Seeing the wood for the carbon

Amid all the hue and cry over the emissions trading scheme, one important sector seems to barely warrant a mention - forestry.

Sure, forestry is an integral part of the present stoush between opposition parties and the government over the bill but only tangentially. Maori Party support is necessary for enactment and it is reportedly close to cutting a deal benefiting Maori forestry owners in return for its votes, a process Labour leader Phil Goff has criticised as lacking transparency.

Yet forestry will, in a post Kyoto and Copenhagen world, represent not only a significant economic benefit to New Zealand in terms of mitigating the national cost of emissions but a public good. Trees after all do absorb carbon and play a role in ensuring soil and water biodiversity.

New Zealand would be in a parlous situation without forestry providing a significant boost to the country's emissions ledger. And we need more forests to offset increasingly intensive asset use, such as dairy, coal and oil.

The economic cost of poorly drafted law is belaboured by the Institute of Forestry in its submission on the Climate Change Response (moderated emissions trading) Amendment Bill. As it stands, says institute president Andrew McEwen, the bill has increased uncertainty in the industry, leading to deforestation and a lack of investment.

Forestry requires investors with a long-term horizon, which is why ownership is dominated by the Crown, Maori and international pension funds. The latter, reports Forest Owners Association chief executive David Rhodes, do take the 20-year to 30-year view in managing their New Zealand assets and have proved "pretty good corporate players".

But these long-term asset-holders have largely shelved new planting plans because of the uncertainty generated by constantly changing rules under two governments and the prospect of shifting goalposts in the years ahead.

"Look at the new planting rate," Rhodes urges. "There have been instances where nurseries are ploughing the stuff back in. One year on, [the scheme's] done nothing for us; it's a backward step for forestry."

To understand Rhodes' and McEwen's ire, you need to appreciate that under Kyoto a cut-off date of 1990 applies. Forests existing before 1990, including replanting or additional planting past that date, are denied the ability to earn or generate carbon credits. Those credits are vested with the Crown.

But come harvest time, those forest owners are liable for the full amount of carbon (offset by new planting), estimated at 800 tonnes a hectare. What the per tonne price is, as minister Nick Smith correctly notes, is a matter of conjecture.

A few years back, Rhodes was accused of scaremongering when estimating the impost on foresters at $13,000 per hectare: "Today, I don't think anybody would dispute it's going to be somewhere near $20,000 a hectare. If we use the latest Treasury figures of $50 a tonne, that's $40,000.

"What price compensation now?" he asks. While more heavy emitters, such as dairy, have had their contribution delayed and 90 per cent of the cost of other industries' emissions is picked up by the taxpayer, forestry receives a 5 per cent subsidy.

Maori forest owners have "rightly pointed out that their forest has been significantly devalued," comments Rhodes. "Government, with the select committee completely neutralised, is desperate to do a deal with another minor party and they've been in talks with Maori over a number of related issues."

One is a preferential package for Maori forest owners for preferential access to marginal Department of Conservation land. It is understood Maori won't pay anything for the land use, get assistance to plant and retain rights to carbon credits to trade on the international market.

"I'm really pleased they've recognised that there's a hell of an impost on pre-1990 forest owners and they want to alleviate the pain." Rhodes says, "but please alleviate everyone's pain not just one group."

There are plenty of other gripes - some carbon is trapped in wood products, so forestry shouldn't have to pay the full whack - but the prospect of alignment with Australia really rankles.

The amendment bill allows owners to trade credits on the international market - until trans-Tasman alignment. Australia will operate a cap on the price of carbon significantly below market prices, meaning earnings will be constrained and new planting deterred.

The lack of political consensus and unseemly rush to pass the bill is a recipe for bad legislation.

It's hard not to draw parallels between the emissions trading scheme and the economic reforms of the 1980s. Both are necessary reforms and emissions trading will also have far-reaching effects on the New Zealand economy.

Back then, the government went too fast, and perhaps too far, when a considered approach to better manage the economic fall-out would have been preferable.

Today, this government risks the same clear-and-burn economic result in tying to push through legislation that lacks widespread support and is poorly written. It needs to heed forestry's complaints.

Nick Smith is a senior financial journalist

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Kevin Campbell   #1   05:36 pm Dec 02 2009

Nick, the National/Maori/United Future cabal has failed New Zealand with a dosgraceful climate change review which was a whitewash, it excluded the science and was setup to create the outcome that eventuated, an ETS for Copenhagen.

As the science behind global warming has always been full of holes and wafer thin the National party had the opportunity to be smart and cautious. Key and Smith rushed into it like school boys and it will come back to bite them on the arse bigtime.

Given that peoples livelihoods and businesses are at stake from the costs associated with the insanity of carbon trading Key should be tossed out at the next election.

He wont and thats because the alternative just does not bear thinking about.

Ian Dickson   #2   11:31 am Dec 03 2009

Nick the situation of pre-1990 landowners is particulalry dire. The ETS locks in forestry as the only possible land use that doesn't incur the deforeation costs of at least $20,000 per ha. Sadly at todays values the costs of planting and tending (the only alternative to deforestation exceed the expected revenue in present value terms after harvesting and transport costs. That makes the real estate on no economic value. It will be hard to attract investment in pre-1990 land reforestation because the value of the carbon credits earned on post-1989 land will be at least $10,000 (based on $26 per CO2e). It is hard to escape the conclusion that pre-1990 forestry land is the latest asset class to be come "toxic" as well as stranded. This is going to create a real policy problem in terms of getting such land replanted if the best avaliable option to the land owner is to walk away from it.

Ludwig   #3   08:11 pm Dec 03 2009

It is all one very sad joke. The head of the IPCC even conceded that we are "possibly" in a period of global cooling which may last 10-20yrs, after which temperatures would resume a rapid ascent. PLEASE!!!! Your credibility is down in the gutter already. The data doesn't lie (in spite of all the efforts of the climate change circus to avoid the reality). They can't even forecast next week for goodness sake, let alone 10yrs from now. However, the scheming and conspiracy to create a one-world govt are barrelling away at pace. Watch for national debt defaults and monetary collapse in the next 5-10yrs....then this will be the pretext for these supra-national bureaucrats to "save us" from capitalism and so-called "free markets". Karl Marx would have been proud of Obama, Brown, et al, and even our own John Key!

Ian Dickson   #4   10:08 pm Dec 03 2009

Ludwig. It is true the IPCC and climate scientists stand accused of "sexing" up the data on global warming. What the evidence shows is there has been a slight global warming over the last 150 years that temerature records have been kept. But there are many problems with the data. The satellite records show a small upward trend in the past 30 years in the northern hemisphre and a minisule warming in the southern. Neither correlates well with the 100 ppmv increase in atmospheric CO2. The recent cooling is the correction of the global temperature spike in 1998 due to El Nino (which no one knows how to model). The prediction of a cooler 10-20 years is the result of weakness of the current sunspot cycle. The sun may yet save us from global warming. I agree golbal climate models (GCM) have significant flaws, and don't include a lot of available palaeoclimate and satellite-derived information. The biggest flaw is that the behaviour of clouds is now known to be different from the typical model formats, noone knows enough about the impact of the oceans, and the relationship of temperature to to CO2 (usually a log of the ratio of current to pre-indutrialisation concentration) is too simplistic. Moreover GCM do not forecast CO2 but answer the question; if CO2 increases (usually doubles) what will be the impact on surface temperature and precipitation in 1000m by 1000m grids? That is a very different question from the one the public are led to believe the GCMs do. Lastly to reach a 2x atmospheric CO2 would require all the known reserves of petroleum, natural gas and about much of the worlds coal to be consumed. This is unlikely without prices adjusting to the point where alternatives are substituted.

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