Are you buying, or do you already own, farmland, forest land or a rural lifestyle block? While your lawyer will be a key adviser in any land purchase, it pays to understand the basics of New Zealand’s Emissions Trading Scheme (ETS) especially if your land is, or may have been, covered in more than 1 hectare of trees, and could be subject to obligations and restrictions under the Climate Change Response Act 2002 (CCRA).

At a high level, the ETS is a key tool to help us respond to the climate emergency and meet New Zealand’s target reductions in greenhouse gas emissions, along with the “zero carbon” measures in the CCRA that support planning for emissions reductions and climate adaptation. Under the ETS, businesses with legislative responsibility for emissions are required to surrender carbon credits (known as New Zealand Units, “NZUs”) for each tonne of carbon dioxide equivalent emitted.

Under the Government’s current ETS design, certain forests  (known as “post-1989 forest land” under the CCRA) can receive NZUs for the carbon dioxide that the trees remove from the atmosphere and store as carbon as they grow, and these NZUs can be sold to emitters to meet the emitter’s surrender obligations.

This creates a carbon market and cashflow for participating forest owners (this is not always the landowners, as landowners can grant carbon rights to third parties through legal arrangements such as leases, forestry rights, carbon agreements and licences).

In contrast, those with “pre-1990 forest land”, which are considered to be part of New Zealand’s baseline carbon sink, are categorised as emitters if they deforest above a threshold. 

Regardless of whether you retain the carbon rights in the trees as a landowner, it is worth remembering that you can still be or become responsible for the associated obligations by virtue of being the landowner of forest land captured by the ETS.

So how do forests end up in the ETS?

1. Voluntarily - owners can apply to register their “post-1989 forest land”, which is land that is currently “forest land” and either was:
   1. not forest land on 31 December 1989;
   2. forest land on 31 December 1989, but was deforested between 1 January 1990 and 31 December 2007; or
   3. pre-1990 forest land that was deforested on or after 1 January 2008, and any ETS liability has already been met.
2. Mandatorily - deforesting “pre-1990 forest land” is automatically captured by the ETS if the land is deforested above a threshold and was:
   1. forest land on 31 December 1989 (native or exotic forest species);
   2. remained as forest land on 31 December 2007; and
   3. contained mostly exotic tree species (note - this means that conversely, land that was native forest on 31 December 1989 and remained native forest on 31 December 2007 is not pre-1990 forest land - it is not covered by the ETS).
3. To qualify as “forest land” under the ETS, an area of land must have forest that:
   1. covers at least 1 hectare in area (or if smaller than 1 hectare, is no more than 15 metres from an adjacent area of forest land larger than 1 hectare);
   2. contains species that can reach at least 5 metres in height when mature;
   3. has (or will likely reach) canopy cover of more than 30% in each hectare;
   4. has an average width of at least 30 metres across (unless it joins other forest land); and
   5. is not horticultural fruit and nut trees that are managed as food crops.

Voluntary registrations for “post-1989 forest land” have the potential to bring financial benefits, but come with exposure to price volatility and extensive compliance obligations. These obligations include reporting (filing emissions returns to record carbon stock changes and receive NZUs) and notification (including as to any change in ownership, or if adverse weather events temporarily or permanently destock the land). The reporting obligations involve extensive underlying mapping and management work, (which can be costly) and there are significant penalties for errors.

The government is also carrying out a review of the current ETS settings, and has separately announced a new annual charge of $30.25 per hectare of registered post-1989 forest land, as well as new fees for existing services, that come into effect on 19 October 2023. These regulatory changes will considerably increase the costs for ETS forestry participation. Please reach out to our experts who regularly work with industry participants, if you would like to discuss these changes.

Any deforestation  of ETS forest land could have significant financial implications. For example, if you have to buy NZUs, the surrender liability could be in the ballpark of $30,000 to $52,000 per hectare of 25 year old pinus radiata, based on an NZU price of $70 per NZU, which is the average spot price recently (noting that the price corridor indicated by current Government policy would suggest the price will increase).

This is why it is important to consider and understand your rights, risks and responsibilities as a landowner and/or any contractual allocation of these to a third party that may already in place through the legal arrangements mentioned earlier, even if you do not personally sign up to be an ETS participant.

Common CCRA notices and what they mean

Your lawyer can carry out a search of your title and obtain copies of any CCRA notices registered against your title. The most common types of notices show the presence of:

• “post-1989 forest land” that has been voluntarily registered in the ETS (known as a “carbon accounting area” and which qualify for NZUs as the trees grow);
• “pre-1990 forest land”, which means there are, or were (and that there still should be ), trees on the land that were automatically captured by the CCRA, for which the landowner at the time (up to November 2011) claimed a one-off compensation allocation of NZUs in recognition of the potential loss in land value through the fact that these trees can neither be registered in the ETS to earn NZUs for future carbon storage, nor can they be cut down for a change in land use without replanting the area in new trees;
• “pre-1990 forest land that is exempt land”, meaning that an exemption applies to the pre-1990 forest land on the property (ie there is no penalty for deforestation). This most commonly results from the landowner owning less than 50 hectares of pre-1990 forest land, and not claiming the compensation allocation of NZUs (there are also other grounds for exemption, including to clear “tree weeds”, and for Māori land etc);
• “pre-1990 offsetting forest land”, which means that part of the land is being used to replant an equivalent forest (and should remain forested) with a species capable of producing a similar level of carbon removal as the pre-1990 forest land which is being or has been “deforested”;
• "post-1989 offsetting forest land”, which is similar to the above except that from 1 January 2023, it is possible to deforest post-1989 forest land (under averaging accounting) and offset the emissions by planting elsewhere as well;
• “temporary adverse event land”, which indicates that NZU surrender obligations have been suspended while the land recovers from a temporary adverse event (eg a cyclone that cleared the trees), provided the forest is re-established and there are no actions taken that are inconsistent with carbon recovery; and
• “permanent forestry land”, which shows a new category of forest land introduced into the ETS from 1 January 2023, being post-1989 forests that may not be clear-felled for at least 50 years after ETS registration (without incurring additional penalties).

No CCRA notice?

While registered CCRA notices should identify all post-1989 forest land that has been registered in the ETS, there can be a lag between the time an application to register is made, and when a CCRA notice appears on the title, or from when post-1989 forest land is de-registered and the CCRA notices are removed from the relevant title. For this reason it is important to check the participant register in the Emissions Trading Register for all land transactions as well, and not just rely on title information.

For pre-1990 forest land, if no compensation units were claimed when the landowner at the time was qualified to apply, then there will be no pre-1990 forest land CCRA notice registered against the land title, even if such forest exists on the land. However, the pre-1990 forest land rules will still apply, unless an exemption or offset has been granted, regardless of whether or not there is a registered CCRA notice. 

If you are aware of current or previous tree coverage greater than 1 hectare in area within the property, it would be good practice to inform your lawyer and seek professional guidance on what to be aware of.

Get in touch

Please reach out to one of our experts if you would like to discuss how we could help you navigate the Emissions Trading Scheme and better understand the opportunities, risks and responsibilities in owning forestry land.

Special thanks to Senior Solicitor Kitty Lin for her assistance in writing this article.