Investors twig on to carbon
Retail investors are within sight of turning their carbon credits into cash, writes Rob Stock.
RETAIL FOREST investors are on the cusp of claiming early windfalls from carbon credits.
Although private forest owners have been selling carbon credits already – there's talk of Waikato farmers holidaying in Bermuda on the proceeds – ordinary people who have bought into forest partnerships have not been offered the same opportunity.
The credits – officially, New Zealand Units – are the currency of the Emissions Trading Scheme, which is being phased in to put a price on the carbon that polluting enterprises emit.
A hectare of pine trees stores around 30 tonnes of carbon dioxide a year, and each tonne of carbon dioxide sequestered entitles the owner to one carbon credit.
The system allows investors, who previously had to wait until harvest for a return on their money (excluding tax deductions), to extract early income from their trees.
Although talk of carbon credit funds for retail investors has come to nothing yet, two of the better-known forestry investment firms are close to introducing carbon credit sales mechanisms for retail investors.
Greenplan, which has some 12,000ha of forest investments, says it is within weeks of issuing investment statements to forest unit investors introducing carbon trading.
That would allow some investors to take income ahead of harvest, which is still many years away for some investors, said Greenplan's John Barton.
Another, Roger Dickie New Zealand, which has planted 83 forests for retail and wealthy private investors, is soon to launch the prospectus for its Greenwood Forest Limited Partnership, a forestry investment near Gisborne. The establishment costs would be recouped for investors through the sale of carbon credits in the first 13 years of the forest's life.
Cashflow now to cover start-up costs is welcome on an investment where harvest is 28 or more years away, but carbon credit trading has its risks and forestry enterprises are proceeding with caution.
Forest owners face costs associated with creating carbon credits and five-yearly audits.
Being allowed to create carbon credits brings future liabilities.
If the forest is harvested or destroyed, the owner has to surrender the credits it created. If they have been sold, the owner would have to buy a carbon credit and surrender it to the government to make up for the loss of the sequestered carbon. That involves extra costs to pay for extensions to insurance on forests, though there was no insurance available to cover destruction by pests.
Selling carbon credits early in the life of a forest also introduces a new risk, that of the units rising in price, thereby potentially devastating returns at harvest.
New Zealand units are currently trading in the range of $18-$20, but the market is in its infancy and no one knows where the price will go in the future, or even if the Emissions Trading Scheme will continue to exist.
Steve Wilton, managing director of Forest Enterprises, says many questions remain unanswered, such as how much creating them and paying for the compliance audits every five years will cost.
Wilton said more details would be known later this year, and it was likely Forest Enterprise investors would be encouraged to pay to create credits, but then "bank" them to see how the market developed.
"You have to be extraordinarily cautious and understand all the variables," Wilton said.
Roger Dickie reckons there is also a level of carbon credit sales that would be acceptable which would result in no need to buy credits back to surrender at harvest, providing the forest was then replanted. A certain proportion of carbon sequestered by forests is in the roots and stumps which remain in place after harvest.
Dickie said the ability to create and sell carbon credits was a "revolution in forestry" that could help the industry expand, which would be good for New Zealand as the world's demand for wood products in a carbon-constrained future would only increase.
Dickie pointed to the firm's latest project, for which a prospectus is being prepared.
"We are going to sell enough carbon to pay for the land and the planting of the trees. That will take us about 10 years. We will only sell a small amount to cover the costs. After that it is a normal forestry investment."
- Sunday Star Times