SECTOR RURAL
The Emissions Trading Scheme impacts land transactions
The Emissions Trading Scheme (ETS) is New Zealand’s main tool for meeting our domestic and international climate change targets. The ETS operates as a domestic carbon market with emitters being required to surrender New Zealand Units (NZUs) for their emissions. An NZU, also known as a ‘carbon credit’, is equivalent to 1 tonne of CO2.
Some forests can receive NZUs for the carbon they remove from the atmosphere. These NZUs can be sold to emitters, creating a price, and lead to cashflow for the owners. The ETS defines two types of forest land, which are treated differently: • Pre-1990 forest land was forest land on 31 December 1989 and remained forest land that contained mostly exotic forest species on 31 December 2007 • Post-1989 forest land is forest land established after 31 December 1989.
Pre-1990 forests Pre-1990 forest land can be harvested and replanted without liability. Deforesting – for example by failing to re-establish or converting out of forest – is highly likely to incur an ETS liability. Deforestation liability should be considered when valuing forest land. As mature forest has a high carbon storage per hectare, even small areas of deforestation can result in significant liability. For example, a 28-year-old Pinus radiata forest can have up to 814 tonnes of carbon stored per hectare. Deforesting 10 hectares would result in a liability of up to 8,140 NZUs, which at $37 per NZU amounts to more than $300,000. Moreover, as pre-1990 forest provided the baseline for carbon storage, any deforestation results in emissions, making it harder for New Zealand to meet its climate change obligations.
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The Real Estate Institute of New Zealand
Oliver Hendrickson, Director Forestry & Land Management, Te Uru Rākau – New Zealand Forest Service
When deforestation occurs, the landowner is usually liable. When buying or selling land, particular care needs to be taken with recently harvested or cut over land. The ETS treats this as temporarily unstocked forest land, rather than deforested, and therefore the new landowner could be liable if the land gets deforested in the future.
Post-1989 forests Post-1989 forests can be registered in the ETS to earn NZUs for increases in carbon stock as they grow. This can have significant value. Depending on where it is planted, 20 hectares of fast growing radiata pine forest receives up to around 16,000 NZU per hectare by age 28, worth almost $600,000. The same area of slower growing indigenous forest would receive 4,844 NZU, worth $179,000, over the same period. When registered post-1989 forest land is cleared (for example, harvested), NZUs must be surrendered to cover the emissions. This can be around 70% to 80% of the carbon stock at the time of harvest. For the 28-year-old radiata pine forest above, this surrender liability could be as much as 12,700 NZU, which is $470,000 at current prices. When the forest is replanted and the net carbon storage begins to increase again, it will begin to earn NZUs. When registered post-1989 forest land is deforested or deregistered, the total unit balance must be paid back. Participants will never have to surrender more NZUs than the forest has earnt.
