Emissions Trading and Forestry in NZ

01/08/2017

New Zealand is the first, and still the only, country to fully include forest landowners in a greenhouse gas emissions trading scheme, the New Zealand Emissions Trading Scheme (NZ ETS). A new paper released today by Motu Economic and Public Policy Research examines how forest owners have responded to the NZ ETS and the reasons to be optimistic about the future.

“The NZ ETS is designed to incentivise the planting of additional forests, i.e. planting that would not have occurred in the absence of the scheme,” said Suzi Kerr, Senior Fellow at Motu Economic and Public Policy Research and lead author of the report.

“Plantation foresters responded to the financial incentives from the NZ ETS in a rational way. Unfortunately, due to international changes and the local regulatory responses to them, those incentives were weak at best and sometimes perverse” said Dr Kerr.”

Carbon sequestration by forestry continues to be an important part of New Zealand’s contribution to its global obligations to reduce emissions and ETS prices over the last year have been high enough to make forestry profitable again.

“There are definitely reasons for optimism when it comes to forestry and emissions trading. If the price remains high, and foresters can trust the scheme not to change, owners of marginal land and forest are likely to avoid deforestation, plant new trees, extend harvest rotations and replant after harvest,” said Dr Kerr.

“We do however, need to be careful about changes to the system that can either give windfall gains or create extra complexity with little gain,” said Dr Kerr.

“In particular, the idea of ‘averaging’, where foresters receive fewer NZ units as their trees grow but do not face liabilities on harvest as long as they replant, could be useful for owners of small forests, who sometimes struggle with the complexity of managing flows of NZ units. However, averaging should be offered on a purely commercial basis so it does not give a financial windfall to foresters at taxpayer expense, and with an option for foresters to opt-out if they choose,” said Dr Kerr.

In November 2012, the New Zealand government announced that it would not sign up to the second Kyoto commitment period. New Zealand became a closed domestic scheme from 1 June 2015. This meant that forestry had a unique opportunity to “double-dip” with re-registration arbitrage. This led to a loss to taxpayers of around three million dollars. Foresters, along with companies that receive free allocations, also benefitted from arbitrage. This was a larger gain for foresters, around six million dollars, but not unique to forestry.

“The NZ ETS has been beset by challenges, and weak or even perverse signals have ensued, alongside policy uncertainty. With the Paris agreement and the recent indications from the Minister on the ETS review, we may now be moving toward a strong, clear long-term price signal that will lead rational forestry responses toward positive social outcomes” said Dr Kerr.

“We need only a clear price signal to incentivise plantation forest planting. In many place however, native forest is a better option. I am hoping this will be made easier in the ETS. Because we’re a country of contrasts, not everywhere is suitable for pine, and planting natives can bring co-benefits such as honey production and improvements to tourism,” said Dr Kerr.

The paper “Including Forestry in an Emissions Trading Scheme: Lessons from New Zealand” by Thomas Carver, Patrick Dawson and Suzi Kerr, is now available on the Motu website. This research was undertaken through Motu’s programme “Shaping New Zealand’s Low-Emission Future,” which is funded by the Aotearoa Foundation.