Emissions trading changes summarised

Wednesday 9 Oct 2019

Last month Margules Groome published a summary of the recent changes to the New Zealand Emissions Trading Scheme with their insights into the how they might change the investment potential for forestry land.

In July 2019 the Ministry of Primary Industries (MPI) announced the third in a series of proposed changes to the Climate Change Response Act 2012, which affect the function of the Emissions Trading Scheme (ETS).

This announcement follows further updates in December 2018, and March 2019, based upon the feedback from consultations the Ministry of Primary Industries and the Ministry for the Environment ran throughout 2018.

Why the need for change? – The ETS has had limited effect on encouraging plantation forestry in New Zealand, with the total area of post 1989 forests registered under the ETS having decreased since inception. Much of this removal was either driven, or enabled by, the crash in unit prices from 2012 to 2015, where unit prices reached as low as NZD2.00.

As the ETS is a key pillar underpinning New Zealand’s ability to meet its emissions targets, change is required to encourage more planting to help meet these goals.

Major changes announced

Introduction of Average Accounting - This is the change with the largest potential effect on forestry investment in New Zealand. A significant departure from the previous method of calculating (New Zealand Unit) NZU flows, the averaging approach allows for liability free NZUs to be sequestered to a pre-determined level based on species, region and rotation length. Provided that the forest is continually replanted after harvest, the NZUs sequestered under averaging will never need to be paid back. The mechanisms of how the averaging age will be calculated are still to be finalised, but there is likely to be provisions for flexibility in harvest age without impacting the averaging age.

Ability to offset – This change provides forest owners with the ability to replant an equivalent forest elsewhere without incurring any liabilities. This will be helpful in the case of high value land being able to be converted into alternative uses.

De-risking investments in the case of adverse events – In the case of a significant adverse event, such as fire or windthrow, provided the forest is replanted in time, there will not be a liability incurred.

These changes will have a significant effect on the viability of bareland forestry investment in New Zealand, considerably altering cashflows in early stages of the rotation without the associated liabilities.

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Source: Margules Groome

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