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Joining the ETS: Making marginal land profitable

The recent passing of the Zero Carbon Act provides the high-level legislative framework to guide other laws around climate change.

Many Kiwi landowners will already have heard of the Emissions Trading Scheme (ETS). However, there’s less understanding about how it works. The rules seem complex and it’s hard to see the wood for the trees. Is it worth joining?

For land and forest owners, the good news is that with a bit of knowledge, the ETS can turn marginal or underused land into a profitable venture by creating favourable cashflows. Farmers can retire their roughest land, get an income from it and focus their farming operations on their best quality land.

Regulatory change

The Government has made a number of decisions this year which will affect the ETS for forestry participants, including the introduction of the averaging accounting approach to calculate New Zealand Units (NZUs) due. The new Zero Carbon Act and Climate Change Commission have been introduced, whose purpose is to guide New Zealand’s transition to a carbon-neutral economy by 2050 or sooner. This is a commitment made by all countries signed up to the Paris Agreement.

Converting more land into forests is one way to achieve this goal. The more forest owners who enter the ETS, the more our economy benefits.

What is ETS?

Simply put, ETS adds a financial incentive for reducing greenhouse gas emissions or a cost for emitting them. The Government gives carbon credits or NZUs to reward ETS registered forests for carbon dioxide that is absorbed by their trees. One NZU represents one tonne of carbon dioxide and is currently trading at or just below the current price cap of $25 per NZU. The allocation of NZUs is determined by the amount of carbon storage and scheme members must submit emissions returns at least once every five years. Once received the NZUs can be sold to businesses with obligations resulting from their greenhouse gas emissions.

Here are some of the things to consider if you’re wondering whether to convert land to forestry and join the ETS:

  • Am I eligible?

To sign-up to the ETS, you will need to own, or have the rights to plant on, at least 1 hectare of land with an average width of at least 30m. The land must have (or have in the future) 30% tree crown cover. To earn NZUs for absorbed carbon emissions, land cannot have been planted in forest before 1990, the benchmark year agreed on by ETS countries. Many countries also have similar schemes, so if you own land overseas it might also be eligible.

  • What are the benefits of ETS for forestry?

The ETS scheme has some distinct benefits for forest owners. Timber prices and/or carbon prices can provide favourable financial returns. Carbon credits provide forestry owners early cashflows, without waiting for the harvest, making financing much easier. Meanwhile forests on farms diversify income, reduce carbon footprints and soil erosion and increase water quality.

Marginal land unfit for other uses, such as sloping ground, areas of poor soil or with restricted access, can be turned into ‘carbon sinks’ that absorb greenhouse gases and generate NZUs that are available for sale to emitters and generate cashflow.

There’s also the option to harvest the trees on a rotational basis. Under the new averaging accounting rules (which apply to forests registered in the ETS after 1 January 2019), so long as the land is replanted straight away, landowners won’t have to surrender their NZUs on harvesting (as under the previous rules). The new averaging accounting rules can increase financial returns for a rotational forest while lowering this carbon liability risk.

  • What funding support is available?

If you’re concerned about the cost of planting or managing a forest, there are a range of options available. The Government offers grants for the start-up costs under the One Billion Trees programme. A private joint venture or partnership with a forestry management business can be a simple way to enable others to take care of the maintenance and monitoring in exchange for NZUs or a share of the profit.

  • How can I get started?

As the rules can be tricky, it’s advisable to see an ETS specialist to find out whether land is eligible for the scheme, receive carbon valuations and profitability assessments, arrange funding support or partnerships and get the necessary accounting and taxation advice.

If you are interested in learning more about the ETS and how joining might work for you, contact ETS forestry specialists Kathryn Cropp and Andrea Leeper at Baker Tilly Staples Rodway Auckland.