Update – 1 November 2021
Cabinet paper on amendments to forestry regulations and supporting documents
On 13 September 2021, Cabinet made decisions on several major amendments to the Climate Change (Forestry Sector) Regulations 2008. These amendments will implement the new forestry provisions in the Emissions Trading Scheme that take effect on 1 January 2023, including the new averaging approach for carbon accounting.
The regulations are being drafted and will be finalised and published by 1 October 2022.
About this consultation
In June 2020, the Climate Change Response (Emissions Trading Reform) Amendment Act 2020 passed into law. This will introduce new forestry provisions to the New Zealand Emissions Trading Scheme (ETS) on 1 January 2023.
The Climate Change (Forestry Sector) Regulations 2008 need to be updated to make the new legislation work in practice.
The amendments to the ETS Forestry Regulations we consulted on included:
- the detailed rules and settings for averaging accounting
- technical amendments to simplify the ETS and let us implement new policies.
Full details are in the consultation document. We held 2 webinars to help explain the proposed amendments.
What was proposed
Between early November 2019 and mid-January 2020, Te Uru Rākau consulted on a package of amendments including options for averaging accounting, and other technical amendments.
The amendments consulted on in March 2021 included the rules and settings for averaging accounting, such as:
- detailed age band frameworks
- rules for accounting for forests over multiple rotations
- the model for how the average age will be calculated.
This consultation also covered technical amendments to simplify the ETS and let us implement new policies. This includes:
- a clearer definition of sub-areas
- rules for the new pre-1990 forest land offsetting process
- amendments to make it simpler to participate
- amendments to implement existing decisions.
Presentation: Averaging accounting options [PDF, 3 MB]
Presentation: Technical updates [PDF, 2.4 MB]
Area weighted Field Measurement Approach (FMA) table [XLSX, 13 KB]
Previous consultation that closed on 15 January 2020
Webinars about the proposals
We held 2 webinars to explain key parts of the proposals on 12 and 19 March.
The 12 March webinar on averaging accounting was recorded and is available to view.
Video: Averaging accounting webinar (58.54)
Oliver Hendrickson: Kia Ora and good afternoon everyone. My name is Oliver Hendrickson. I'm the director of forestry and land management at Te Uru Rākau which is part of the Ministry for Primary Industries.
My role over at Te Uru Rākau is that I'm the director responsible for the emissions trading scheme for forestry and I'm here today to work through some of the options we have for how forestry in the ETS could be improved in the future operating model that we'll be bringing forward.
Joining me today I'd like to introduce a couple of my colleagues: Simon Tomkins, who will be working through some of the age bands, and Anne Manley, who will be working through some of the options available for how second rotation forest can be calculated going ahead.
There's a couple of things I just want to go through in terms of a bit of housekeeping initially. The first thing, because this is a webinar - we are video recording this and we will be making this available on our website for anybody who wishes to to view it at whatever time that works for them so we're creating a resource for others to be able to get engaged in this and I think it's probably obvious that because of the kind of exceptional circumstances we find ourselves in with COVID, we're trying to work in the medium that can't be cancelled at the last minute. But for us to be successful and to have a nice one hour session with you, can I please ask that you mute your microphones so that we don't have any kind of interference or cut-off coming through that's been recorded that makes it difficult for others to hear.
For questions, we'll be taking questions for the last 15 minutes of this and can I please ask that if you have any questions please write them into the meeting chat so in about 10 minutes from now I'll have the laptop closer to me and I'll be looking through all those questions and we'll do a moderation session at the end. The other aspect is you might say well 15 minutes isn't long enough, I totally agree. We'll be taking all the questions that have been presented and we will be creating a frequently asked questions that we can then put back out to you to everyone who's interested in here and we'll be then having more direct discussions with people. Today we're kind of at a macro high level in terms of trying to provide something for everyone that's available right now.
Also at the very end of our presentation, the last slide will provide details on how to make a submission. Now just like when we've done previous consultations, please make a submission in writing to us and the details on how to do that are at the very end and they'll be on our website as well. And we really hope that you have questions and we can have a conversation at points today. It's excellent that you've been able to raise questions but we can't actually take those as written submissions. We do or we are required that for us to formally receive submissions they are done through the submission process.
So I'm going to spend a little bit of time just kind of getting to where we're at and what we're going to cover and what this presentation is about and what it's not. So I'll take us through purpose and background, Simon will work through how some of the averaging accounting will work and the age bands and Anne as I mentioned before will work through the second rotation and then we'll get into a little bit more detail on bands and then we'll have some Q&A.
So this consultation is really flowing on from the legislation that was passed by the government last year which introduced averaging accounting for new forests. We had a consultation on the regulations about this time last year and regulations are really kind of the detail rules that participants and us who have to administer the ETS will work by. A lot of the options that we have to discuss with you, you'll see there are probably inherent trade-offs between simplicity and through complexity and while complexity may have more units that can be earned, that also comes with potential for inadvertent non-compliance and just - it can be hard.
So for some participants and I'm always really aware that we have participants ranging from small farm foresters up to multinational forestry companies with tens of thousands of hectares so we're really keen for feedback from each part of the sector around this and looking for an option that will work.
So some of the key things that came through in the new legislation was as I've described averaging accounting, a new permanent post-89 forest activity which is really kind of picking up where the permanent forest-sink initiative left off and NZUs will be available in both of those categories though the permanent category will have tagged units. And we also introduce some new policies about temporary adverse events which are available to all ETS participants, not just new forests and spatial offsetting rules for if we need to relocate forest and trying to maintain the carbon accounts for land use flexibility.
All right, so the top line talks about where we're at - how the legislation is currently worked through and it's taking effect, all of this is leading to a kind of final implementation date of 1 January 2023. And if you look on the bottom line, the green circles, that looks through as to where we are at in the process of developing the regulations, kind of the detailed settings of how these things will work. Right now we're in, you know, early 2021. This is the consultation on those final policy decisions by mid this year, we'll be looking to go to cabinet for those final policy decisions to be made and then we move into further drafting and testing and the regulations then being made into law by October, so they can be in effect three months later in January 2023.
So why is averaging important? It lines up with how we currently do our accounting internationally, it'll help us meet our climate change targets because averaging has inherent benefits of being able to provide for more safe carbon units for foresters to be able to trade freely and it will encourage afforestation. It's also inherently how averages work, it is simpler compared to stock change accounting.
So who will be able to use the averaging accounting? If you registered into the ETS before 1 January 2019 you remain on the stock change accounting approach. If registration is between 1 January 2019 and the 31st of December 2022, you have an option of going into stock change or averaging but from 1 January 2023 and onwards averaging accounting is mandatory for all new forests.
And I'd also just like to make clear a couple of things about this consultation is about the rules that will be available for new forests. The decision, and I think many participants who are listening may be interested about whether averaging will be applied to the existing post-89 estate, cabinet is still yet to make a decision on that and we understand that is in their programme of work for late this year.
I'd also just like to make clear, while the Climate Change Commission is doing its consultation right now on how New Zealand can meet its emission targets and the creation of emission budgets, this consultation is not in response to the Climate Change Commission work, it will however over time dovetail into what will become the government's emission reduction plan when it takes receipts of the Climate Change Commission's report and that ERP as we are calling the emission reduction plan is the government's response on how we're going to get to those targets, across the entire economy, of which forestry is just one part.
All right, well thank you for bearing with me for now, I'll be going and viewing the questions and the meeting chat and I'm going to hand off to Simon who is going to work through on some of the more detailed work on how averaging accounting.
Simon Tomkins: Cool thank you Oliver, this presentation - this part of the presentation will just run through how averaging accounting is going to work and what the rules are and after that we'll talk about some of the different options for averaging accounting.
So at its core averaging accounting is concerned with the long-term average carbon stock of a forest. So if you imagine a forest in New Zealand like the one on the top right hand side of the slide, they're planted exotic forests and then they'll usually be grown if it's a pine forest for around 28 years and then they'll be harvested and replanted and grow again.
The carbon stock in this forest increases as the forest grows but then a lot of the carbon is emitted at harvest and then it starts growing again after the forest has been replanted. Instead of accounting for these short-term changes in carbon stock over time, averaging accounting will move to a model where participants in the ETS will earn units as the carbon stock in the forest increases up to the long-term average carbon stock. We work out that long-term average carbon stock by looking at a forest that's grown and harvested over multiple rotations and taking an average of the amount of carbon that's in that forest.
So if you look at the graph, you'll see a blue line increasing up to a flat point and as that blue line increases that's the cumulative carbon stock per hectare of a forest. At age 16 it reaches what's called the average age, which is the age where the long-term average carbon stock is met and after that point, there'll be no further accounting for changes in carbon stock in that forest over time, so long as it's replanted so you can harvest at no liability and essentially all of those units you've earned up to the average age, can be sold into the market at low risk, as long as the forest stays in the ground and is replanted and the same species you won't have to do any accounting.
And this creates a lot of benefits for participants as Oliver mentioned it really increases the value of new forests and newly planted forests that use this approach and that's because they earn a lot more low risk units under averaging than they did under the previous stock change accounting approach, where participants would earn up and then have to surrender units every time the forest was harvested.
Under averaging for a pine forest for example the average age will be 16, a forest will be able to earn units for the first 16 years of growth and then not have to surrender them and can sell them into the market - that's an increase significantly over what the low risk amount of units would have been under stock change, and because it increases the value of new forest and newly planted forests, it's expected to increase afforestation.
As forests become more valuable, we'd expect more people to plant them and that new forest planting will help us meet our climate change targets. Averaging is less beneficial for older forests that are already past their average age and that's because they're already storing the average amount of carbon stock in their forest so they have no more units to earn or surrender unless they do something like change how old they are or change species.
So when we calculate the long-term average carbon stock of a forest, we assume that it's consistently harvested at the same age. So in this example in the table below, we've got a pine forest.
Across the estate and over time, pine forests have typically been harvested at age 28. If we assume that a forest is always harvested at 28 it gives us an average age of 16. However we know that if a forest is harvested when it's older, the average amount of carbon stored in that forest will increase - so for example if a forest - a pine forest was constantly harvested at age 35, the average age of that forest would be 19 and it would store more carbon on average than if it was harvested at 28. Now to capture this in accounting, we've created these ranges of harvest ages called age bands and basically any forest that's harvested within those ages will be given a single average age and be able to account for any difference between whatever its current ages and the new average age of the age band.
So whenever a forest enters the ETS, you won't be able to select your age band - you'll get one based on what we think your forest is when we think your forest is going to be harvested based on what we typically see in the estate. However if a forest grows to an older age than the age band or the default age band, you'll be entitled to earn a few more units and if it's harvested earlier than we expected, you'll have to surrender some units.
We can put this together in the diagrams on the slide in front of you now, so, on that graph forest when it's first registered would earn units for the first 16 years of growth and at that point as long as it's harvested within the age range of 20 to 35 and replanted it wouldn't have to surrender any units. However, if it was grown to reach age 35, it would earn additional units up to that dotted blue line on the right.
In this case this is a pine forest it's using a default table from Gisborne, so it would earn 110 extra NZUs per hectare. If it was harvested earlier, it would have to surrender some units so for example if it was harvested before it got to age 20, the participant would have to surrender some units for that harvest to account for the drop in carbon stock with a drop on the average carbon stock of that forest over time. So age bands really determine how precise the ETS will be for new forests. If we have a lot of narrow age bands, there'll be a lot of precision and optionality to increase your harvest age a little bit and earn additional units, however, it will get more complicated to keep track of the forests over time.
The other option is having a far simpler approach, where you only have one age band for example and it doesn't matter when you harvest your forest you'll always stay on the same average age - it'll be really simple. And the options that we're considering at the moment in this consultation and that are detailed in the consultation document, are a single age band approach, a four age band approach which you've already seen on the graph and another more complicated option when you have age bands that are five years wide throughout.
However, before we get to that I'm going to pass off to Anne Manley who's going to discuss some options for how we account for forests once they're past their first rotation.
Anne Manley: Thanks Simon. Well in addition to age bands, the other significant topic that we'd like your feedback on during this consultation - is where the changes in carbon stock in second and subsequent rotations should be accounted for. The current proposed approach would have ETS participants accounting for changes in carbon stock in the second and each subsequent rotation.
A second alternative approach which you'll find in the discussion document proposes accounting for changes in carbon stock in later rotations only if the land is deforested or a participant leaves the ETS. That's effectively the way we treat p90 forests now.
Under the first option - that's the detailed reporting on second and subsequent rotations, participants will need to account for changes in carbon stock if a forest is harvested in a different age band than in the previous rotation. For example, a forest that is harvested at 28 years, replanted, grows to age 35 when it moves up an age band and is then harvested at say, 36, may earn units. However, the next rotation would also need to be harvested at the higher age band, otherwise the participant would need to surrender units. Changes in carbon stock would also need to be accounted for if the forest type is changed between rotations. For example, if the first rotation is radiata pine and the second rotation is indigenous, the participant would need to surrender units down to the average carbon stock of the indigenous forest type. Finally, changes in carbon stock would need to be accounted for if the forest is deforested or removed from the ETS.
Looking at the implications, this detailed approach would provide the opportunity to earn some additional units for changes in rotation length, or from switching to a higher carbon yielding species. It would incentivise participants to manage their forests in the same way as their previous rotation. If a participant extends harvest age on the first rotation from age 28 to 30 or even 35, they will be incentivised to maintain that extension on a second rotation so they don't need to surrender units, and keep the additional carbon storage locked in.
On the other hand this detailed approach to accounting in second rotations will reduce flexibility in future forest management, with the potential to be limited or locked into a particular species or rotation length over time. Participants could potentially be penalised for changing species to indigenous. As you know forestry has long horizons between decisions and consequences, there would be challenges keeping information current over 30 years particularly when the land can be bought and sold potentially multiple times during that period, and compared to the simple option, this approach is more complex.
Having to restart accounting at 28 to 30 year time periods for many forests would increase the chances of non-compliance. Under the second simpler option I should say participants would only have to account for a change in carbon stock if they deforested the land or left the ETS. In this instance a second rotation forest would not earn any units for changing forest type or increasing the harvest age but neither would it need to surrender units.
Under this simpler option, it would be more straightforward to manage forests in future as long as there are trees in the ground there would be no requirement to account for changes in carbon stock and there would be more flexibility to respond to changing market and operational conditions in future. Examples there are, you know, variations in log prices or perhaps new genetics allowing trees to grow faster and be harvested earlier.
Conversely credits earned from doing something outside the default in the first rotation, for example increasing carbon stock would not be locked in. Participants could return to a typical harvest age or change to a species which stores less carbon meaning that units could be over credited.
So as that change wouldn't necessarily be matched in later rotations, New Zealand would likely have to account for that difference in international accounting. We're actually going to investigate this a bit more later on in the presentation, so I'll now pass you back to Simon who's going to discuss the age band options in more detail.
Simon Tomkins: Thanks Anne. So we have three options for age bands that we're consulting on in this round of consultation and as we discussed before - age bands is a concept and the more age bands you have, the more precise the ETS will be. This may give forest owners benefits at higher carbon prices, as they can extend their rotations and earn units and more precisely trade off log and timber - sorry - carbon and timber prices when they make harvesting decisions. However, age bands will increase the complexity of averaging compared to having fewer age bands and they'll limit the flexibility of managing forests in the future as previous rotations will have to be matched through time in order to avoid surrender liabilities.
Precise rules will make it harder to comply and a lot more information around a forest will have to be kept and maintained over time and when you purchase and sell land. So generally as we work through these we'd like you to think around how some of those trade-offs around simplicity versus precision should be managed and whether you'd like to see the scheme become or continue to be quite precise and complex or simpler and more flexible, and the three options we've got from most simple the most precise are a single age band or a single average age for each forest type, having four age bands across all forest types or having five year wide age bands across forest types.
So we'll dive into it. A single age band is the simplest option, basically every forest will have an average age and an average carbon stock and it will earn units until it reaches its average age and from then on it will not have to account for any changes in the forest unless it changes forest type and that will depend on the kind of options that Anne's already talked about around second rotation accounting.
So a pine forest could be planted, it could be harvested at age 30, it could be harvested at age 20. It wouldn't matter, it wouldn't have to account for any difference in carbon stock between those ages. It'll be really flexible, one thing to note on the slide is that the table, the carbon stocks in that table are pulled from the default tables. If someone is a FMA participant or they they use the field measurement approach because they've got over 100 hectares registered in the ETS, they would still use the FMA table when they're earning units so the carbon stock of the forest will depend on what kind of table you're using. The other thing to mention there for the radiata carbon stock is that it's from Gisborne, other parts of the country may not have that much carbon being stored at the average age if they grow slower.
So let's think about what we might see at strong carbon prices or weaker log prices in the future. In general we would see a lot of new planting under this model, it has a strongest incentive for exotic afforestation as they have higher average carbon stocks and more units will be earned. Even at quite high carbon prices harvesting is likely to continue at ages typical in the wider estate and we wouldn't expect forests registered under averaging to be harvested at different times from other forests. That's because there's no incentive from the ETS and averaging accounting for people to change their harvest age to earn more carbon or surrender carbon.
It will be expensive to change forest types away from high carbon storing species if we account in detail on second rotations. And that's basically because if a pine forest has a lot of carbon in it, an indigenous forest will have less there will be a large surrender liability and it'll be very expensive to make that change. At high carbon prices you might also see a switch to permanent forests especially if the log price is really weak.
The benefits of this are that there's a strong afforestation incentive so there are a lot of units turned up to the average age. It'll be really simple for participants to plan for and it will also be quite simple to comply with the reporting as you won't need to worry about when a forest was harvested.
The drawback is that there is no incentive to extend harvest and if a lot of forests across New Zealand were harvested later than they are at the moment, we may actually pick up that in that international accounting and each hectare of forest would contribute more carbon to our international accounts than if everything was being harvested at the ages it currently is. We may also need a rule to prevent super short rotations so people harvesting around like 10 or 15 - we're considering that further and the best way to implement that.
Four age bands is the second model we're looking at and this is pretty simple, it's probably the simplest way that we could actually implement having age bands in the ETS and they are kind of aligned with typical management regimes of forest so you've got a really short rotation band that goes from ages 0 to 19 and one in the middle that covers harvest ages from 20 to 34 and then one that caters to more long rotation species from 35 to 49 and one for trees that get up to 50.
So a pine forest we've already kind of looked at this but a forest would earn up to 16 years if it was pine and then if it was grown to an older age say 36 it would start earning it would be in a dollop of units aged 35, but I want to draw you guys attention to the douglas fir row and the table on the slide.
You can see there the default age band of the douglas fir is actually later than the default age band of a radiata and that's because typically douglas fir are a lot older when they're harvested in the current estate - they're normally harvested in the late 40s. That means that a douglas fir forest would be earning units for the first 26 years it's registered in the scheme up to its average age. It would then have to be harvested older than 35, otherwise it would have to surrender units. So each forest type has its own default age band and they might not all be the same.
There's more detail in the discussion document itself, one thing to note is that indigenous is 50 - and the only reason, we have to give an average age and we have to assume it's harvested to calculate that average age and we've used 50 because that's the maximum age in our current lookup tables. As these get updated over time, I'm sure we'd reconsider whether that's an appropriate harvest age as, kind of, it's a bit weird to wrap your head around with indigenous and averaging anyway as most of it might go into the permanent category but that's how it will currently be accounted for.
So under four age bands, if we had stronger carbon prices or weaker log prices you would still see a lot of new afforestation. There's still a significant increase in value of new forests, so the strongest incentive will still be in exotics. You may start seeing delays in harvest age across the estate - up to at least 35 for a four age band model because that's when additional units are earned for a radiata forest and at higher prices or if the log price was quite low in comparison to the carbon price, participants might push their harvest age out to 50 or switch to a permanent forest.
It will be expensive to change forest types from ones that have high carbon stocks to low carbon stocks and it will also be quite expensive to harvest a second rotation forest in an earlier age band than it was on its first rotation, so Anne's example of a forest that was harvested at 35 on its first rotation - it would be unlikely to see that return to being harvested at age 28 on second rotation if we have detailed accounting through time.
Because there are age bands we'll also likely see higher rates of non-compliance as the scheme gets a bit more complicated compared to a single age band approach and buying and selling land will also become more tricky as more forest owners might manage their forest outside a typical age range and more information will have to be captured about that forest through time as a result.
So the key benefits of this are the strong afforestation incentive, particularly from a climate change perspective we see a lot more forests going into the ground. It's also the simplest way to have age bands we think, having wide age bands means that it's unlikely for people to be accidentally switching between age bands whether they can't get a harvesting crew in in time or whatever other reason. Kind of the shifts in management we would have to see to move age bands would probably be quite deliberate. However there are some drawbacks. A lot more ongoing monitoring will be needed compared to a single average age approach and one thing to mention is that we kind of look at these graphs and think about forests as kind of single blocks but really that's one hectare of forest and you can have tens or fifteens of these graphs going on at once as you have different forest types and different harbour stages, different planting years it all gets quite complicated to track over time.
Like we mentioned earlier, forest type and harvest age will have to be matched in subsequent rotations but the trick here will be that these will be a long time apart and it will really have some ... first rotations may have quite a significant impact on second rotation behaviour but the prevailing conditions that that second rotation might be quite different from what they were in a first rotation. Accounting rules will need to be more complicated to account for how age band shifts work, we'll probably also potentially need a rule for super short rotations, we consulted on some options for that in the paper last year.
There may also be unintended wider consequences from delays and harvest if it happens at a wide scale. Whether it's impacts for the wood processing sector or on other parts of the economy as a result, we're kind of interested in hearing what some of those consequences might be.
Five-year age bands are quite - the concepts work the same as for four different age bands but you have one every five years. This is the best way to implement complicated and a quite precise age band model. That's because every five years you have a mandatory reporting period, so everyone has to report what's happening in the forest at that point in time and this means that if someone left their forest after the default harvest age, every mandatory emissions return period they'd earn a few more units for that forest if they didn't harvest it and it kind of keeps it in line with other time frames that we have in the ETS and should keep things as simple as possible while having a lot of different age bands.
The other thing to mention here again looking at that douglas fir row in the table on the slide - the default age band will always be the one where the assumed harvest stage will be so in this situation it's the highest one, if you harvested your forest before 45 you'd have to surrender and each forest type has its own default age band - those are in the discussion document at page 20 if you want to look at that.
Overall the outcomes we might see will be quite similar to a 4 age band model - the one thing I do want to draw attention to though is the final bullet point - on this slide and that is that it will become even more difficult to track your forest and you need more precise information over time than you would under a four age band model. That's just because there are more age bands, so as you have more options it'll always be more complicated and there'll be more things to keep track of as we go.
The pros and cons of this are also fairly similar to a four age band model, strong afforestation incentive, the key difference is that it allows a really precise trade-off of carbon and timber price for forest owners which may allow them to kind of maximise their returns particularly on that first rotation. The flip side of that is that on a second rotation, what was optimal on your first rotation may now not be optimal but there would be quite a large cost in order to move out of a higher harvest age for example.
There are also some further drawbacks from this model that come out of having so many age bands so a lot of forest will be shifting out of what the default age band is, that will be more complicated over time and also it's probably easier to accidentally shift between age bands compared to a four age band approach. That's because they're narrower and there's less time to ensure that you're harvesting within that window.
So I'll now pass back to Anne to talk about how age bands might fit in the second rotation options and kind of bring it together as a package.
Anne Manley: Thanks Simon. So as Simon said I'll just briefly recap on the options for second and subsequent rotations. The detailed second rotation accounting approach will involve ETS participants accounting for changes in forest type and harvest age in every rotation. The simple second rotation accounting approach will only require participants to account for changes in carbon stock if they deforest or if they leave the ETS. Detailed accounting would incentivise participants to manage their forests in the same way as their first harvest but will reduce flexibility for future forest management.
Simple second rotation accounting would maintain flexibility for future forest management but will not lock in increases in carbon stock. So if you have a situation where a participant in the first rotation extends their harvest age but returns to a typical harvest age in their second rotation or changes to a species that stores less carbon, there's the potential to create the risk of over-crediting of units. If this over-crediting occurred at scale, this would likely have to be accounted for in our international reporting.
So how great is the risk of over-crediting units? There's relatively low risk of over-crediting units from switching forest types. Forester behaviour across the New Zealand estate has been very consistent over time from a species perspective. People usually replant the same forest type they had on the first rotation, however changes in harvesting ages are likely to pose a greater threat or risk rather - a simple approach can be implemented at low risk if people are likely to keep harvesting around default harvest ages.
Under high carbon prices, participants are more likely to extend harvest ages and then may be incentivised to harvest at a more commercially typical age during the second rotation. That's when the risk of over crediting increases and potentially becomes a problem at the international level. If we look at the example on the slide here, if we have a participant with 100 hectares of radiata who has earned an additional 110 units per hectare for harvesting at age 35 in the first rotation and then in the second they go and harvest at age 28, under this simple model they wouldn't face a surrender for harvesting early. As I said, if this activity occurred at scale it would be picked up in our international accounting and New Zealand would have to account for the difference between the first rotation and the second.
So putting this in the context of age bands, the lowest risk of over-crediting units when there is no accounting for carbon stock changes in second rotations is if there is a single average age. i.e. a single age band for the first rotation. The risk of over-crediting is greater where there are multiple age bands, if foresters benefit from extending the harvest age in the first rotation but cannot benefit from further extensions or are not required to surrender units for decreased carbon stock in second rotations.
Bearing in mind this potential risk of over crediting and other matters we've highlighted today such as accounting over a long time horizon and variations in flexibility for future forest management, we'd encourage you to look at the age band options in the context of both first and subsequent rotations. We're interested to hear your views on how the various age band options will work over time and not just for the first rotation. Simon will now recap on the session.
Simon Tomkins: Thanks Anne. So thinking about how these options all come together, we can kind of line them up from most simple to most precise. So if you look at the most simple end of things we've got a single age band with simple second rotation accounting. It then gets a little bit more complicated if we have more detailed second rotation accounting. At the other end of the spectrum, we've got five year age bands with detailed accounting through time.
The reason that the two columns in the middle are greyed out, is because we consider there's a bit more risk there right? As Anne discussed, if people are earning units for extending their harvest ages but those increases in carbon stock aren't locked in - there does become a bit of a risk of over allocating units to participants and those are where you have four age bands or five year wide age bands and a simple second rotation accounting option.
And we really like you to think about how these things fit together as packages when you provide submissions to us and we kind of want to hear what your preferred overall option would be.
Quickly to recap, we want some feedback on where you think we should draw the balances for averaging accounting. Age bands will introduce more precision and may give people additional benefits but that comes at a cost of increasing complexity and it may limit the flexibility of people to manage forests going through the future. As we've kind of discussed as well, accounting in detail in the second rotation is going to be likely if we have precise age bands for a first rotation and we really want to hear about how these options might affect you, your business, or your local community. If you're a forestry consultant, we'd be interested in hearing about how the options might affect some of your clients as well. Whether they be small or large, we're just interested in getting a good round set of feedback.
The key questions in the consultation document that we'd really like you to answer would be how would each of the different age band options impact you - which of the proposed age brand frameworks are your favourite - which one do you prefer, why do you prefer it and are there any little tweaks you'd like to see to it - maybe you really don't like where one of the age bands is, maybe you love a four age band approach, but really don't like where one of the thresholds between age bands is set. Let us know if you'd like to see any small changes and why.
The outcomes of diff - so sorry - one of the things we've talked about is that the the outcomes of the age bands really depend on timber and carbon prices and over time in the future. Both of which can be quite hard to predict - we want to know how you think we should take into account of that uncertainty when determining what the final framework should be.
We're also interested in whether there are wider impacts you'd like us to consider, this presentation is focused fairly tightly on the benefits and the costs and the implications for a forest owner but if there are other things you'd like to think us - you'd like us to consider, whether they are either economic or environmental impacts, please let us know.
Cool, I'll now pass over to Oliver for a Q&A session.
Oliver Hendrickson: Great thanks, thanks guys - well done. So I think as Simon and Anne have laid out well there's some real trade-offs here and I think you'll see too that's probably why we haven't designated any preferred options from our perspective just yet. However, we are also obviously even under clear instructions since we started the review in 2015 to try to simplify the emissions trading scheme so there are options that show that pathway there but we've also had as we've tested this with our technical advisory group of forestry and carbon specialists that there may also be interest out there for more precise options as well which are kind of those four and five-year age bands and there's trade-offs between the precisions of units and the complexity that comes with the compliance and on that as well.
So, well done guys on laying that out and I just hope - and if people can work through and give that some good thought. I'm also really cognisant that, you know, we've done some modelling on this and models are great up to a point - we're trying to think what's going to happen in 30 years from now. Log prices could be different, who knows, right? Change is the thing that's constant in our lives, the trees we planted 30 years ago - we did so because we thought we'd have a booming pulp and paper industry now and how different things are. So it's helpful but also things could change so think about the flexibility that may be needed in the future as well.
Okay, I would like to try and work through some of the questions here and thank you everyone who's been bringing them up. I'm gonna go from some of the quick ones and then get into some of the detail here, one of the questions we had was related actually to the Climate Change Commission regarding certified exotic forests and something about mitigating carbon decline.
I - we are also looking into the Climate Change Commission report, specifically on the forestry aspect and any advice that the commission provides to the government - we'll be checking all of those things there so I can't comment on the veracity of what's in the commission report. I have read it, it's rather large if you've read it, I just can't put my finger on it but I would really encourage - please engage with the Climate Change Commission on that aspect if you think it's important.
Also a question about is there technical info available regarding the modelling? Yes we commissioned Price Waterhouse Cooper to do some costing and modelling for us that I mentioned before and we'll be making that information available which tries to flesh out these trade-offs a bit more. And that'll be available on the consultation page alongside everything else once we get it up. Do you have a date on that?
Simon Tomkins: Soon, end of next week,
Oliver Hendrickson: End of next week. Great, okay. So one question I had where I was clarifying, averaging applies to new forest - do you mean new forests that are planted on bare land only?
Simon Tomkins: Cool, that's a really good question. So earning - so any forest could be registered as an averaging forest but if it's already reached its average age or it's on its second rotation, it will already come in at the average carbon stock and it won't be able to earn the kind of initial for a pine forest 16 years of carbon being stored. So a new forest, when we talk about new in this situation we do really mean newly planted forest on forest that - on land that hasn't been forest previously.
There is a technical stand down period that will apply when you're defining what a first rotation or new forest is. Basically it will have to have not been forest in 2021 - I think - I'd have to double check, and then from there if someone's already a participant in the scheme or they've already got a forest they'll have to deforest for 15 years before they can register again as a first rotation forest and that's to stop people just technically deforesting by converting their land use for a couple of years and then coming back in as a brand new forest for the purposes of accounting and earning units.
Oliver Hendrickson: Great, next one we had a question about the default age - why was the default age reduced from 17 to 16 years?
Simon Tomkins: So we still haven't got the final age - this is the age that we're using and the method that we're using to calculate, it was actually being consulted on the document as well. The reason it comes out ... the way we've calculated it and it's come out at 16 is looking at basically taking an FMA table, well a table that represents the majority of the forest registered in the ETS and then assuming that the forest is replanted one year after it's harvested. That comes out with an average age of 16.
Oliver Hendrickson: Thank you. How are existing participants treated with greenfields and they're added carbon accounting areas?
Simon Tomkins: So if you add a carbon accounting area after 2019 that would be eligible to move to averaging accounting, so one participant can have some existing forest in stock change accounting and some new forest in averaging accounting. One thing to mention is that if you add it into an existing CAA, it might not be able to transition to averaging - it'll have to be a complete new CAA that's eligible for averaging for it to be able to transition. And I think that also connects into the decision that government ultimately needs to make at the end of the year about whether averaging will be available to all the p89 estate.
Oliver Hendrickson: Okay I think we covered that. Will the regional lookup table values still be utilised?
Simon Tomkins: Good question, yes they will - for radiata. So they're the only ones with regional tables, they will still apply as per usual.
Oliver Hendrickson: Okay. When calculating the change in the averages, will it be the difference between the average of the age bands?
Simon Tomkins: Yeah, so yeah it will be - so you'll be earning - so take for example, sorry I keep using pine forests but they're the most common forests. So if you had four age bands and you had a pine forest at age 34, it would be on the default average age when it moves to age 35, if you submitted a return then - you'd be able to account for the difference between the carbon stock age 16 and the carbon stock at age 19. So it'll be using a similar method to calculate carbon stock changes we do at the moment, the age will just increase and that timing will be all the units will be earned when the forest actually gets to the higher age band and it'll be one dollop. It won't be kind of spread out as you move through the age band.
Oliver Hendrickson: Okay, got a question for Anne. Are there any reasons against having a detailed second rotation accounting only if a significant change in average carbon stock has occurred?
Anne Manley: Sorry, what was the question?
Oliver Hendrickson: Here it is here, are there any reasons against having a detailed second rotation accounting only if a significant change in average carbon stock has occurred? Do want to give that some thought and maybe for the FAQ? Yeah well done Andrew, you've stumped the team so.
Simon Tomkins: Andrew from forestry?
Oliver Hendrickson: Uh Andrew … got to get in touch with you. There are no prizes for stumping the team though if anyone's trying to think of that.
Will there be any roadshows done to discuss the options presented similar to the ones done across the country previously? No not right now, we do have some hui coming up but just with the uncertainty we have with travel, we are trying to work through more these sorts of mediums that are more flexible and but what I would say is, this is this is really the start of the consultation discussion. You know, we really want to reach out and hear from everyone so we're going to do our best to connect and get in - please get in touch and you know over the phone and that sort of stuff will and Microsoft Teams meetings and stuff. We want to do our best to be able to connect with everyone.
Okay, why can't I choose my own harvest age?
Simon Tomkins: So the reason that we have default age bands and default harvest ages, is because if we gave everyone the option to choose their own one that they entered - for starters compliance would become extremely difficult. It would be very difficult to track it over time but particularly over land sales as well.
There's also a risk that it creates if you have a leasing arrangement over the carbon on the land, that you might get paid some money, someone else gets the units but then your harvest age is really tightly controlled and people may not really manage their forest in a way that avoids the surrender liabilities and it also is actually over crediting the forests in comparison to what we're getting for them internationally. So internationally we wouldn't realise any additionality unless a forest was actually harvested in an older age. So giving it additional units when it's age you know 16 to 20 is basically just giving units away that aren't backed yet by carbon storage that we can claim in the international accounts.
Oliver Hendrickson: Okay, we've got a question here which is about option two, I was wondering is it possible for us to put that slide up I'm not sure or maybe we can reference it in the Q&A? Challenging is what the team tells me, so we're not going to break it but we will when we do the FAQ though we'll make sure that this question is put to that slide so you can visualise it as well but I do want to ask the question. So under option two, will all additional units be allocated in a lump sum once the next band is reach? Example, plus three years at age 35 for pinus radiata.
Simon Tomkins: That's a great question because we don't really need a graph, the answer is yes - yep they'll be awarded at age 35. Whenever you file the return once that change has happened.
Oliver Hendrickson: Great, we've got a question here on can you confirm how we put in a submission - so submissions are due on Friday the 9th of April. If you go onto our website you'll see the consultation page, this is from - we'll send this out to everybody who's attended so it's really clear and there's the questions are in the consultation document and there's an email address that you can send your submissions to us, please. Yeah, yeah if in doubt just send us an email.
I do note we've had a question to about afforestation grant applicants and whether ... so this is probably going back a few years and they're coming up now to their ability to register if they wish. Would they - because those forests would have been planted a while a wee while ago, obviously - will they come in under the new averaging system when they register?
Simon Tomkins: They could do. They'll be treated like any other forest at registration, so it depends when they're put into the scheme, but at the moment they'll be eligible for averaging. There's no specific restriction. Because they're granted.
Oliver Hendrickson: Can we send out the presentation document? Yes, there's no problem with that at all. I hope it's been helpful, and absolutely we can do that. I've got another couple of questions. Hang on, I can only get half the question when it first comes up ... we've got about five minutes so I think this will be coming to a close.
If you planted some carbon accounting areas and registered your forest under stock change and then plant and register others after 1 January 2023 will you end with a mixed forest between stock change and averaging or will the forest move to the default type?
Simon Tomkins: No, so you would end up with a mixed forest. I guess that comes back into play about the decision cabinet hopefully needs to make about extending averaging to the estate. One thing to clarify that, though, you'll never have a mixed CAA, so you'll always have to have them in separate CAAs for accounting purposes but as a participant you'd have a mix.
Oliver Hendrickson: Okay. I just want to acknowledge we had a fairly detailed question, I can't scroll down but I will be able to get it ... It was around under a five year age ban is carbon accounting at the carbon accounting area or at the sub-area level. I'd like to actually get that, because it was quite detailed, it gave a good example. I think that's one we're going to have to probably put into the FAQ and get that up, I just want to acknowledge that that question had been asked.
We've got about four minutes left. Are there any final questions to come through here? Okay, one thing that's also very helpful for us is you may have noticed we are not a crack team on webinars, this is my very first webinar, and please we'd be keen for your feedback. If there's any way we can help improve the presentation means and if you're looking for more information or if something didn't work for you, don't be stranger, get in touch. And we'd love some feedback, because you know, how this year goes we may have to do more stuff like that and we may apply this into more kind of Te Uru Rākau and MPI's consultations going forward, so it is helpful to get the feedback to see if what works and what doesn't.
All right well we've got some questions coming in here. When will you be able to confirm the default age, 16 or 17 years?
Simon Tomkins: It'll be part of the policy decision we're making in the middle of the year.
Oliver Hendrickson: Okay, middle of the year - that will be a cabinet decision on the policy.
Will we be able to make changes to the mapping of carbon accounting areas in the future?
Simon Tomkins: So you will be able to reconfigure CAAs. The new process for that I think goes live on 1 January 2023.
Oliver Hendrickson: Right. Okay, we've only got a couple minutes so I think we're going to move to close. I would just like to really thank the team, and thank everybody who's participated, and the patience... I know we kind of, that was a lot of information but that it is recorded and we'll get this information out.
Quick question came in - where can we get the consultation document? We'll send an email to anyone who's applied as part of this to make sure you've got all the information you need. If you haven't, please contact the team directly. And we will get the webinar and the Q&A up shortly, probably give us a bit of time, but obviously in a meaningful way so that it's useful for if anyone wants to cross-reference to this.
All right, so the key thing is you know this is a new medium for us so please get in touch and thanks again to everyone for participating and for the work the team has done. Really nice balance between simplicity, which has its benefits, and complexity which can also provide the precision that some are looking for. So thank you everyone.
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