention to move away from food producing on the productive land, which I agree is a great risk to NZ!). The big issue for us is balancing potential revenue streams from carbon farming versus the desire for better looking permanent native and exotic forests.

    Reading your article in conjunction with many others I am confused about one point. You note that carbon credits can only be claimed for one rotation – so 28 years for Pinus Radiata (as defined in the Climate Change Regulations 2008?). Could you please outline where exactly this restriction comes from?

    I am aware of the existing PFSI and am watching closely how this, and the averaging accounting approach, will be impacted by the Zero Carbon Act. But everything I read seems to suggest I could plant Pinus Radiata and claim credits for 50? years under today’s system, albeit with a very large liability sitting against it in future). This differs from what you have detailed above. Your response would be very much appreciated. Thanks

    • Keith Woodford says:

      James,
      I will have to look further into this.
      But you can only claim for one rotation.
      For native species you could claim a lot longer than Pinus radiata but at lower annual rates.
      Can you explain why you think you can claim for 50 years with Pinus radiata – where did that come from?
      KeithW

      • James Macphee says:

        Lets say I plant a 50ha plot of pinus radiata today (2019) and the current ETS system continues as it currently stands (ignore averaging approach and assume not a permanent forest under PFSI etc etc). In 2064 the trees will be 45 years old and I am required to do an emissions return. Using the following guide (https://www.mpi.govt.nz/dmsdocument/4762/send) I would obtain the carbon stock for the specific CAA at 45 years from Schedule 6, subtract the carbon stock as determined at the previous return and there I have the units I would be credited. There obviously appears to be an upper limit of 50 years based on the tables available, but I can’t find anything in this guide, the regulations or elsewhere to suggest I can only claim credits up to one rotation (28 years for PR). Happy to be proven wrong though. Cheers

  13. Dave Janett says:

    You can put trees into permenant forest and get credits in perpetuity. These have very strict and narrow rules around harvesting, European style. To be honest a lot of commentary on how the ETS works here is uninformed. There are multiple options for trees and carbon. Of greater concern to farming should be demographics. In many areas there is no labour now and it is going to get a lot worse in the next 20 years. We have to start planning for what we are going to do when there is NO ONE available to work – Every industry, farming and forestry, in rural areas needs to wake up to this. It is already happening overseas – I’ve just returned from Hawaii and large areas of land are in fallow. They can’t get anyone to work the land. Everyone needs to get out of there corners and realise we will need everyone and everything to try and keep rural communities viable in the future.

    • Keith Woodford says:

      Dave,
      I don’t think you are correct in saying you can get ETS credits in perpetuity for permanent forests. Can you show me how this mght happen
      KeithW

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