The combination of the Zero Carbon Act and forthcoming Emission Trading Scheme legislation will transform the landscape. The Government has done a poor job of educating New Zealanders about what it will mean. The Government is now on the defensive.
In this article, the focus is on multi-rotation production forestry. The associated story of permanent forests must wait for another article.
The starting point is that NZ has a policy goal of zero net carbon emissions by 2050. That means, among other things, that NZ has either to find new energy sources to replace fossil fuels or to offset those emission in other ways. The offsetting has to start right now.
There are only two ways to offset emissions.
One way is to sequester carbon in trees in NZ. The second is to buy emission rights from overseas people who grow trees overseas.
The second way is an avoidance strategy where New Zealanders pay others to carry the burden. It works only in a world where there are lots of wealthy people in one part of the world and lots of poor people elsewhere.
Both NZ and Australia have played this game in the past. Unfortunately, NZ did it with cheap and largely fraudulent emission units from Ukraine.
Both NZ and Australia plan to play the overseas buying strategy again, though this time, hopefully, with more integrity.
However, there is not much virtue signalling or salving of consciences by these actions. It cannot be the main game.
To cut to the chase the new zero-carbon legislation means New Zealanders need to totally change their lifestyles and plant a huge number of trees in NZ over the next 30 years.
To put things into perspective, the wall of wood coming up for harvest in the next 10 years is about 650,000 hectares. It will all need to be replanted but the replanted forests will not earn carbon credits. It is only new forests on land not recently in forests that earn carbon credits.
NZ’s short to medium term forest policy is encapsulated in Government messaging in the Billion Trees programme. Assuming a planting rate of 1000 trees a hectare, which is typical, then replanted forests will take up most of the Billion Trees. It bears repeating that these replanted forests will not earn carbon credits.
Extending the thinking out to 2050, by then almost all the 1.73 million hectares of existing plantation forest will have been harvested. That, too, will need replacement with another rotation of trees on the same land just to avoid new carbon liabilities.
The proposed new ETS, with its focus on new, multi-rotation forestry converted from farmland, will provide forest owners with first-rotation credits based on the average sequestered carbon over multiple rotations. For new forestry based on radiata pine and 28-year rotations, forest-owners will claim credits for the first 17 years of the first rotation.
To state that as explicitly as I can, the carbon benefits relate to long-term accumulated environmental benefits over many rotations but the total cash benefits are paid out in the first 17 years of the first rotation.
The credits are expected to total about 340 tonnes a hectare of carbon-dioxide equivalent. At current prices of $25 a tonne, they will be worth about $8500 over 17 years.
However, the smart-money people can see potential for this carbon price, really a carbon-dioxide price, to rise to at least $75 a tonne but perhaps $100 or even $200.
Given a price of $100 a tonne a hectare of farmland converted to forestry would earn $34,000 over the next 17 years from carbon trading.
That raises the question as to how much farmland will be converted to forestry. It’s a multibillion-dollar question.
Let’s take a hypothetical figure of 100,000 hectares a year. After 10 years we would have a million hectares of new forests and they would be earning about 20m tonnes of carbon credits each year. That would make a sizable dent in our overall net emissions but would not get us anywhere near zero net emissions.
To put things in perspective, NZ’s gross emissions of carbon dioxide equivalence are about 80m tonnes a year. About half is long-lived carbon dioxide. The rest is based on equivalence calculations for methane and nitrous oxide.
From a national perspective one of the problems with 28-year rotation radiate pine is that the trees will earn credits for only 17 years. For the 11 years from year 18 to year 28 the trees are still growing but neither earning new credits nor incurring new liabilities.
So, after 17 years we have to plant more new forests on more farmland just to keep up the existing flow of credits needed for elsewhere in the economy. It requires running fast to stand still.
Once 28 years have passed then, if the trees are harvested, there will be a liability attached to the land of about 340 tonnes of carbon dioxide equivalence. To avoid payment of the liability, the land must be replanted in another rotation of forestry. But I emphasise this replanted forest, being second rotation, earns no further credits.
Hence, if we are to move to anywhere near a zero-carbon lifestyle and unless we can totally eliminate use of fossil fuels the forests must continue marching across the landscape, like the mythical triffids of the John Wyndham classic.
So, is there a counter argument why the above scenario is alarmist?
The counter argument can only be that new technologies will come to the rescue. Supposedly, we will rely on solar, wind and geothermal combined with new battery technology to transform our economy. At that point the march across the landscape can stop.
Actually, the scenario I have drawn above has already allowed for these technologies coming substantially to the rescue. Without them, the march of the pine trees across the landscape will need to be much greater than 100,000 hectares a year.
Even with policies that are well thought out there are always prospects of unintended consequences. With carbon trading there will be substantial windfall gains for people who own non-dairy pastoral land and sell it for forestry. We are seeing that already.
The reason I exclude dairy-land is that dairy economics are sufficiently strong that dairy-land values will provide a buttress against forestry. The forestry will go predominantly on sheep and beef land though there will be exceptions.
Right now, when non-dairy pastoral land comes on the market there are multiple forestry buyers competing for it. This is particularly the case for land within 70km of a port. The likelihood is competition for this land can only increase.
In previous articles I have focused on the role of international investors because they have the scale and financial power to make big decisions quickly with implications that become irrevocable. However, the landscape transformation issue goes well beyond international investors.
If there is a key difference between 50 Shades of Green folk and the Government it is that 50 Shades is looking forward while the Government is relying on rear-mirror statistics.
Right now, the Government has a tiger by the tail.