We were consulting on the design of averaging accounting for forests in the New Zealand Emissions Trading Scheme (ETS), and how flexible or precise it would be. This fact sheet outlines the key trade-offs and likely impacts of each option. It covers different options for averaging accounting and for second rotation forests. These were set out in more detail in the discussion document.
Averaging accounting will be a new method to calculate carbon storage for new post-1989 forests. Forests that use averaging accounting will earn carbon credits up to an age equivalent to the forest’s long-term average carbon stock – the "average age". The average age is based on an assumed age that most forests of the same type are harvested at For example, most radiata pine forests are harvested at or around age 28.
Each type of forest in the ETS will have a default average age it will earn carbon credits up to. Once a forest reaches its default average age no carbon credits will be earned or surrendered unless:
"Age bands" will determine how flexible averaging accounting will be when a forest owner wants to to harvest at a different age. Age bands are ranges of harvest ages that are assigned the same average age. The default average age will sit within the default age band.
If a forest is actually harvested in a lower band than the default you will need to surrender some carbon credits. If it is harvested in a higher band you will earn some carbon credits.
If there are more, narrower age bands a forest will change its average age at harvest more often. This means forests may earn carbon credits when harvest is delayed past the default age band, but harvest ages must be kept track of and matched in subsequent rotations to keep those carbon credits. This would get complicated over time.
The ETS is introducing averaging accounting for forests. Each type of forest in the ETS will have a default average age it will earn units up to. After that age, no units will be earned or surrendered unless:
Age bands are ranges of tree age that a forest can be harvested between while still being considered to have the same average age. Age bands determine how precise and how complicated averaging accounting will be.
If there are more age bands a forest will change its average age at harvest more often. This means forests may earn units when harvest is delayed past the usual age, but harvest ages must be kept track of and matched in subsequent rotations to keep those units. This would get complicated over time.
Under this option a forest will earn units for carbon storage on its first rotation up to the default average age of its forest type. There will not be any additional earning or surrendering of units, regardless of whether the forest is harvested later or earlier in the age band.
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A graph of NZUs earned in a forest over time showing that the amount of units earned will stop at the default average age, and will not increase or decrease regardless of when the forest is harvested.
This option is very simple. It will still encourage high levels of planting but provides no incentive to delay harvest and store more carbon. It also keeps the ETS out of forest management decisions around harvesting.
Over time, this will be simple for participants as they will just have to keep the land in forest and can harvest at any age without surrendering any units. This could allow people to manage forests appropriately under the current environmental and economic conditions of the day, with no barrier from the ETS for Forestry.
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A single average age scores moderately high for increasing incentive to store forest carbon, very high for providing regulatory certainty and durability, very high for improving ease of compliance for participants, and very high for administrative efficiency and effectiveness for regulators.
This option provides wide bands to accommodate different forest management.
This framework has 4 age bands across all the forest types in the ETS. These will accommodate 4 types of rotation:
Each forest type will have different default age bands depending on when they are usually harvested. For example, radiata pine forests will have a default age band of 20 to 34, but Douglas fir forests will have a default age band of 35 to 49.
If a forest is harvested very early the participant will need to pay back some carbon credits. If it is grown long past its usual harvest age the participant will earn more carbon credits. Under the 4 age band option, carbon credits will only be earned by a very long extension of harvest age past the default, but many carbon credits may be awarded at that point.
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A graph of NZUs earned in a forest over time showing that the amount of units earned will be lower than the default amount if the forest is harvested early, or more if it’s harvested later than the default age band.
This option is more complex than having one average age for each kind of forest and will allow forests to earn carbon credits, or require them to surrender, depending on when the forest is harvested. If timber prices drop and carbon prices increase, participants may delay harvest to earn additional carbon credits. This could mean some radiata pine forests are not harvested until at least 35 years of age.
Over time, forest owners will have to keep track of harvest ages over multiple rotations. This could be an important factor when buying and selling forests to ensure participants don’t have unexpected surrender obligations at harvest.
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The 4 age band option scores very high for increasing incentive to store forest carbon, very high for providing regulatory certainty and durability, moderate for improving ease of compliance for participants, and moderate for administrative efficiency and effectiveness for regulators.
This is the most complex, precise option.
If a forest is harvested earlier than the default age band, carbon credits will need to be surrendered. Surrendering carbon credits for early harvesting would be more common as the bands are narrower than the 4 age band option. Surrenders might be more common in forest types with varied management practices.
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A graph of NZUs earned in a forest over time showing that the amount of units earned will increase in small, regular steps depending on when the forest is harvested.
Because the age bands are narrow, many forests may be harvested outside their default age band. Forest harvest ages will have to be kept consistent for each rotation to avoid detailed accounting. Knowing the harvest age in the previous rotation would be important when buying and selling land to allow planning for future ETS liabilities or entitlements.
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The 5 year age band option scores very high for increasing incentive to store forest carbon, moderately high for providing regulatory certainty and durability, moderately low for improving ease of compliance for participants, and moderately low for administrative efficiency and effectiveness for regulators.
Averaging accounting has been designed so detailed accounting will continue through time. This means each time a forest is harvested the participant may have to surrender carbon credits, or the forest could be harvested later to earn additional carbon credits. Participants would also have to pay back carbon credits if they change to a forest type which stores less carbon, but might earn carbon credits for changing to a forest type which stores more carbon.
This would be a complicated process, and high carbon prices could "lock in" species and harvest ages from previous rotations. Any change to a forest which meant you earned additional carbon would have to be repeated in subsequent rotations if you wanted to avoid surrendering carbon credits.
This approach is precise, so also means more information will be needed by participants and purchasers of forest land. It will be important to keep track of previous harvest ages and species across a forest.
Participants will need to plan carefully under this accounting approach. This will be particularly true for landowners who are ETS participants but do not have control over exactly when a forest is harvested (for example, if the forest is leased).
If we adopt a simple approach to age bands, carbon accounting for forests in the ETS could be very simple on second and later rotations. It may only be necessary to account for deforestation liabilities rather than changes in the forest (also called harvest liabilities). For example, it wouldn’t matter if the harvest was delayed or the forest type changed as no surrenders or earning would occur. Participants would only have to surrender carbon credits if the forest was not replanted or was converted to another land use.
Participants would be free to manage their forests as they see fit, so long as they retain forest cover (if they deforest, all carbon credits will have to be paid back). This would be a flexible option that allows forests to be managed in line with changing economic, regulatory, and environmental conditions. On the other hand, second rotation forests will not be able to earn carbon credits for extending their rotation age or changing forest type.
If we have simple age bands and apply this approach to second rotation accounting, there is only a small risk of forests being managed significantly differently to their first rotation. In practice, we expect people to keep managing their forests as they did on the previous rotation. This is standard practice in existing forests as they are typically planned well and managed to maximise returns.
The Ministry for Primary Industries website has information on all the policy changes being made to the forestry parts of the ETS.
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