Nothing matches carbon-farming economics on sheep and beef land
This last week I spent two days in Rotorua at the New Zealand carbon-forestry conference where I was also one of the speakers. Both I and others presented perspectives on the path ahead for this new industry. There were close to 300 attendees plus an international online audience.
Although there was diversity of perspective as to how the industry might develop, I sensed no doubt that we all saw ourselves as being involved in something big that, one way or another, is transformational for New Zealand
Most of the attendees were either forestry people already in the business, or alternatively service-industry people who either are already or in future want to be part of this new industry. There were also some Government and Climate Change Commission people there to help explain the current regulatory framework.
However, there were not many farmers at the conference, apart from those who were already in the business of carbon farming, and doing rather well, I might add.
For me, the value of a conference like this is not only to hear the formal presentations, but to talk informally to a diverse range of industry people. That is how I can learn from those on the ground whether there is some key factor that I might have missed.
There was nothing there that made me change my views in any significant way, but there was information that helped further enrich what I have been learning in recent times about this fascinating industry.
One of the foundation points of my own address was that, if simple economics from a land-owner perspective is the criterion, then the answer is also very simple. On the sheep and beef lands of New Zealand there is nothing that can touch the economics of carbon framing.
Of course, simple economics is only one part of the story. Also, that story does change somewhat according to land type. However, the differences in the story are mainly in relation to the other land-use opportunities that are foregone as a result of carbon farming, rather than the carbon farming itself.
One of the remarkable things about carbon farming is that the returns are similar for both soft country and hard country, and largely independent of either on-farm infrastructure or distance to towns and ports. However, there are differences between the North and South Island related to climate, and also some variation between the north and south of each island.
A consequence of this is that for each area of New Zealand there is a difference in land price that carbon foresters are prepared to pay, but at least within the North Island those differences are modest. Southern Hawkes Bay farms have been selling for about $15,000 per hectare in recent months. Gisborne has been about $17,000 and King Country about $14,000. This is for pastoral land that fits the carbon farming regulatory environment.
The publication last week in the New York Times of an article on New Zealand carbon farming provides further evidence that this is now an industry of international interest. I was aware some weeks back that this article was in the offing as I was myself interviewed for it.
I am always cautious of media interviews where, following an interview of an hour or so, the journalist picks out a few sentences to weave into and support a perspective that may or may not be accurate. However, I reckon this journalist did a good job within the word limit.
An example in the New York Times article – which did not come from me – was a Gisborne farmer who purchased a sheep and beef farm in 2013 for $NZ1.8 million, and recently sold it for $NZ13 million. It was described as a windfall outcome, and it is hard to argue with that.
The likelihood is that, at the $1.3 million paid for it in 2013, it would have been marginal for sheep and beef, but now highly suitable in 2022 for exotic forestry. It might be a windfall, but it is also likely to be an appropriate change of land-use.
The New York Times journalist sought my perspective on whether New Zealand sheep and beef farmers deserved sympathy for being pushed off their land. My response was that farmers who sell need no sympathy, as they are doing very well from it. If there is sympathy to be shown, it is for the prospective generation of sheep and beef farmers who cannot compete with the forestry interests.
My real concern is whether, from a broader societal perspective, a lot of the forestry is going in the wrong places. I am positive about long-rotation and permanent carbon farming being developed on marginal pastoral land, but far from happy when I see farms sold for short-rotation forestry on what is good pastoral land.
Fundamental to that perspective is that pastoral farming provides export income, whereas carbon farming is an internal industry providing climate credits for fossil-fuel use, with this generating no export funds.
I was intrigued to learn at the carbon-forestry conference that some of the big companies are now promoting leasehold rather than purchase arrangements. One such arrangement is where the forestry company plants the trees on a portion of the land at their cost, and then, for an annual land rental paid to the farmer, earns the carbon credits for the next 16 years before handing the land back to the farmer.
I am cautious of such arrangements. Farmers need to understand that carbon credits that have been earned through forestry leases rest as liabilities on the land that the farmers own. Unless the credits are repaid, the land must stay in successive cycles of forestry but with no further carbon credits. Farmers leasing out land for forestry need to be very sure they understand all of the fine print.
I am also concerned that foreign investors are still very much involved as the pine trees march across Aotearoa New Zealand. The carbon credits will be sold in New Zealand but the cash returns from these sales will then be repatriated overseas.
Currently, there is a bill working its way through Parliament to make it harder for foreigners to invest in New Zealand forestry, be that for carbon farming, or timber production, or a combination thereof. However, I am also hearing that lawyers believe they will still be able to find a pathway to approval for these overseas investors. That sends a chill down my spine.
Another of the key take-home points from my own presentation was that the new averaging scheme for carbon credits, within newly planted production-forestry systems, is providing great incentives for planting exotics on the better class of pastoral land. It is the carbon credits earned in the first 16 years rather than the prospective value of the timber that is driving this process.
What we are seeing is the prospect of 16 years of carbon credits for new production forests, with this 16-year period being a very short time, yet driving investment into ongoing cycles of production forests, with no further credits. This has huge land-use implications for future generations of New Zealanders.
In recent months I have been saying that the pathway forward needs to have two key components. The first is to allow long-term and permanent exotics on the marginal country, recognising that afforestation with natives on much of this country is impractical, despite being emotionally appealing to those who do not understand the constraints.
The second component would be to recognise that on many sheep and beef farms there is about 20 percent of land that is steep and that this would also be best in exotic trees. Farmers know which land fits this category and it is reasonable to allow them to plant this land with minimal consenting. The specific allowable limit could be set regionally, or even on a farm-by-farm basis taking into account the specific land classes. Afforestation beyond that level on any property would require detailed consenting.
A lot of people have been saying to me that this sounds sensible. My response is that current policy is a long way from this. Of course, the devil is always in the detail. However, we have good maps of every square metre of New Zealand and specific property-based zoning is totally practical, with this being managed by regional councils.
Posts from Keith Woodford 
Keith, you are talking about the income side of Carbon Credits, which goes to a handful of wealthy people. When is it time to talk about who is paying?
Andrew
The people who pay for the credits are the people who need to purchase the credits to balance their emissions
But perhaps your focus lies elsewhere relating t the broader societal issues?
Keith
Yes, these emitters will inevitably pass the costs on to consumers, which is all of NZ society. This is to provoke the ‘change of behaviour’ that comes when we cannot afford to drive our cars our buy import goods.
I am in the position of having done a lot of tree planting for environmental and timber purposes, with the intention of engaging in continuous canopy forestry. I saw the value of the trees to be in developing biodiversity, modifying climatic extremes, and recycling nutrients through leaf litter etc, with an ultimate sustainable timber harvest. There was enough value to my farm system to justify planting these 250,000 or so trees without any carbon considerations. But now I find myself with close to one million dollars worth of carbon units in my holding account and the knowledge that this money is going to come out of the pockets of the general population who will be paying more for everything they consume because the Government want to change their behaviour. I will do well personally but the cost to society is likely to be extreme. It is hard to feel enthusiastic (or ethical) about this.
I do not believe that the ETS is going to change the global climate, but it will change NZ society in ways we probably have not yet considered. A huge amount of resentment as the cost of everything increases seems inevitable. Human success as a species has been founded on our ability and willingness to adapt the environment to our will, and humans very rarely accept a huge reduction in standard of living, yet this is exactly the stated aim of our climate policy, in ‘changing our behaviour’. Sociologically it seems very unlikely to end well.
Waimata
There is a lot of wisdom encapsulated within your last paragraph.
Keith
After the permanent forest has reached maturity, the absentee owner has cashed-up the credits and abandoned the property, who picks up the tab for the loss of sequestration if the forest gets wiped out by disease, fire or wind-throw? Seems to me that a diversity of species provides greater resilience.
Graham
I agree that diversity of species provides greater resilience.
I also agree that abandonment is an important issue to be considered, and this is relevant to both short and long rotation cycles.
Keith
Hi Keith
I am not aware of whether Government in purchasing credits from foresters requires foresters to arrange prudential security to cover this risk to taxpayers. If it took the same approach as big business, it would require the forester to arrange a guarantee or bond from a bank or firm having an acceptable credit rating. Some middle ground is possibly more realistic.
Graham
Graham,
Government allocates credits to foresters but does not purchase from foresters.
The credits are then available to be sold on the secondary market to emitters.
The taxpayer is only involved to the extent that emitters pass on emission costs in their retail pricing.
The issue of foresters abandoning land in situations here the liabilities attached to the land title exceed what would otherwise be the market value of the land has not been considered in a regulatory ‘what then’ context.
KeithW
Keith, Im not sure the middle class are going to wear this. If you look at the increase in Western world growth it mirrors the increase in credit. The last 20 years have seen growth on the back of ever more debt. Already this year we have seen huge cost increases which have not been mirrored in wage increases.
I see the meat industry has lifted min wages to $24.70, thats only $42,000 pa after tax and it’s still seasonal. Around here you are not going to rent a house under $450 pr week. giving you 19k to live on after rent. Thats less than $53 a day to live on, a tank of fuel is going to take $28 off that daily income. Thats a very poor wage and definitely not a living wage.
Are these people that are going to be paying the wealthy often foreign owners of NZ carbon forests?
I do believe that a stable democracy requires a land/home owning middle class. The rise of the corporate farmer is not a positive outcome.
There was a Victorian scientist John Tyndall b 1820, he was the first to discover that water vapour was the main culprit of potential global warming. I talk to a lot of farmers and very few believe in AGW.
We are at present being run by a kakistocracy, I don’t see that changing in the short term, but it will when the bill to pay turns up.
Andrew,
I agree that there are difficult times ahead for NZ and these difficulties are not well understood by any of the political parties.
KeithW
I picked up some pine trees last week heading up the East Coast. I asked the Nurseryman if he could ever see a situation where these tress could be milled, like me he thought the infrastructure would never be there for his 15 million trees pa, let alone all the other trees being planted. They will never be harvested.
Andrew,
I agree. There are many investors who like to claim they are focused on timber ( and the foreign investors have to claim this) but it is the carbon that is driving everything.
KeithW
It would be interesting to factor in such social cost for these provisional communities from this activity.
Sure there are those profiting handsomely from such carbon activities. Some of these being large Fossil CO2 emitting companies – buy into carbon farming, and ‘x’ cost and past onto customers are a much larger price (increasing NZU).
But one thing is for sure, the vast majority of the ownership and returns of such entities happen in the likes of Wellington, Auckland, or some other foreign city. Not in the provincial communities in the likes of Poverty bay, CHB, Otago / Southland that carry the physical & social aspects of such landscape change.
Keith
Sorry, I got the link between abandonment and taxpayer liability wrong. The issue I think Government needs to address is when a permanent forest has reached maturity and the forester has sold all of the allocated units. At that point, the forest continues to carry the carbon liability indefinitely and the underlying land is likely to be worth much less in alternative use. Hence, the potential for abandonment. If the forest is then destroyed, that will presumably have to be recorded as a loss of sequestration in the National Greenhouse Gas Inventory. That is where I see a potential for taxpayer liability if NZ is not meeting it’s international obligations for emission reduction. Maybe the Government needs to retain a small portion of the allocatable credits as an insurance fund for forest loss due to fire, disease or wind throw. That would also help with the current imbalance between sequestration and gross emission reduction.
Graham
Waimata, may I encourage you to read the Climate Change Commission’s recent advice to govt and to understand the ETS construct or what economists term an “invention” (specific to NZ not the globe). The NZ ETS is now a govt levy on the team of five million for govt spending on ‘incentivised’ measures to reduce fossil fuel emissions eg dairy factories to switch heat plants from coal to biofuels and getting bangers off the road, and most importantly purchasing overseas units. All such “incentivised” initiatives are detailed in NZs first Emissions Reduction Plan along with funding of $2.9 billion as sourced from the ETS levy.
https://www.rnz.co.nz/news/political/467196/first-emissions-reduction-plan-spends-2-point-9b-from-emergency-response-fund
https://environment.govt.nz/publications/aotearoa-new-zealands-first-emissions-reduction-plan/
https://www.climatecommission.govt.nz/
This levy is primarily generated from the govt auctions of 26 million virtual NZUs that at say $77/NZU will generate $2 billion this year alone and will double by 2030 to $4 billion annually.
Let’s stop the learned economists talk that the NZ ETS is to change the behaviour of fossil fuel consumption by the team of five million. As Minister Shaw has acknowledged to change behaviour the price of carbon would need to be at least $600/tonne resulting in a tax of around $1.30/litre for petrol that would destroy the economy and nor would there be any certainty that emissions would be reduced at the rapid rate required.
The only way to cut emissions is to cut emissions and thankfully this is being initiated via NZs first Emissions Reduction Plan, all incentivised led, with lots of carrots and no sticks and all funded by the team of five million via the NZ ETS (who are largely unaware of their current annual contribution of approx $1,000 per household, based on 2.7 people per household).
And Waimata please don’t have any conscience regarding the monetisation of carbon sequestered via a sale of NZUs to the team of five million. Such a sale is obviously only possible via your decision to render the plantation as permanent albeit not a favoured status by our sector bureaucrats. But rest assured the sale of your 12,000 tonnes of CO2 will be a rarity in the reformed ETS commencing 1 Jan 2023. And may I comment, please don’t sit on those 12,000 NZUs forever believing they will have ongoing ever-increasing value because they are counted in the 49 million NZUs that are deemed surplus, and the Climate Change Commission is advising be sold by 2027 or be annulled. My forest grower colleagues respond saying Forestry World War III will erupt if such advice is upheld. Well, the govt annulled tens of millions of ERUs (hot air units) overnight in 2014 and they are likely to apply the same in 2027.
Make hay while the sun shines
Jefftombleson would you be kind enough to explain (in small words if possible to aid my comprehension) the 49Million surplus units? Are these pre-2023 units? Or units held by investors?
Are you suggesting the role of forestry in ETS might be changing after 2027?
The permanent forest category is the perfect fit for my mixed hardwood forests, as the original aim was always to plant trees for ecological services firstly, with continuous cover timber extraction a secondary issue. The re-establishment of native forest under them is an added bonus, despite increasing pressure from feral deer and goats. Essentially, I never intended to clear fell the forests anyway because the standing trees have more environmental value (providing wind and erosion protection, nutrient recycling, bird/insect habitat etc) than their timber value would ever provide. Unfortunately the possibility that farmers may want to plant trees primarily for environmental reasons appears somewhat lacking in the ETS forestry debate. The carbon farming angle has changed this though, I am of the opinion that any farmer who does not have 99ha of their farm under some kind of tree cover and ETS registered is missing an opportunity. The tree cover pays for itself environmentally even without any carbon income. I have more than 130ha of forest but less than 100ha of ETS registered forest, for reasons largely related to a strong aversion to excess paperwork and compliance issues.
Waimata, the quantity of surplus units (sometimes referred to as the overhang) by registry account holders is around 144 million. The following as requested is a description of where these 144 million units have come from up until June 2022.
Around 40% of the production plantations registered in the NZ ETS are yet to be harvested. Accordingly, it is estimated that around 52 million units issued are held by these growers for surrender to meet emissions liabilities at harvest that will be largely complete by 2030. So these units are not surplus.
Following commencement of the NZ ETS, owners of up to 1.4 million hectares of forest first planted before 1990 were given a one-off allocation of up to 60 units per hectare as token compensation for loss of land value associated with pre1990 forest land that could not enter the ETS as per all pre1990 forests globally. Around 14 million of these units are currently held in holding accounts.
During the time of the international unit price crash, emitters applied what was called arbitrage that in essence involved purchase of dirt cheap international units and legitimately using them to surrender and meet emissions liabilities and to hold the NZ units that has added to the current surplus.
Units also became surplus as emitters took advantage of the fixed price option that enabled them to pay cash rather than surrendering units that contained a higher trading value than the fixed (cash) price.
Units are also being held resulting from the trigger price being reached in the govt auctions of virtual units that released 7 million units in each of 2021 and 2022 that despite being designed to quell the price of carbon they were rapidly snapped up.
Emitters are holding around 30 million units as ‘hedging’ that is equivalent to forward purchase of approximately 1.5 years’ worth of credits. These are emitters such as fuel companies that purchase units that are passed on to the consumer at the fuel pump. Such forward purchase is apparently for the purpose of smoothing unit price fluctuations.
Yes Waimata, the NZ ETS is to change commencing next year. It is to become a cap-and-trade system ie a reducing cap on emissions that in turn forces the unit price up. To what extent the NZ ETS is to become a system whereby the trading occurs largely amongst the emitters is not clear. What is clear is the CCC advice that the virtual auction volumes be reduced to just accommodate for the 49 million surplus units by 2027. It is not at all clear how the tens of millions of newly issued units will be accommodated if at all.
The CCC’s advice is that ‘vintaging’ be applied to any of the 49 million surplus units that are not sold by 2027. Vintaging puts a time expiry on units, and while this may not be welcomed by holders of these surplus units, it is what was previously applied by the govt to tens of millions of international units in 2014. And for forest grower participants it was applied overnight with no warning. The CCC acknowledges there may be challenges to this approach and is suggesting the alternative is to apply the same to new units issued to forest ETS participants that is also fraught with protest that is compounded by MPI believing that units will be issued to forest participants under the NZ ETS for 50 years or more.
I am afraid that NZ is rudderless regarding the purpose of forests in the NZ ETS and more particularly forests to provide an ongoing carbon store in 2030, 2050, 2100 and the thousand years to follow. The issue is that NZs post1989 (carbon) forests amounting to 700,000 hectares was largely established from the mid-1990s to the mid-2000s then no more new plantings took place, just the chainsaw massacre (deforestation) of over 200,000 hectares of forests first planted before 1990. The commercial production component of NZs post1989 700,000-hectare forest estate is a large bubble that is currently being harvested, resulting in considerable emissions and it will mature and be harvested again around 2050 when NZ desperately needs the carbon store, not the associated harvest emissions.
Waimata, I trust the simplistic explanation answers your question. As Keith Woodford says “if you think you understand the NZ ETS then you don’t, because the NZ ETS is highly complex” in part because it’s the only ETS globally that permits forests to participate as a sector, and the realisation that a reasonably well functioning ETS such as the EU ETS is estimated to have resulted in just 6 to 10% contribution to reducing emissions than if an ETS did not exist ie their ETS is a levy, generating mega funds that is spent on incentivised emission reductions, and NZ is following the same via the sale of virtual units via govt auctions that is funding the first stage of NZs Emission Reduction Plan. The USA has gone one step further and applying a system of tax credits, ie lots of carrots and no sticks. In my strong opinion this is the same approach that the agricultural sector should be taking followed by the remaining sectors around 2030.
Keith, my experience is that survival rates for Manuka planting are very similar to radiata pine planting. Manuka is a nursery crop for a diverse Indigenous forest while land planted in pines will be forever lost to indigenous forest and the diversity of fauna that goes with such a forest – just look at the spread of wilding pine in the South Island. It is a pity that the almighty dollar rewards from walk away carbon farming planting of radiata pine is encouraging so many myths to be perpetrated about the difficulties in developing indigenous forest – true it takes time, but one only needs to look at the hills either side of the Hutt Valley near Wellington, which once were covered with gorse but are now in natives, to know that land can successfully transition to native bush. The financial return from a carbon farming perspective is less but the end result is just so much better.
Paul
The issue with manuka is that it does not sequester significant carbon and in general is not therefore eligible for the ETS.
I agree that the hills around the Hutt Valley are now reverting to native bush and we understand the ecology of that process. But there is still a long journey from native bush to native forest that sequesters lots of carbon.
Most of the wilding pine in the South Island is Pinus contorta and not Pinus radiata. To the non botanist they can look very similar but their ecology is very different.
Getting from radiata pine to native forest has the same issues as getting from manuka to big native trees that sequester significant carbon. Both require a seed source of the big trees. As long as that seed source is present (and much of the time it is not present) then getting from pines to natives is feasible and there are good examples of this.
KeithW
Thanks Keith. Provided land planted in forest meets the Te Uru Rakau eligibility criteria it can join the ETS. As you will be aware if the forest land meets the post-1989 criteria it can join the ETS. Plantation Manuka qualifies as forest land provided it is greater than one hectare, has 30% tree crown cover at maturity and an average tree canopy width of at least 30m. Trees must meet a height of at least 5 m at maturity and Manuka meets this criteria. Agreed, Manuka, and the other natives that populate the area, do not sequester carbon as fast as Pinus radiata and other exotic species, but that does not mean we should plant species for carbon farming that leave future generations with a country covered in pine forests. We can plant greater areas in Manuka/native forest and look to more direct ways of reducing carbon emissions. A ‘long journey’ does not make a wrong direction right.
Yes, I appreciate that Pinus contorta is a major problem- so are other pine species such as Douglas fir, but the point is that once established these forests, including pinus radiata, will not, accept on the fringes, allow natives to take over – you have said yourself the pine grow faster than the natives. Any opening left by fallen pine will soon be reestablished in pine saplings. I would really like to see examples of your pine forests getting to natives. I have never seen this – even when the pine forests I have seen are cut down the natives emerging are surrounded by young pine saplings that soon dominate. I agree that population of a Manuka plantation with natives may be required to speed the conversion to a diversified native forest – some manual planting may be required but new technologies are already emerging that will facilitate planting on a large scale involving the use of drones.
Planting exotics for plantation and harvest forestry purposes is a great use of hill country land – it returns export wealth to NZ, absorbs carbon from the atmosphere and supports rural communities. Carbon farming with Pinus radiata sucks wealth from rural communities and the New Zealand public, and leaves a lasting eyesore for future generations. The landowners who plant Pinus radiata solely for carbon farming are the only ones to benefit and they may even live overseas.