The ETS is both a goldmine and a minefield

The Government never foresaw the land-use forces they were unleashing with the ETS

In recent weeks I have written multiple articles on the Emission Trading Scheme (ETS) with a particular focus on forestry. This week I also had an extended interview with Kathryn Ryan on RNZ ‘Nine to Noon’.  However, there is still lots more that needs to be said.

The bottom line is that carbon forestry is now far more profitable than sheep and beef farming on nearly all classes of land. We are indeed on the cusp of the greatest rural land-use changes that New Zealand has seen in the last 100 years.

For many sheep and beef farmers, carbon farming can now be a gold mine. The key requirement is pastoral land that will grow an exotic forest that will not be destroyed by storm, fire or disease.  

It will take a while for the pine trees to march further across the sheep and beef landscape, with seedlings and planting labour the immediate constraints. But let there be no doubt, right now whenever sheep and beef farms come onto the market, then both the purchaser and the underbidder are typically ‘thinking forestry’. They can easily outbid those who have a sheep and beef perspective.

Sheep and beef farmer options
Sheep and beef farmers now have four options.

Option 1 is to progressively plant at least part of the farm in trees. The major constraint is the cost of establishing the forest. Many farmers need all of their current cash flow for property maintenance and living. There is nothing left over to establish the forest which is likely to cost between $2000 and $3000 per hectare.

Option 2 is to lease-out the land or alternatively to take on a joint-venture partner. Anyone going down the lease path needs to be very sure they have got things worked out as to who owns both the assets and any carbon liabilities at the end of the lease.

Option 3 is to sell to a new owner who will plant a forest. Land prices are rising and the selling option is increasingly attractive.

Option 4 is to ‘hang in’. This is fine for those who love their sheep and cattle and are ‘making a go of it’ financially. It may even be the best option, at least in the interim, if land prices are going to continue rising. But eventually, managing the process of generational succession requires moving with the times to the most profitable option.

So there lie the options linked to the goldmine. In short, based on the current economics and assuming the carbon price is sustainable, then it has to be carbon farming, either as a permanent forest or in association with lumber.

In coming to that conclusion, the key assumption is whether or not carbon prices will be maintained. There lies the first potential landmine. I now turn to that issue.

Carbon pricing
The current rules of the game are complex but the big-picture message is clear, at least when it comes to forests versus sheep and beef, on land that is currently used for pastoral purposes. On that class of land, the ETS is the driver and carbon is the new gold.

The emission trading scheme was first introduced back in 2008. However, until recently the ETS has largely been a background issue, with the price of carbon too low to dominate investment decisions.  To the extent that the ETS has been relevant, the key forestry focus from a Government perspective has been in association with production forests.

 It is only in the last two to three years that some people have started to realise that, with the carbon price rising rapidly, carbon farming without harvesting might actually be the option that provides the best financial return.  Associated with this, no-one in Government seems to have realised the potential for sheep and beef to be blown away by the march of the pines.

Increasingly, there is now recognition even among forestry professionals that carbon farming has the potential to not only push sheep and beef farming aside, but to also profoundly affect the lumber industry, with considerable timber production also being pushed aside.  

The spreadsheets that I run for my own analyses, confirm that non-harvested permanent forests not only look better than sheep and beef, but are also looking better than the combination of carbon plus production forests.  This is certainly the case on the hard country and increasingly on the better country.

A key feature of importance within the current ETS is that the carbon price required to make urban folk change their lifestyle behaviours is much more than the price that will lead to pine trees marching across the landscape. There lies the conundrum.

For example, If the carbon price were to reach $100 per tonne, the petrol emission charge would only be 24 cents per litre. At the same carbon price of $100, then non-harvested forestry is not only looking more profitable than sheep and beef, but also looking the best financial option on a considerable proportion of current dairy land.

When I first started writing about these incongruities in mid-2019, the articles were read by some influential people on both sides of the political spectrum. But the dominant paradigm at that time was that we must plant more trees, and that carbon trading through the ETS was the way to achieve this. So there the matter lay.

The key point for the discussion here is that if the ETS is going to have a meaningful effect on emissions in the broader economy, and both sides of Parliament have already committed to that policy, then the price of carbon certainly has to be well above $50 and in all likelihood a lot higher. This means that unless the Government fundamentally changes its perspective, and hence changes the rules of the game set out in the ETS, then carbon farming looks a safe bet. 

Political options
It is important to note that no-one of major influence across the political spectrum has said that they want to blow away our existing land-based industries, although some have said they wish to see a decline in these industries.  Of relevance here is that, according to the Ministry of Primary Industry’s recent State of Primary Industries document, 83% of New Zealand’s physical exports are from primary industries. We live in an export-led economy with primary industries doing the leading.  

Carbon farming, as currently set up, does not earn foreign exchange. In the long run, that could change, but that prospect is a long way off.  

Climate Change Minister James Shaw has been stating recently that higher prices for carbon are desirable and indeed needed to change emitter behaviour. Similarly, the Climate Change Commission has advocated with success for the upper limits on the carbon price to be raised to $110.15 by 2026.

There seems to have been a failure by both the Minister and the Commission to recognise what high prices do to land-based activities. In contrast, the supposed price limit for 2021 was only $50, but that number was itself blown away by the market. As I write this article, the current price is $64.50 and the futures price for 2026 is above $73.

There would seem to be an inevitable conclusion that the ETS as currently structured may not be fit for purpose. That is a conclusion that will not sit at all well with Government.

Put another way, within an ETS there is no price of carbon that will substantially change emitter behaviour without being sufficiently high to blow away sheep and beef.

Changing the rules of the game will be messy.  Almost certainly, there will be lots of defensive attitudes within Government and lots of upset people outside Government. That will include many sheep and beef farmers, together with the new breed of investors, if the new goldmine is subsequently taken away by any countermanding set of regulations.

The position of industry organisation Beef+Lamb seems to be that regulatory limits are needed.  But one should not assume that this is what many sheep and beef farmers themselves necessarily think. They might prefer the goldmine.

I said at the start of this article that there was a lot more that needs to be said.  That remains the situation.  I have only scratched the surface.

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, sheep and beef farms, Uncategorized. Bookmark the permalink.

17 Responses to The ETS is both a goldmine and a minefield

  1. Don Nicolson says:

    Keith, with respect, many of us, years ago tried to inform what you describe would result in a completely logical gaming of the concept. No legislated market can deliver anything but mischief and the NZETS, now even nicer to game with floor and ceiling prices meets that in spades. And they say ruminant methane is a problem. Its nothing like the problem successive governments have encouraged, enacted and keep endorsing. Its a travesty

  2. Rick Cameron says:

    The obvious antidote is grassland sequrestration made simple. Measured techniques and adjusted grazing strategies have been proven to do this. It involves current decision makers to remove a fictictous methane bias against rumenants that have been historically higher. These administrators are long in their planning with these ‘little’ steps a long that journey. Could this wilful blindness to the methane be construed as a farm depopulation step?

    • fjplugge says:

      Rick appreciate your comment. What do you think about Agroforestry and accounting for the microbial carbon in the soil and especially that stored in the fungi hyphae?

    • David Porter says:

      i’ve always thought that too Rick but the more I read about soil C, the more cloudy the picture is. To me the real problem is not selling C credits as soil C builds but soil C tends to fluctuate considerably with the likes of climate. The obvious question then is are you going to have to buy back credits when you’re soil C falls in a dry year for instance?
      With forestry, it is easy to measure with enough precision the above ground C stored in the trees but with soil it is more difficult. I listened to a podcast with Paige Stanley who did her PhD at Berkley on soil C sequestration and she spoke about, among other things, the different pools of faster and slower turning C and seemed to suggest by the end that it was impossible to give a scientifically valid formula for how to consistently increase soil C with the present state of knowledge. I know that in US & Aussie there is some selling of C credits going on but I think that says more about the desperation of some large corporates to greenwash than reality.

  3. Andrew Wilson says:

    The ETS is nothing more than a cynical wealth transfer mechanism from the middle and lower classes to the elites, and in plain sight too.

    I talked to a friend in the industry and was told they intend to buy every farm that comes up for sale on the East coast. As they now have income coming in from previous years planting, they intend to reinvest and reinvest, taking farms off middle class kiwi sheep and beef farmers and then signing up to nothing more than a giant scam paid for by an already low wage NZ economy.

    This in forest which will never be harvested, not that I believe there will be markets in the future for our pine anyway.

  4. Keith Woodford says:

    Andrew,
    I am getting significant feedback along the same lines that the forest companies are trying to buy everything. We have never seen anything like this before.
    Keith

    • Andrew Wilson says:

      Keith, I was told that one company in Dannevirke has told real estate agents they want to purchase every farm on the East side, right down to south of Masterton, everything. Good solid inside source . Another Friend in Gisborne is telling me the same, orders in with agents, ETF companies wanting to buy anything and everything.

      Go team of five million, straight to the poor house.

  5. Trevor Osbaldiston says:

    Hi Keith

    Do you know whether the economic analysis on the effect of the substitution of land use on the NZ economy has been undertaken? NZ laws generally require some form of economic analysis. If it has been done can you please let me know where to get hold if it?

    If it has not been done how do we force the study to be able to provide the NZ public with facts they can then use to pressurize the powers that be?

    • Keith Woodford says:

      Hi Trevor,
      I am not aware of any study.
      The Climate Change Commission has done analyses of the overall impact on the economy but I don’t think those analyses are sound. Essentially they worked om a starting assumption that all resources used in agriculture value chains were substitutable to other uses and that this would occur in an environment of greatly increasing GDP.
      It would require a general equilibrium model that includes economic effects on exchange rates.
      Also, no-one in Govt is likely to have modelled a situation where carbon farming ‘blows away’ sheep and beef because that was not an intended consequence
      Keith

      • Don Nicolson says:

        Keith- re your last paragraph,” …not an intended consequence”.

        In this country the climate change agenda has always been about taking the edge off all animal agriculture and in doing so ingratiate speculators. In this case speculation aided by the legislation protected, C unit market
        Recall that the loophole that allowed ability to use eastern Europe units as NZ equivalents? Well who made the cash out of that that? No one dared to ask!
        It took 10 years for the Nats to close that ‘opportunity’ and now Shaw and Co have given even more sweets for the fast money crew again. Shame on them and shame on foresters who once upon a time grew and tended trees for the end use, whether amenity or harvest.
        It was never hard to plant a tree for the right reason until the meddling State thought they knew best.

      • Trevor Osbaldiston says:

        Thanks Keith. So how do we get the modelling done to allow for an informed public debate and reaction?

  6. Andrew Wilson says:

    Keith, another bit of interesting information from inside was that 4-5 years ago trees went to many markets and although China was still big player nothing like today. He said as of the last few years nearly everything is going to China and for some reason it’s not being reported.

    I did some searching and it looks like a minefield out in markets at present, partly due to China’s ban on imports of recycling materials, so where does packaging come from now, Softwoods?

    Bans on Timber exports by Russia and also Australian exports from Victoria.

    (Russian Log Export Ban in 2022 – Implications for the Global Forest Industry),

    https://www.abc.net.au/news/2020-11-13/timber-export-ban-boost-for-green-triangle-processors/12880024

  7. Keith Woodford says:

    Andrew
    I need to explore further before coming to a position as to the importance of the Russian export ban re our own exports to China.
    Keith

  8. David Routley says:

    Kieth et al,
    A simple query from a simple person.
    Over my 80+ years the fortunes of our pastoral industry have in the main fluctuated between poor to excellent but always the worlds need of its produce has has kept it viable.Produce from pastoral landuse is tangible,carbon credits appear to be logical therefore supposedly also tangible. One person or a nation cannot outlaw food consumption but it seem conceivable that a person and or a nation could abscond from the carbon credit system and dismantle it overnight. I cannot see New Zealand’s pastoral fortunes claiming a great deal of attention on the world stage.Should not NZ stop overseas purrchasing of carbon and declare our pastoral lands offlimits?
    DaveR.

    • Keith Woodford says:

      Dave
      Currently our carbon credits only have official validity within the NZ scheme – they cannot be sued to cancel carbon liabilities that overseas business people have in those overseas countries.
      Overseas investors can purchase farms as long as they commit to converting a large proportion thereof to forestry. The current rules say this has to be production forests ( but including carbon credits) but my bet is that they will subsequently be able to convert to non-harvested forests.
      My own preference would be that foreign investors were not allowed to invest in NZ land fullstop. We have enough challenges sorting out our land-use issues without having the complications of overseas investors.
      Keith

  9. Mark Gunton says:

    We have a well developed Land Classification system in NZ…surely there is enough “marginal” land that could be planted to more than satisfy NZ’s needs in terms of carbon sequestration while allowing “food productive” land to be protected…after all if you are planting forests that are never going to be harvested it therefore follows that “slope” issues and water quality should be enhanced.

    The Government needs to clearly set out rules to protect good productive land from carpet forestry (pinus radiata) such as is being contemplated for the land around Auckland which has recently been the focus of arguments over urban sprawl versus highly productive marketing gardening soil types.

    There is enough good land in NZ…..we don’t need to farm the “bad”… but if never harvesting why not incentivise/make it “native” reafforestation.

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