Carbon benefits going up in smoke?

PETER WATSON
Last updated 12:39 20/11/2012
Michelle Kennedy
MARTIN DE RUYTER/FAIRFAX NZ
MUCH DISGRUNTLEMENT: Murray McClintock, managing director of Carbon Farm Ltd.

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The collapsing price of carbon has left investors feeling conned and forest owners warning of deforestation.

They have seen the value of their investments plummet as the carbon price has sunk from $25 a tonne to less than $3.

A lot of this has been a result of Europe's economic woes, but much of their ire is directed at the Government, which earlier this month passed legislation further watering down the Emission Trading Scheme (ETS), which was set up in 2008 to meet our international climate-change obligations by putting a price on greenhouse gases to provide an incentive to reduce emissions, invest in energy efficiency and encourage tree planting. Forestry was among the first to sign up.

The latest changes to the ETS, which have been welcomed by Business New Zealand and Federated Farmers, delays the introduction of other sectors into the regime and gives agriculture an indefinite reprieve.

The Government also refused to prevent polluters from continuing to meet 100 per cent of their obligations by buying cheap offshore carbon credits.

It followed this by saying it would not sign up to a legally binding commitment under the Kyoto Protocol to reduce greenhouse gas emissions. Instead, it has pledged to do it through a voluntary parallel United Nation's process.

The critics - led by the Commissioner for the Environment, Jan Wright, Opposition politicians and the forestry industry - have been scathing.

They argue that the changes mean we have an ETS in name only and it will lead to higher emissions taxpayers will ultimately have to pay a huge bill for, that it makes a mockery of our clean, green image and that it will damage our international reputation.

The Green Party calls it ecocide, while some on the other side of the debate have likened the carbon market to a Ponzi scheme.

The Government argues that the amended scheme strikes a balance between the country doing its fair share and not unreasonably affecting New Zealanders at a time when many are finding it tough going.

Minister of Climate Change Issues Tim Groser insists the changes will still allow us meet our current and future obligations, while enabling the economy to grow.

Murray McClintock, managing director of Nelson-based Carbon Farm Ltd, one of the country's largest carbon specialists, is in no doubt what it means.

He has seen much of his business melt away.

His phone used to ring two or three times a week with people keen to plant trees for the carbon they stored and the credits they could earn. Now his work is limited to doing compliance for those already in the scheme.

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What's worse, he says, is that there are a lot of disgruntled people who applied for carbon credits under the ETS for their existing forests or planted new ones, only to see their carbon value fall by 90 per cent in 18 months.

"Some people feel they have been conned in that they were given something as monetary compensation in the form of carbon credits, which was represented to them as good as cash, but which has rapidly devalued."

Under ETS rules to discourage deforestation, owners of pre-1990 forest blocks, which make up 91 per cent of 101,000 hectares of plantations in the Nelson region, could either apply for a one-off allocation of carbon credits or, if they owned less than 50 hectares, they could seek an exemption from their deforestation liabilities.

The scheme was popular in Nelson, with more than 80 per cent opting for credits, which Mr McClintock says are now in danger of becoming next to worthless unless the Government follows other countries by capping the importation of cheap foreign credits, many from dubious sources such as Russia and Ukraine.

In the meantime, he is already seeing evidence of planting programmes being canned and harvested blocks not being replanted as their owners looked to convert the land to dairying and other higher-returning land uses. Nurseries have ploughed under trees as a result of cancelled orders.

Some estimates put the current rate of deforestation at 16,000ha a year, he says, which is likely to increase.

"In Marlborough there have been some big programmes put on hold and I know of others in Canterbury, Otago, Gisborne and the central North Island."

About 170,000ha of forest on land owned by central North Island iwi was ripe for conversion now there was little incentive to replant.

In Nelson, most of the forest is on steeper land not suitable for anything else, but he still expects to see pockets go on the fringes of dairy land in places such as Korere and the Rai Valley.

"It costs about $15 a tonne to make it worthwhile to grow trees for their carbon, so if you get only $3 a tonne nobody in their right mind is going to invest, particularly when the signal we get from the Government is that this is not a temporary situation."

Allowing forests to go makes little economic or environmental sense, he says.

"In an economic climate where we have 145 people a week losing their jobs, the forestry industry worked out that if we continued the planting programme which was planned and which has now been put on hold, we would have created about 6000 jobs."

The fall-off in replanting is also likely to exacerbate a spike in emissions, when the many forests planted in the 1990s are harvested in the 2020s, making it even more difficult to meet our emission targets, he says. "Forestry is our get out of jail free card for this decade, but if we don't keep planting we will go into huge deficit.

"Ministry of Environment projections assume we are going to get lots of new forest plantings."

The low carbon price has also had bizarre consequences, which have further undermined the integrity of the ETS, he says.

Polluters such as fuel and energy companies are making windfall profits by buying cheap credits to offset their emissions, while still charging their customers as if carbon was worth $25 a tonne.

"Forestry is New Zealand's fourth biggest exporter, yet its interests have been subsumed to those of the big industrial emitters like Comalco, New Zealand Steel and Fletcher Challenge."

Forest owners are some of the biggest buyers of credits because it gives them a cheap way to pay off their deforestation liabilities if they decide not to replant and use the land for something else. Instead of paying up to $13,000 per ha, they are paying only about $2000.

Expect also to see Maori seek to renegotiate Treaty of Waitangi deals, now that $500 million has been wiped off the value of their forest holdings, he says.

Uncertainty about the ETS had put owners of post-1989 forests off registering with the scheme. Barely half had done so, which meant the Crown picked up the remaining liability.

He says Treasury has estimated that the latest changes to the scheme will cost $328m over the next four years "and that is contrary to National's election promise that any changes would be fiscally neutral".

"We are essentially putting off polluters' obligations longer and taxpayers pick up the difference."

The Government denies it has broken any promise, saying forestry is a long-term investment and there is nothing stopping foresters from holding onto their credits until the market recovers.

Mr McClintock dismisses arguments that New Zealand is already doing its bit to reduce emissions, saying as the 11th biggest emitter per capita in the world we can't afford to slacken off.

A host of other countries are starting ETSs, while we are weakening our scheme, he says. "We are hardly world leaders here."

He is not the only one annoyed.

Matt Stuart, of Nelson Forest Managers, says after a busy 2010, the market for carbon farming has died, leaving some "very disappointed" clients.

He had a large number of people - Americans and Europeans, Kiwi farmers and mum and dad investors - looking for land in the top of the south and Southland to get into carbon planting, "but that's all fallen over".

Others had bits of unproductive farmland that they wanted to plant in trees purely for their carbon.But he says those who had gone ahead have not been left with a worthless forest because he made sure they planted a mix of varieties, including some that could be milled for their wood.

Forest consultant Peter Wilks doubts the low carbon price will lead to widespread deforestation, because most forests are planted for their timber, but he sees it putting a handbrake on new forests, "which is unfortunate as the Government needs new plantings to offset projected carbon emissions".

But changes to the ETS had sent a signal to the investment community that forestry is a risky business.

"Not only do you have the risk of fire, wind and disease, but now you can't even rely on the Government."

Mr Wilks says he lost count of the number of workshops he had attended where government agencies actively promoted people to invest in forestry for their carbon benefits, only for the rug to be pulled out from under the scheme.

"I think they have to look pretty hard at their own reliability. Forestry is a long-term investment and people need predictable and stable policies to justify investing in it."

For many forestry investors, the cost of applying for carbon credits and complying with the scheme's measurement requirements is more than what the credits are worth, Mr Wilks says.

"A lot are pretty unhappy about having signed up to a scheme which is costing more than they are getting out of it."

Nurseries, too, have been caught out. Russell Mead, manager of ArborGen's nursery at Spring Grove, which produces 2.5m radiata seedlings a year for mainly big commercial foresters, says demand has dropped slightly during the past couple of years as the carbon forestry market dried up.

It ploughed unwanted seedlings under this winter, but not to the extent that some North Island nurseries had been forced to do after big planting programmes were cancelled, he says.

Nelson Forests, the region's largest forestry company, says the ETS has had little impact on it because most of its plantations are on Crown land and it will continue to replant everything it harvests because it is a timber business.

Estate manager Andrew Karalus says it is holding onto what carbon credits it has and hopes the Government caps the number of foreign units coming into the country to help the domestic market. "Some people are starting to wonder if the next step is that there is no ETS at all. That would be a really retrograde step."

But not everyone in the forestry industry is pessimistic. Rory Cobb, of Action Forest Management, says the fall in the carbon price has happened so quickly that it has had only a limited impact on planting and the price could easily recover.

"We are back to the situation where forest investment has to stand on the returns from the timber."

Things could change quickly and the price could swing back up, he says.

- Nelson

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