The carbon price is now high enough to change land-use sufficiently to blow away sheep and beef, but too low to significantly influence emission behaviours elsewhere
The concept of ‘carbon farming’ has been around for a long time. I recall carbon farming discussions with my colleagues at University of Queensland back in the early 1990s, but the industry has taken a long time to finally arrive. Well, it is now here. And it has the potential to overwhelm not only the sheep and beef industries, but also have big impacts on the timber industry.
It is only six weeks since I wrote an article setting out that carbon farming is now considerably more attractive than sheep and beef on the hard North Island hill country. Then two weeks later I extended that analysis to the easier hill country. In a more recent article focusing on the Emission Trading Scheme (ETS), I mentioned that the same conclusion could be drawn for considerable parts of the South Island. All of those can be found archived at my own site https://keithwoodford.wordpress.com in the forestry category.
I undertook those analyses using a carbon price of $48 which was then the market price. As I now write this article on 8 September, the price is $62 and has been moving up each day.
Forward contracts for 2026 are now available above $71. That means that anyone who knows they will have carbon NZUs available to sell at that time can right now lock in a price above $71.
There is talk that, given current settings within the ETS, the price could soon rise to more than $100. The Government’s current advice is that a price as high as $110.15 would be acceptable in 2026, with the Government’s cost-containment reserve only being activated at that point.
Given that this year’s cost-containment reserve is already exhausted, there is considerable speculation as to what will happen as soon as the next auction on 1 December. The Government will need to find some more firepower if it wants to put a lid on current prices. At last week’s auction, they were totally outgunned by the commercial investors, who sucked up all of the 2021 reserve and still the Government could not hold the supposed maximum price to $50.
I have just rerun some forestry calculations using $60 as the carbon price. At that price, and if financial returns are to be the key criteria, I can confirm that carbon farming is clearly the highest and best use across most of the existing sheep and beef land. However, note the caveat about financial returns being the criteria for that finding.
There is also no doubt that if financial returns are the criteria, then it has to be exotic forests. Natives grow much more slowly and are more challenging to establish.
In contrast, if amenity values and perhaps biological diversity are the criteria, then native forests can indeed be the solution in some specific situations. But if the criterion is either dollars or carbon sequestration, then it has to be exotics.
Those exotics don’t necessarily have to be the Pinus radiata that we refer to as ‘pine trees’. It might be eucalypts, or it might be redwood, or in some cases Douglas Fir. But let there be no doubt, it won’t be native forests if dollar returns and carbon sequestration are what counts.
Until recently, the timber industry has been rather keen on carbon farming as an adjunct to production forests. Once the carbon averaging system is introduced next year, the risk associated with claiming carbon credits for first-rotation forests will have been greatly reduced.
As long as carbon credits were valued at $20, $30 or even $40, then for first-rotation forests it looked like a nice little income earner alongside the main business of timber production. However, foresters are now realising that carbon farming has the potential to totally outrun production forests in relation to these first-rotation forests.
From a land-owner perspective, in many situations it is now looking better to collect credits for the carbon, not just for the first 16 or so years under the new averaging system for production forests, but to let those credits run on, initially to 50 years, but then beyond for another 30 or so years to full maturity at perhaps 80 years. Forget about the harvest!
Note that this situation pertains to new forests on land that has most recently been in pasture. Carbon credits are not available for any land that was in forest immediately preceding 1990. There are also major limits in regard to those first-rotation forests planted after 1989 that are now reaching maturity. In general, but with exceptions, those forests will remain as production forests.
One of the major exceptions will be post-1989 forests where the owners registered their forests in the ETS and collected the associated carbon credits. The key issue is whether or not these credits were cashed-in or are still held as NZUs. If the NZUs were cashed in, then at least some of those NZUs will need to be repaid at the now much higher carbon price.
Hence, there are some nasty situations coming up for some landowners, with the only escape being to now convert these forests to permanent-forest status. But the details are too complex to get into right now. It must wait for another article.
James Shaw in his role as Minister of Climate Change has been explicit that the ETS is operating much along the lines he had hoped, and he is not at all upset that the carbon price is now rising rapidly. His perspective has been that the carbon price needed to be at least $50 per tonne before emitters would start significantly changing their behaviours. Similarly, he has indicated that he can see the price of carbon rising considerably higher and he is comfortable with that occurring.
So, let’s look at what would happen if the price of carbon, with ‘carbon’ being the shorthand for ‘carbon dioxide’, reached $100. It would mean that the carbon tax on petrol would be about 24 cents per litre, given that a litre of petrol releases approximately 2.4 kg of carbon dioxide. This change would undoubtedly be an issue of annoyance to many motorists, but it would not greatly change petrol-buying behaviours.
In contrast, a carbon price of $100 per tonne would mean that carbon farming would blow away all significant agricultural land-uses apart from dairy and horticulture.
One of the problems with carbon farming becoming dominant is that carbon returns are received in New Zealand dollars. As currently structured within the ETS, they are transfer payments within the New Zealand economy. In contrast, the agricultural industries earn export dollars, and it is export dollars that underpin the New Zealand economy.
According to Ministry of Primary Industries in their most recent ‘State of the Primary Industries’ document, New Zealand’s primary industries earned 83% of New Zealand’s export income in the most recent year. They also state that this percentage has been increasing for the last ten years. Sheep and beef currently earn about $10 billion of foreign exchange each year.
Another issue is that land converted to carbon forestry is locked up permanently. Give the associated carbon liabilities attached to the land, there is unlikely to ever be a pathway for future generations back to agriculture.
I have been writing regularly about forestry for more than two years. There are now fifteen articles focusing on forestry archived at my own website https://keithwoodford.wordpress.com amongst the more than 60 articles on many topics that I have written during that period.
Back in June 2019, I wrote 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”. That insight remains the reason that carbon farming now has the potential to blow away the sheep and beef industries.
When I first made that statement, it was heard in Wellington. Someone with considerable influence rang me and we talked about it for well over an hour. But we were not on the same wavelength. I was politely told that New Zealand’s focus had to be on planting a lot more trees given our international obligations. The implication was that collateral damage to sheep and beef was just the way things were.
As for solutions, that gets real tricky. Unscrambling the egg is not easy and I will have more to say on that. But the first step is to get acceptance that we have already headed into dangerous territory.
Keith – remember under averaging carbon credit collection cannot “run on” up to 80 years. Carbon foresters only get one crop of credits up to Year 16-17 (according to MPI website).
If it’s a never-to-be-harvested forest under the total stock regime, then yes, carbon collection can go on…my clients in this position are very happy.
If carbon prices go over $111 then new native forests will be worth more than sheep&beef, at least for the first 17 years! (Assuming the averaging year for native is 17 as well – we find out in Oct 22, which is a long time away…)
Yesterday the UK Govt set a target price of £245 ($NZD484) for emissions.
And the EU is working on tariffs based on carbon intensity. They started on this policy development 15 years ago. I attended a conference on it in Switzerland in 2005, came back with the message, but nobody in NZ took me seriously then.
The other question is how many genuine credits has the Govt got to back the ETS?
Some more math to do yet.
On Wed, 8 Sep 2021 at 1:55 PM, Posts from Keith Woodford wrote:
> Keith Woodford posted: “The carbon price is now high enough to change > land-use sufficiently to blow away sheep and beef, but too low to > significantly influence emission behaviours elsewhere The concept of > ‘carbon farming’ has been around for a long time. I recall carbon farmi” >
Yes, to get credits past year 16-17, forests will have to be in the permanent class.
I assume all native forests will be in the permanent forest class.
The real issue is the number of credits (NZUs) that are squirreled away by forest owners (something > 71 million) and how many are held by non foresters (appears to be a similar number).
Just like the RBNZ can and does create money whenever it wishes, the Govt can do the same thing with NZUs. But they then have to work out what that will do to their ‘Paris budget’ which does require a cap. It is feasible to have a situation where net emissions are low because of a lot of new forestry, but apart from the forestry part of the economy, everyone else is just sailing on ‘as before’ apart from paying emission charges. It is not obvious that anyone in Government has figured this out.
Hi Keith, I am looking at getting investors in to help cover planting costs and planting long term trees like Redwoods. Talked to a friend who is looking at 50 hectares of his 1000 hectare farm next year, trees will be in short supply. This will take off, we are all talking about it.
I also think that it is not much more than a giant scam.
Hi Andrew. It maybe is a scam but there are few alternatives that the world, or most of it, can agree on.
Regarding the video, at about 9:30 Dr Shiva lets the cat out of the bag that he is doesn’t believe in climate change so it is not surprising that he thinks that the Paris Accord is bogus. The whole point of the Paris Accord is that we must stop emitting fossil fuel derived CO2 and paying for emitting is about the only way to make people and businesses change behaviour, be it stop emitting behaviour or adopt low carbon technologies. As Keith says in his article, the amount of the “fine” for emitting must be big to achieve (force?) the changes necessary and with approx. 35 billion tonnes of fossil fuel derived CO2 emitted per year, even taking the modest $50/t is only 12 cents/litre of petrol. That won’t change much behaviour or pay for much new technology but it is a total global bill of $1.75 trillion hence the wealthy “new world order” comments from Dr Shiva. The number sounds big but is only just over $23 per person on earth per year; not a behaviour changing amount!
If you start restricting energy in at the top then our credit based system won’t survive, debt is after all borrowing from the future.
The only to fix it is moving to a totalitarian Gov’t, personally Id rather take my chances with the market.
He may not believe in global warming but he could still be right, i’m very cautious around belief systems on both sides.
Does it look as though anybody in the “corridors of power” is taking on board the potential impact of high carbon prices on export earnings? If it is likely to affect us in this way, would this not also be an issue with other commodity-producing countries of our ilk?
I agree with you Keith, it doesn’t seem to be a sensible way ahead.
I know I’ve said this before but my main gripe is that paying any amount to salve our conscience is not the way forward. The end point is when New Zealand is covered in trees and buildings and where do we go then?
There are very few other countries that are considering replacing a major export industry with carbon farming. Indeed I cannot think of any.
Also, Uruguay is the only country where pastoral agriculture underpins the economy to the extent that exists in NZ.
To the best of my knowledge, no other country, or group of countries such as the EU, has an ETS that incorporates forestry in the way that NZ does.
We really are ‘out there’ on our own.
Because of the way that all the bits of the system are traditionally handled by different Ministerial portfolios and Ministries, combined with the reality that very few people have the breadth of education to be able to bring the various pieces of the system together within an analytical framework, we now find ourselves in a bit of a mess.
Sorting out this mess is going to be one of the big tasks for Government over the next year or two. In my opinion, there is almost no-one on either side of politics that is currently n top of the issues. Even worse, our politicians have not really identified the situation that now needs to be addressed. Simon Upton and Rod Carr are two people with the intellect to seek a pathway forward, but only if they are authorised to take this on, and have the right advisers to assist.
Haha. That goes for so many areas of public policy in NZ. We have lost the far-sighted institutions that maintain areas for debate and discussion in a non-partisan manner. I am associated with a think tank that is the kind of common ground where these things should be possible, working around a core paper from you. Or a webinar format with Simon and Rod, and a few others? You would have to simplify the technicalities, I have to say. I find it difficult to follow and I am basically taking your word for it because I trust your judgement and academic background and nous!
I don’t think intellectualism will solve anything. It’s a nice thought though. I was thinking last week how much change has happened and how it’s speeded up. When I left school my first major purchase was a saddle, one tonne of fertiliser was the same price as a lamb, life was simpler. This as I watch my neighbour spray half his farm with roundup, before ploughing the fields with a half million dollar tractor. Farmers have taken on debt, not all of us but those that have, have plenty and that has pushed land prices to absurd levels, the belief in a bigger brighter future is strong with them.
Debt haas allowed us to consume the future, ‘creditisation’ a friend of mine calls it, faith in a brighter future, take that away and I don’t see a happy future, egalitarian movements are usually violent ones.
I would love to go back to those simpler times but that is not an option an a financialised world, a world where banks do %60 plus percent of their lending to exisiting asset holders borrowing against equity.
Keith, thought-provoking series of articles. The standard of comments also has been well above the norm. CCC recommendations on land use and investment regulations and the NZ ETS implementation will almost certainly evolve over the next decade. As you identify, changes are required; however, unintended consequences could easily lead to sub-optimal outcomes if not identified early and mitigated.