New ETS accounting method and implications for land transactions

The Government recently made announcements on the key settings for averaging accounting. The new carbon accounting approach fundamentally alters how many carbon credits a newly registered post-1989 forest will earn in the Emissions Trading Scheme (ETS). It will be mandatory from 1 January 2023, but there are options for forests registered between 1 January 2019 and that date. It is important for people promoting property sales to understand how averaging accounting for forests in the ETS applies to specific land.

Our previous article (winter 2021 issue) explained the differences between post-1989 and pre-1990 forest land (which has obligations if it is deforested) and some of the forestry ETS implications. When providing advice or preparing marketing materials, establishing the difference and the ETS implications are the first steps.

How averaging accounting will work

A post-1989 forest — land where forest is first established after 31 December 1989 — can enter the ETS and earn units under the new averaging accounting rules from 2023. It will earn units on its first rotation up until it reaches a set age (called the average age) — 16 years for radiata pine, but generally a higher age for other species. It earns no more units at that point, but the owner will not have to pay any units back to the Government if the forest is harvested or the tree species changes. The owner must simply keep the land in forest cover.

Considerations for land already in post-1989 forest

There are different things to be aware of depending on whether land has never had forest, is already planted, or is recently harvested. The implications for land which already has forest on it, or is recently harvested, are discussed here in simple scenarios where there is a small forest which is all the same age and is harvested at the same time.

Is the land already registered in the ETS?

The first thing to check is whether the forest land is registered in the ETS. A land status notice registered on the title — look under ‘Interests’ for ‘… Notice pursuant to Section 195(2) Climate Change Response Act 2002…’.

If the land is registered in the ETS, the vendor and purchaser have obligations to ensure the proper transfer of ETS participation, including notifying Te Uru Rākau — New Zealand Forest Service and completing an emissions return. The participation is transferred to the new owner, including any liability for future harvesting or deforesting and future earning potential of the land. The units already earned by the forest are not. How this is sorted out is up to the parties involved in the transaction.

Purchasers of land with forest registered in the ETS must be aware of their ETS obligations going forward. Failing to comply with these obligations can have serious consequences. For example, from 1 January 2022, infringements may be issued for failing to transfer participation in the ETS correctly. There are also other penalties if the emissions return is not correctly submitted. Infringements will start at $1000 for individuals and $3000 for companies, and penalties for incorrect returns or failures to submit returns can be considerable — in the $10,000s or $100,000s.

When was the land registered in the ETS?

The next thing to consider is when the land was first registered in the scheme. If registered in the ETS before 2019, it must stay on the existing stock change method for carbon accounting and cannot transition to averaging accounting 1 . The stock change method rewards units for as long as the forest grows, but there are significant surrender requirements when the forest is harvested. This surrender is capped at the number of credits the forest has earned since it was registered — which may be considerable if the land changes hands late in its growth cycle.

With the stock change approach, if the forest was registered after it was ten years old, it may not have any credits left over after paying them back at harvest. A forest that has already been harvested and is on the stock change method will earn credits again as the second rotation grows, but it will have to surrender all the credits it has earned if harvested.

If the forest is registered in the ETS after 1 January 2019, it will be on the stock change approach when registered. However, the owner can choose to transition to averaging accounting in 2023. This is a one-off opportunity. If they do not choose to transition in 2023, they will stay on stock change accounting.

How old is the forest?

With averaging, the age of the forest is very important. A forest that has reached its ‘average age’ before registration or is on its second or subsequent rotation will not earn any credits. For example, radiata pine forests planted before 2003 will be older than 16 — their ‘average age’ — in 2019, so they will not earn units under averaging. The less time between planting and registration, the more earning potential the forest has.

If the forest has already been harvested, it won’t earn any units under averaging accounting. This is because it’s unlikely to store any additional carbon compared to its first rotation and the policy intent of averaging is to encourage new forest establishment.

From 2023, as an alternative to averaging, post-1989 forests can register into the permanent forest activity and earn units on the stock change approach but cannot be clear-fell harvested for 50 years.

Buyer beware

Due diligence is essential for land sales that may have implications in respect of forestry in the ETS. Depending on management of the forest, many factors may affect the purchase price for the forest land, including costs from surrendering units at harvest or possible benefits from future earning of units. Particularly for large or complex forests, the advice of a consultant or professional adviser with experience in the ETS is recommended.

Oliver Hendrickson

Director Forestry & Land Management, Te Uru Rākau — New Zealand Forest Service