Key issues for the forestry sector from the Climate Change (Emissions Trading and Renewable Preference) Bill

New mechanisms to combat climate change mean the cost of carbon has now become a commercial reality for New Zealand business with the forestry sector at the forefront of the Government's policy initiatives in this area. In this article senior associate Kate Radka outlines the essential features of the emissions trading scheme for the forestry sector proposed under the Climate Change (Emissions Trading and Renewable Preference) Bill and sets out some questions to help foresters develop a strategy for managing their financial exposure to carbon.

The Climate Change Bill introduced on 4 December 2007 is significant for the forestry sector in New Zealand. The Bill largely reflects the Government's policy announcements in September regarding the introduction of an emissions trading scheme, which over time will be economy-wide. For earlier Bell Gully commentary on this refer to the article "New Zealand's Emissions Trading Scheme - how will it work and what are the implications for business?" in the Spring 2007 Commercial Quarterly.

The essential features of the scheme for the forestry sector are:

The new legislation is not expected to be passed until mid-2008 but will then apply (along with regulations) retrospectively to the forestry sector, with effect from 1 January 2008. The first emissions reporting period for forestry scheme participants is after two years, for the period ending 31 December 2009. While the details of the Bill and Regulations are important to foresters, key issues that businesses operating in the forestry sector will need to address in the coming months include:

• Allocation of units to pre-1990 forests. In its September policy announcement the Government stated that units would be allocated to pre-1990 forests on a pro rata basis according to the forest size. This has not been carried through to the Bill and instead the policy is to be developed further and, once decided, will be reflected in an allocation plan. Pre-1990 foresters should be protecting their interests by advocating an appropriate allocation policy and plan to Government.

• Rights of landowners and forestry right/lease holders. Liability is on the landowner in respect of pre-1990 forests unless they have divested any decision on deforestation to a third party. For post-1989 forests the participant can be either the landowner or the forestry right (or lease) holder, as applicable, but either requires the agreement of the other before it can register as the scheme participant. Therefore these parties need to be communicating with each other about their intentions.

  Crown Forest Licence holders are unlikely to be allocated any units under the scheme as the units attributable to Crown land are expected to be set aside for the settlement of Maori claims under the Treaty of Waitangi.

• Trading forestry emission units. Foresters will be the first to have emission units available for sale under the scheme. This could provide important liquidity to a market where there are expected to be more buyers than sellers. However foresters will have to consider their future land use plans carefully before selling units, as they may face having to buy back units at uncertain future prices if their plans change over time. Post-1989 foresters face similar uncertainty when deciding whether or not to opt in to the scheme. For pre-1990 foresters anticipating substantial future deforestation, with the local market likely to be short, they may well need to look to overseas markets for Kyoto-compliant units. The pricing and availability of the different types of international units can vary greatly over time, so it is not too early to start looking at purchasing options.

Initial questions for pre-1990 and post-1989 foresters to start thinking about

As the consultation period for submissions on the Bill and draft Regulations draws to an end, foresters should, at least, be considering the following initial questions as they develop their strategy for managing their financial exposure to carbon.

Pre-1990 forests

• Will the proposed NZU allocation scheme for pre-1990 forests (pro rating based on forest size) favour you as compared to the alternative options floated by the Government? If so, have you indicated your support, and if not, have you made submissions in favour of a different option?

• If there are multiple interests in relation to your forest (e.g. a landowner and forestry right/lease holder), there may be more than one person with the power to deforest and trigger liability under the emissions trading scheme. If so, have you determined who is the participant for the purposes of the emissions trading scheme?

• Do you have an interest in an unincorporated joint venture, trust, partnership, or jointly own land with others, which may result in you being jointly and severally liable under the scheme?

• Are you entitled to an exemption from the emissions trading scheme and, if so, how do you get that exemption?

• Are you involved in other projects or activities that involve pre-1990 forests, which may take you over the threshold for seeking an exemption from the emissions trading scheme?

• How do you intend to use or develop your land in future? Have you refined your strategy for use and development of the land to minimise your liabilities and maximise opportunities under the emissions trading scheme? If you are considering deforesting and changing to a new land use, have you calculated your potential liability under the proposed regulations?

• Do you have an interest in Crown forest land? Will you have an interest in Crown forest land under a future Treaty of Waitangi settlement? If so, have you determined which of the proposed options will be best for you on the basis of your proposed development or use of the land?

• Have you identified all of the carbon trading opportunities that may be available to you?

• If you are selling or buying forestry land, how will you minimise your exposure to liability, and maximise your opportunities?

Post-1989 forests

• How do you intend to use or develop your land in future? Would your proposed use and development of the land maximise opportunities and minimise liabilities that may arise under the emissions trading scheme if you opt in?

• When comparing the benefits and liabilities under the scheme, bearing in mind your proposed use and development of the land, against those under the Permanent Forest Sinks Initiative and the status quo, which is the best option for you?

• Are you a forestry right holder or lease holder of post-1989 forestry land and have you sought the permission of the landowner to opt into the emissions trading scheme, if you are intending to opt in? Is your interest in the land sufficient to enable you to do so?

• Are you a landowner with a forestry right holder or lease holder of post-1989 forest on your land? If so, have you determined who is the participant for the purposes of the emissions trading scheme?

• Do you have an interest in an unincorporated joint venture, trust, partnership, or jointly owned land with others which may result in you being jointly and severally liable if the activity in which you have an interest gives rise to obligations under the scheme?

• Have you identified all of the carbon trading opportunities that may be available to you?

• If you are selling or buying forestry land, how will you minimise your exposure to liability, and maximise your opportunities?

Enquiries and information

For more information on any of the cases, articles and features in Commercial Quarterly, please email Diane Graham or call her on 64 9 916 8849.