What was once an invest-and-wait scenario is now even more attractive – instead of awaiting the culmination of the forest rotation cycle, income is now generated for the investor from a far earlier stage.
A unique investment, carbon forestry dramatically improves forestry’s terms of trade. In addition, forestry is a genuinely green, environmentally sound investment.
When the New Zealand Government ratified the Kyoto Protocol, it presented the nation’s forestry industry with a massive opportunity to spread its reach and grow its income from timber.
Now, as never before, owners of forests can not only make an income from selling timber but also from sequestering CO2. The major advantage of the carbon trading is the time-value of the money – a forest owner can now earn income sooner, instead of waiting for the end of the forestry rotation.
With established carbon markets operating across the globe, 2007 saw total carbon trading sales of around US$64 billion throughout the world. The 2008 figure increased to US$118 billion – and by 2013 that number is forecast to reach over US $600 billion. New Zealand’s first transactions for forest carbon trading occurred in early 200, after the NZ ETS (emissions trading scheme) legislation was enacted in 2008.
The ideal scenario for a carbon sequestration forests sees an owner selling his or her carbon credits annually until the point at which the rate of forest sequestration plateaus. When that happens, the forest is harvested, then the revenue from the harvest can be used to repay carbon liabilities. Then the forest can be replanted, and another round of carbon sequestration can begin in order to see carbon sales start all ver again.
As a Kyoto protocol signatory, New Zealand’s legislation enables all its carbon credits allocated to the private forest owners to be government-verified. This means they are highly-regarded by international purchasers as very high-quality carbon credits.
Carbon from Forests
Through the process of photosynthesis, growing trees absorb and convert carbon dioxide from the air into carbon – as timber.
Carbon credits and carbon liabilities are described as ‘carbon dioxide equivalents’, expressed as CO2e. Carbon makes up 50% of the weight of dry wood, and to make a tonne of carbon requires 3.67 tonnes of carbon dioxide. So during its formation, a tonne of dry wood sequesters around 1.8 tonnes of carbon dioxide. Each tree’s amount of stored carbon dioxide can be calculated annually and tallied into units the equivalent of tonnes of carbon dioxide – carbon credits. These can then be sold on the global market.
Those who show that they are reducing greenhouse gases (GHGs) can, through trading mechanisms developed by several nations including New Zealand, receive carbon credits. These can be onsold to others who are increasing their GHG emissions.
New Zealand legislation allows landowners to set up permanent forests, which then accumulate Kyoto emission units. Then the forestry owners can be involved in forest carbon trading, following rules formulated under the Kyoto Protocol.
Carbon credits come in different types. Each different type has a different value, which depends on its source. However, each carbon credit equals a tonne of carbon dioxide. New Zealand forestry investors earn NZUs – New Zealand Units – from the carbon dioxide sequestered in the trees.
New Zealand’s Emissions Trading Scheme (ETS)
The ETS, or emissions trading scheme, was the creation of New Zealand’s Climate Change Response Act 2002. The emissions trading scheme aims to get all New Zealand sectors involved and, as covered by the Kyoto Protocol, take into account all the significant greenhouse gases.
The emissions trading scheme’s objective is to support international efforts to lower greenhouse gases. To that end, it supports New Zealand to lower its net emissions to less than business-as-usual rates, and to comply with our obligations under Kyoto Protocol and all our international obligations.
Emission trading is our preferred approach. That’s because:
It’s widely agreed that emissions trading is both effective and economically efficient;
It’s a flexible and adaptable option;
It’s a good incentive for investors – and the industry as a whole – to improve the use of resources; and
It meets the principles and requirements of the Kyoto Protocol.
How the Emissions Trading Scheme Works
By putting a price on greenhouse gas emissions, the emissions trading scheme encourages industries to find the best ways to reduce overall emissions across the entire New Zealand economy.
There are 3 core obligations for participants in the emissions trading scheme:
Firstly, they must keep track of all the emissions for which they are responsible;
Secondly, they must provide an annual report of these emissions to the Government;
And thirdly, they must cover their reported emissions by surrendering emissions units.
The Government issues emissions units for the forest carbon sinks which meet the necessary criteria. They may be held, or traded in New Zealand. The main ETS unit of trade is the New Zealand will be the NZU, or New Zealand Unit. A single New Zealand Unit represents a tonne of CO2, whether it’s emitted into the atmosphere (these are called emissions) or removed (called removals).
The emissions trading scheme is linked to the worldwide market for the Kyoto Protocol. New Zealand Units are usually interchangeable with AAUs – New Zealand Assigned Amount Units, which are New Zealand-held, according to the Kyoto Protocol. Any country can use AAUs to meet Kyoto Protocol obligations, but they’re not allowed automatically under every nation’s domestic ETS. For instance, the EU (European Union) does not currently let NZ AAUs to be utilised by businesses looking to meet their obligations under the European Union’s ETS. That said, some European nations have purchased our AAUs.
NZU ownership is recorded in the New Zealand Emissions Unit Registry, or NZEUR. When NZUs are sold or surrendered, they are moved across registry accounts. Any participant wanting to sell NZUs can instruct the NZEUR to transfer the NZUs across from one account to another.
A similar process governs emissions units surrendered for compliance purposed. Participants tell the Registry to transfer the units from their own account into a ‘surrender account’. Any shortfall in the number of units required to be surrendered must be purchased and subsequently surrendered.
The costs of administration, auditing, monitoring and compliance will be met by forest owners. Forest owners are also liable for maintaining the stocks of carbon. Sold credits must be repaid at the time of harvest.
Log Revenue and Forest Carbon Sales – How it Works
Forest owners who sell NZUs are committed to maintaining the carbon dioxide stock that has been sold. The carbon stock must either be maintained in perpetuity, or additional units will need to be purchased in order to cover any carbon stock loss in the forest. Natural and climate events are the most common reason for a loss of carbon stock: fire, disease, earthquake, windthrow or natural degradation as the trees reach maturity and begin to die – or are harvested. Insurance covers most climactic events, but excludes disease. Harvesting needs to happen before the trees begin to degrade.
A newly-planted Radiata forest has the potential to recoup its establishment costs in the first ten to 12 years by selling carbon. The desirable long-term result for carbon forestry investment is having the harvest income repay the carbon liabilities. The prices are vitally important in this equation: the price of the wood harvested versus the price of the replacement credits.
Up to 200 tonnes of carbon for each hectare of forest can be sold by the owner of a post-2008 Radiata forest without resulting in any carbon liability, provided the forest will be replanted. The reason for this is that around 200 tonnes of carbon per hectare is left in the soil and roots after harvesting. As the roots and stumps decay, new plantings offset the carbon losses.