Carbon farming needs long-term rules

I wrote recently about the need for big decisions by Government to sort out the rules for carbon farming. In that context, I was more than a little interested to see what the Coalition Agreement would come up with.

The answer is that it only needed one sentence to set the cat among the pigeons, so to speak. That sentence, actually a dot point initiated by NZ First but agreed to by all three coalition partners in the overall agreement, was to “Stop the current review of the ETS system to restore confidence and certainty to the carbon trading market”.

The mainstream media has yet to pick up on the significance of what has been agreed. I am also unsure whether the Coalition Government itself understands the implications.

First, what was the purpose of this review that is now to stop?

Essentially it was to deal with the fundamental and irrefutable ETS problem that the carbon price needed to drive significant change in emission behaviours is so high that, on almost all pastoral land, it would make carbon faming much more profitable than sheep and beef. This price could also be sufficiently high to make carbon farming more profitable than dairying on much of the better land.

From an economic perspective, the key reason this is seen as problematic is that the sheep and beef industries earn some $12 billion of foreign exchange each year and dairying earns close to $25 billion. In contrast, carbon sequestration does not earn foreign exchange.

Losing this foreign exchange would be a huge issue extending far beyond the farming industries.  Much of the overall economy would disintegrate in the absence of these primary industries to pay for imports of pharmaceuticals, medical equipment, cars, trucks, computers, machinery, fuel and so on.

From the perspective of the Climate Change Commission, the key concern relates to their own specific mandate. Their concern has been and still is that there could be so many forests planted that this would eventually drop the carbon price below what is needed to change carbon emission behaviours.

So, both the Climate Change Commission and the Labour Government have had a Goldilocks problem of not wanting too much or too little carbon sequestration, but of finding the amount that would be ‘just right’. That problem is now a poison chalice handed to the new National/ACT/NZF Government.

By mid-2023 it was clear that the ETS review being undertaken by the Labour Government was heading towards a supposed solution that, one way or another, the price received for a carbon unit (NZU) sequestered by carbon farmers should be less than the price paid by carbon emitters.

In other words, Government would set the price for carbon sequestered in forests sufficiently low so as to significantly reduce the profitability of these activities, and hence the amount of sequestration. The Government would be the only buyer.

The Government would then sell the units at a higher price to emitters. In the process, Government would make a big profit, almost certainly some billions, by managing the trade.

In response to the Labour Government’s mid-2023 discussion document setting out a range of options as to how this might be done, there were more than 600 individual and corporate responses. The Ministry for Environment has been beavering away ever since analysing these submissions, with individual submissions up to 70 pages. They were meant to report back to the Minister this month (December).

I was not enamoured by any of the proposals within that discussion document, and so at one level I am relieved that the work has been stopped. By doing so, the new Government has effectively put a stop to the notion, at least until the next election, of separate prices for sequestration and emissions, and with Government playing a monopolist game in the middle as the sole trader. However, I also suspect there was a lot of wisdom embedded within those 600 submissions.

Anyone interested in carbon-farming investments can now have confidence that, at least until the next election, the sequestration price will align with the emission price.

As it stands, the decision to stop the review will be welcomed by those foresters who are currently earning NZU credits in the ETS, and likewise anyone else who owns NZUs as an investment.

Similarly, it will give some confidence to those who are interested in setting up large-scale forests with introduced species, knowing that there are now no overarching central-government policies to stop them.

It should also create new interest among hill-country sheep and beef farmers that individually putting the worst 10-20% of each farm into carbon forestry is a very attractive diversification option.

As I write this article on 5 December2023, the carbon price for one New Zealand Unit (NZU) has risen from $70 to nearly $76 in the ten days since the coalition’s agreed policies were announced. This is probably due to those who hold NZUs – and there were close to 161 million of these units in private hands as at 30 September 2023 – now being confident to look for a higher price before they sell.

A simple calculation of 161 million units multiplied by $75 comes to more than $12 billion. It’s a big nest egg, but not all of these units are owned by foresters. Big trade-exposed companies have been holding onto their free government-gifted units as an investment. There are also private non-forestry investors.

For a range of reasons that I will not go into here, what happens to carbon prices in the coming months is far from certain. However, my expectation is that, with current ETS settings, the price will rise considerably over the medium term, say two years, and possibly for some time thereafter. Even if the carbon price does not rise any further, the profitability of carbon farming is now of the same order it was in mid-2022 before the kerfuffle of the last 18 months.

But oh, if everything was really that simple!

On 3 November 2023, a new system of regulations was put in place called the National Environmental Standards – Commercial Forestry (NES-CF). The regulations apply both to plantation and permanent (continuous cover) forests. They require that any proposed forest of more than one hectare has to be assessed by the relevant local council within each of eight separate stages of the forestry cycle.

It would seem that a new bureaucracy of regulations has been created. How they are interpreted will be crucial.  I expect there will be lots of legal hearings and appeals. There will also be some strident lobbying of local councils as each goes through the painful process of developing new district plans.

The regulations will in general be manageable for the big forestry operators who can spread the regulatory costs over hundreds of hectares. But they are going to be more than a little off-putting for farmers who just want to dip their toes into carbon farming. This might be something for the relevant minsters to now look at.

The other fundamental problem is that as things stand, we are heading back to the situation of several years ago when good quality farms were being sold for forestry. Indeed, professional forestry companies much prefer this type of land which has less health and safety issues, lower cost of internal roading, lower costs of harvest and remediation, and closer to ports.

There is only one solution. It has to be a case of simple and consistent regulations that lay out the specifics of where forests comprising introduced species can and can’t be planted.

My suggestion, which I first floated close to two years ago, is that individual pastoral farmers should have automatic rights to plant continuous-cover forests on a proportion of their land, perhaps somewhere between 10 and 20 percent of the area, but constrained to no more than say 100 hectares on any property.

Farmers know which parts of their farms are the least productive parts and this is where they would choose to plant these forests. It will be the gullies and steeper country. Farmers would need to register these relatively small-scale forests as continuous cover, and with automatic approval constrained to approved species.

Alongside this, full consenting would be required for larger areas of afforestation, taking into account broader environmental and community issues. These issues would need to be defined for each district plan.

Logic would say that district plans should direct the large-scale forestry to land classes 6, 7and 8, and totally away from classes 1 to 5. Class 5 land could be approved for forestry when surrounded by land of classes 6, 7 and 8, but only if this surrounding land made any other use of the Class 5 land uneconomic. This overarching direction should come from Central Government.

Overarching consenting rules need to have agreement across party lines. Long-term investment decisions cannot be at the mercy of three-yearly elections. If we can’t get broad agreement across party lines as to the rules, then forestry policy will lurch from crisis to crisis.