Climate Change

19 Feb 2009

Emissions Trading Scheme – Continued Uncertainty For The Forestry Sector

The Emission Trading Scheme Review Committee, established to honour a commitment given by National to ACT in return for support on confidence and supply, has been mandated to review the emissions trading scheme (ETS) passed by the previous Labour Coalition Government and a range of related matters.

Early speculation that the ETS would be put on hold pending the outcome of this review, has not eventuated and the ETS remains on foot. In this FYI we briefly touch on what this means for ETS participants, particularly the forestry sector which is the first "cab off the rank" for ETS compliance.

The National led Government, while accepting that climate change is among the greatest challenges of our age, has described itself as "having a more modest view of New Zealand's role in the global efforts to tackle climate change".[1] As a result, a review of New Zealand's suite of climate change policies has been initiated, spearheaded by the Emissions Trading Scheme Review Select Committee. The terms of reference of the committee are wide, but the Government went on record in December, in New Zealand's Statement to the UN Climate Change Conference in Poznan, as saying that the objective of the review is not to step back from Kyoto. Far from retreating from the climate change challenge, the review is "a means to find a politically durable way of moving forward by building a wider policy consensus. " Submissions close 27 February 2009.

Although the ETS passed into legislation in September 2008, its application was effectively backdated to 1 January 2008. Whatever the politics, the end result is a policy hiatus and uncertainty for those directly and immediately affected by the ETS. This uncertainty principally affects the forestry sector which is the first sector to come into the ETS. Over the Christmas period the Ministry of Agriculture and Forestry (MAF) took out advertisements bringing to the attention of owners of exotic forests obligations that certain of them may have under the ETS as it is currently enacted. The ETS Review Committee may well, in due course, recommend changes which change the existing legislative scheme. 

We have divided our comments by reference to those owners of pre-1990 forest land (land that on or before 31 December 1989 was in exotic forest) and owners of post-1989 forest land (land that was not in forest as at 31 December 1989).[2]

Pre-1990 Forest Land Owners

The ETS requires owners of pre-1990 forest land in the calendar year 2008 who deforested some of that forest land (converted it from exotic/pine forest to some other use eg grassland for dairying purposes) and the converted area was greater than 2 hectares, to have reported the fact of that deforestation to MAF by 31 January 2009. Moving forward, deforestation of pre-1990 forest land from 1 January 2009 must be reported to the Ministry 20 working days from the date of the deforestation. 

Bearing in mind that a failure to report could, on conviction, incur a fine of up to $8000 for a first offence, foresters clearing land ready for possible conversion, are placed in a difficult situation, particularly where the economics of conversion versus replanting are unclear pending clarification on how a new/amended ETS might work.

Record keeping of possible intentions and any uncertainties becomes potentially very important and pre-1990 forest owners in this situation should ensure that they have a good understanding of the parameters of the obligations imposed by the ETS.

The goods news, however, is the obligation to submit an emissions return by such a deforester and hand over New Zealand Units (NZUs) (or some other acceptable equivalent) to the Crown to offset the deemed emission will not accrue until the period 1 January to 31 March 2010 when the first emissions return for the period 1 January 2008 to 31 December 2009 is due. By this time (hopefully) both the process of the Select Committee review and any subsequent amending legislation should be well sorted. 

The 50 hectare Exemption

Forest owners holding less than 50 hectares of pre-1990 forest land that has attractive alternative uses, such as coastal subdivision, are faced with more of a dilemma. Under the ETS as it currently stands they have until 30 June 2009 to seek an exemption from the application of the ETS to their forest. Failure to obtain an exemption will mean any future deforestation will incur a cost, the amount of which will be dependent on the price of NZUs at the time of such deforestation. Some commentators have suggested that this could be more than $24,000 per hectare. However, if they go through the expense of preparing and making an application for an exemption, they also face the possibility that subsequent amendments to the ETS may render their application unnecessary.

This difficulty would be best amended by extending the timeframes in relation to making an exemption application, although the challenge (and greatest uncertainty) will be whether there is a political will to pass amending legislation within the necessary timeframe.

The Free Allocation

Part of the quid-pro for the constraint placed upon pre-1990 forest land owners under the ETS was a process by which a certain amount of NZUs would be allocated on a without cost basis to pre-1990 forest land owners. 

The allocation process was initiated with the circulation of a draft allocation plan for which submissions now close on 30 April 2009. Currently there is a closing date of 31 July 2009 for applications. Given this timeframe, again it is likely that the final outcome of the Select Committee review will not be known when applications close. Owners of pre-1990 forest land who wish to apply for the free allocation of NZUs will therefore have to make a decision as to whether or not to proceed with the cost of making the application notwithstanding the uncertainty as to what the ETS may look like in due course.

Again, we suggest that this difficulty could be best handled by extending the timeframes for making an application for a free allocation of NZUs. Unlike an extension for the 50 hectare exemption, which will require an legislative amendment, this extension could be easily accommodated through administrative processes.

Post-1989 forest

For owners of exotic forest on post-1989 forest land, the situation appears to be a little more straightforward.

Under the changes made to the ETS prior to its enactment, post-1989 forest owners can defer the decision as to whether or not they will apply to enter the ETS until some time in 2012. If they do enter the ETS at that point, under the current scheme, they will still be able to claim NZUs for the CO² sequested by their forest from 1 January 2008. 

Post-1989 forest owners still have the option to register as ETS participants now. The MAF advertisements reminding forest owners that it can accept applications (as envisaged by the current ETS legislation) for those post-1989 forest owners wishing to enter the scheme make it clear that it is still business as usual in relation to administration of the ETS and no “hold” directive has been issues pending outcome of the Select Committee review. We understand that some forest owners who wish to get the benefit of carbon sequestered in the 2008 year sooner rather than later are seriously contemplating, if not already making, applications to join the ETS.

This will create the interesting position whereby the Crown may be required to allocate NZUs to such participants even though the ETS may or may not go forward in its current state. Whilst the MAF approach follows the strict letter of the law it may also reflect a more pragmatic political consensus. Notwithstanding the review process, the ETS as regards the forestry may well not be that different to that currently in the legislation. Be that as it may, this uncertainty adds another layer of complication and potential unnecessary expense for the forestry sector.

As can be appreciated this policy "hiatus" has generated concern and criticism from the forestry sector who have to deal with the resultant uncertainty on a day to day basis. It is noteworthy that unlike the uncertainty surrounding the ETS, the Permanent Forest Sink Initiative (PFSI)[3] does not appear to be on the Government's agenda for amendment. In this regard Simpson Grierson continues to assist clients in relation to the PFSI whilst they are awaiting resolution of the uncertainty surrounding the ETS.

We will monitor developments with interest.

[1]    Nick Smith 9 December 2008

[2]    For a fuller discussion of the distinctions between post-1989 forest land and pre-1990 forest land in the context of the ETS see our FYI July 2008

[3]    For a fuller discussion of the PFSI and the Afforestation Grant Scheme (AGS) see our FYI dated July 2008.

Authors

Peter Stubbs

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Dave Trueman

Partner - Corporate & Commercial

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Elisabeth Welson

Partner - Corporate & Commercial

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Craig Nelson

Senior Associate - Corporate & Commercial

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