Initially legislated in 2008 to reduce greenhouse gas emissions, and recently refined, the Emissions Trading Scheme (ETS) offers significant revenue potential to owners of land that meets certain criteria.
This can include lucrative opportunities for rural properties otherwise mainly suited for hunting and recreation.
Rotorua based Felix Brandt is ETS manager for forestry consultancy PF Olsen, which manages about 12 per cent of New Zealand’s carbon forests.
“From November government will restrict how much forest can be ETS registered. With limited exceptions, such as categories of Māori owned land, no more than 25 per cent of actively farmed land classified up to Land Use 6 can enter the ETS. For Land Use 7 and 8, which is less productive for farming, there is no restriction.
“Over the last five years the carbon price has more than doubled, which has had a huge impact on land values across New Zealand,” he says.
Companies in certain industries, such as energy, must purchase and surrender carbon credits to cover their emissions. In this way the ETS puts a price on emissions, incentivising companies to cut them, for instance by becoming more efficient.
Conversely, ETS participants who earn carbon credits from activities that remove carbon from the atmosphere are financially rewarded for contributing to climate mitigation. Trees sequester carbon, so planting a forest generates carbon credits, which the forest owner can then sell into a very liquid market.
ETS forests must have been planted or naturally regenerated on land that was not forested before 1990.
“Forest owners must register their trees in the scheme, which is administered by government agencies. Carbon credits are earned yearly up to the average age of the forest, or for 50 plus years depending on the carbon accounting system the trees are registered under.
“A forest earns carbon credits depending on its size and the tree species. While the carbon credit price can and does fluctuate, since 2015 it has consistently risen,” says Felix.
Initially carbon credits (NZUs) traded at around $20 each. However, due to the ETS initially being open to foreign markets, buyers acquired junk carbon credits, which caused the spot price to drop to less than $2.
In 2015, once the government closed the ETS to foreign carbon credits, the price steadily recovered, almost reaching $90 in 2022. Regulation is the biggest ETS risk factor and while regulatory changes checked that rise, the price is currently around $56.
“Much marginal or low productivity farmland is still perfectly good to grow tree species, which generate a steady stream of carbon income. Trees also reduce erosion, helping stabilise the land and catchment water supplies. Scale is a benefit, reducing the per-hectare administration costs and maximising the number of trees that absorb carbon.
“To ensure sustained carbon credit revenue, a suitable area should be able to remain in forest for decades, or even permanently, in which case native species may be preferable, providing greater biodiversity as well as mitigating erosion.“A few years ago, when preparing a business case for forestry, the ETS was seen as the icing on the cake. Now it is a big part of the cake itself, sometimes even the whole cake. These new land use class restrictions will have a significant impact however, likely reducing the amount of afforestation,” Felix says.
Pine trees offer the best ETS returns.
“A conservative estimate for carbon sequestration from a radiata pine plantation forest is 20 tonnes per hectare per annum, worth about $1100 per hectare at the current carbon price. Indigenous species also have value. On steep land with shallow or erodible topsoil, manuka might be better than big, heavy pine trees. A reasonable figure for smaller manuka stands, less than 100 hectares, is six tonnes per hectare per annum,” says Felix.
Gary Brooks, East Coast rural manager for PGG Wrightson Real Estate, has noted recent interest in ETS registered hunting blocks.
“We are marketing a large Ruatoria property with significant ETS registered native forest including manuka, kanuka and rewarewa. We also have a Ruapehu district property growing first rotation forest. Both properties show exceptional return on investment from their carbon credits, while also offering some grazing, abundant hunting, and the potential for other recreation. Interest in these, and similar properties, has consolidated significantly since carbon credit values have increased,” he says.
Felix Brandt has advice for anyone thinking of registering for the ETS:
“To better understand the risks, rewards, and forward cash flow earnings, talk to a consultant or someone you know who already has a forestry carbon investment. It is a complex topic, and the up-front investment is not small, so you need to be confident that you will get a good return.“To register, you need to submit detailed technical information on the forested area, including GIS shapefiles. The process has become increasingly difficult for private individuals, hence the need for specialist help,” he says.
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