Cost benefit analysis on proposals for implementing averaging accounting
A cost benefit analysis was used to model 4 different age-band frameworks for averaging accounting. The analysis report is being released as part of the consultation on proposed amendments to Emissions Trading Scheme (ETS) regulations. Find out how to interpret the report findings, and download the executive summary and full report.
This age band report is related to an open consultation
The report is related to the consultation on proposed amendments to the Climate Change (Forestry Sector) Regulations 2008.
Amendments to the ETS forestry regulations we are consulting on are:
- the detailed rules and settings for averaging accounting
- technical amendments to simplify the ETS and let us implement new policies.
Submissions on the consultation close on 9 April 2021.
PwC modelled and analysed 4 age-band frameworks
To help with our work on age bands we hired PwC New Zealand to model and analyse 4 age-band frameworks (referred to in the report as ‘scenarios’).
- A single age band.
- 4 age bands.
- 5-year age bands.
- Mixed age bands.
Scenarios 1 to 3 are part of the open consultation that closes on 9 April 2021.
Scenario 4 was part of a previous consultation held in 2019.
The scenarios were tested against a range of model forests (such as a first rotation forest registered in the New Zealand ETS from its planting year). The report shows the impacts of these age-band scenarios and their sensitivity to different variables such as New Zealand Unit (NZU) prices.
Before reading the report, note the limitations of cost benefit analyses and that the report:
- does not cover the impact of introducing averaging accounting
- does not aggregate the net benefits to all foresters
- authors had to make a range of assumptions to model the age band scenarios
The limitations of cost benefit analyses
This type of analysis paints a broad picture, rather than detail for all participants.
It can be difficult to quantify variables, particularly with respect to the future and how changes may arise. This is particularly hard for forestry where we are looking 20 to 30 years into the future. As well as this, cost benefit analyses (CBAs) only measure direct effects and there may only be limited information available to support the analysis.
However, CBAs provide an evidence-based, independent view. They can provide insights which can help us analyse behaviour in the future.
It is useful to consider the relationships and relativity between the results in a CBA. For example, if in all but one scenario the results are of the same order, it would be useful to examine the outlier scenario in more detail.
This report looks at options for age bands to implement averaging accounting. It provides insights into the performance of different age-band scenarios and conditions that may incentivise a transition from averaging accounting age bands to the new permanent forestry activity, under stock-change.
The report does not cover the impact of introducing averaging accounting. The Climate Change Response (Emissions Trading Reform) Amendment Act 2020 was passed last year making averaging mandatory for newly registered forests from 1 January 2023.
PwC’s analysis centred on understanding and quantifying the net benefits to an individual forester of a given model forest type, and their behaviour around:
- harvest age,
- tree species choice (where relevant)
- whether to participate in the ETS.
This report does not aggregate the net benefits to all foresters, those within a region, or to New Zealand as a whole. Aggregated impacts will be part of the wider package of advice (the regulatory impact statement) provided to ministers.
A range of assumptions had to be made for PwC to model the age band scenarios.
The model assumes that foresters have perfect knowledge of all relevant inputs to their decision-making (such as growth of their forests, future timber and NZU price paths and future NZU accrual), both now and in the future. It assumes that foresters make their decisions to maximise net present value (NPV).
However, in reality, foresters make decisions based on a range of factors including harvest difficulty, site productivity, timber revenue, cashflow needs, NZU prices, and management plans. In the report, some of these factors are addressed by the presentation of the ‘optimum harvest range’. This shows the age range where the NPV is within 97% of the maximum, and the ‘loose’ range is likely to be slight relative to other benefits. These factors will be described and taken into account when final recommendations are made on age bands.
Assumptions have also been made in relation to model inputs such as:
- operating and administrative costs
- costs to the Crown
- carbon price pathways
- timber yield
- log prices.
These assumptions are largely based on past performance, but this may not predict future results. The modelling uses what we consider reasonable high and low ranges to assess if the likely outcomes or behaviour will be significantly different.
We recognise that others may have made different assumptions for this analysis. As you review the report, consider the assumptions made in determining the results and if these line up with your general expectations. We are interested to hear how you think the age band scenarios would work in different situations (for example, with and without second rotation accounting) and how their implementation would impact you, your business, and your community.
Download your copy of the report
When reading the report, we encourage you to focus on the overall story that it tells – the general patterns and trends in the results, rather than the specifics of individual inputs or outputs. The report aims to identify the conditions that could lead to certain behaviours and the differences between different age band scenarios. We are interested in your responses to those trends.
This report is just one input into our analysis of age bands. We will use it to inform our thinking and test other factors that could influence the performance of the age-band frameworks.