Emissions Trading Scheme improvements
Between 2015 and 2019, the Government conducted a Review of the Emissions Trading Scheme (ETS) and then consulted with New Zealanders on potential changes and improvements to the scheme. A wide range of changes are being introduced, which will apply from 2021. Find out about what's changing.
10 December 2019 – Consultation extended
Te Uru Rākau extended the deadline for submissions until 5pm on Wednesday 15 January 2020.
10 November 2019
The ETS Forestry Regulations consultation was opened for submissions.
24 October 2019
Climate Change Response (Emissions Trading Reform) Amendment Bill 2019 introduced
The Climate Change Response Amendment Bill was introduced to Parliament for its first reading. The Bill covers the policy decisions on the ETS forestry improvements that have been announced over the last 9 months – for example, the introduction of averaging accounting. The Bill also includes the decisions on agriculture in the ETS.
You can make submissions on these major changes through the Environment Select Committee.
We were also consulting on the ETS Forestry Regulations, which cover the operational detail of the changes. For example, how averaging accounting will work.
If you have any questions, email firstname.lastname@example.org
Note that any submissions on the policies should go to the Environment Select Committee when it is receiving submissions.
The changes include:
- the introduction of averaging accounting for all post- 1989 forests registered from 1 January 2021
- the option to use the new accounting method for all post- 1989 forests registered in 2019 and 2020, with a decision needed from the participant in 2023
- post - 1989 forests registered in the ETS before 2019 cannot transition to averaging accounting. This decision will be revisited in 2021.
Introducing averaging accounting for post-1989 forests will reduce the costs and complexity of the ETS for forest owners.
What the change means
As at November 2019, the current carbon accounting approach ('stock change') requires a participant in the ETS to account for any loss of carbon in their forests, even if that loss is temporary. This means when trees are harvested, foresters must surrender back to the Crown a large portion of the carbon credits (New Zealand Units or NZUs) they've earned from a forest’s growth, even if the forest will be re-planted.
When the change comes into effect, forest owners who use the new 'averaging accounting' option will no longer need to surrender NZUs when they harvest (if they replant). Participants would instead receive fewer NZUs as their forest grows, up to a determined average level of long-term carbon storage.
Expand on the next sections for information related to averaging accounting
As part of the ETS changes for forestry, Te Uru Rākau consulted on whether post-1989 forests registered before 2019 would be able to transition over to averaging accounting.
The Government has decided that forests already registered in the ETS would not be able to transition to averaging accounting at present. In 2021 the Government will revisit whether this could be done on an optional basis.
The decision weighed up the benefits to the climate, and the impacts on the functioning of the ETS.
The decision weighed up the benefits to the climate, and the impacts on the functioning of the ETS.
Averaging accounting has the most impact on people's decisions to plant new trees. As forests already registered in the ETS are already in the ground, averaging accounting would have limited additional impact on their carbon storage. Allowing existing foresters to transition to averaging would therefore have little benefit from a climate standpoint.
Additionally, a transition to averaging could lead to an oversupply of units on the market, as it would be more attractive to trade units. This would make it more difficult for the Government to cap unit supply and could hinder our ability to meet our international targets and climate change goals.
There are also significant financial costs to the Crown if existing foresters are able to transition to averaging accounting. This is because fewer units are surrendered under averaging accounting than under stock change accounting, which impacts income to the Crown.
Government decided that there was limited benefit to carbon storage, while the potential costs of increased unit supply in the ETS and reduced Crown income were more significant. In 2021, when more post-1989 forests have harvested and have submitted returns, we'll have a better idea of the impact of increased units on the market and the costs that would result. At that point, Government will look at the impact of allowing existing forests the option to transition to averaging and ministers can make a more informed decision.
In the meantime, forests registered before 2019 will remain on the same terms and conditions as when they joined the ETS and will be no worse off.
Post-1989 forests that join the ETS after their first rotation will be considered to have already reached their average age. As a result, these forests would not earn NZUs except if they extend their rotation.
This is because the Government would be allocating units for carbon storage that doesn''t help New Zealand reach our climate change commitments – that carbon has already been stored prior to joining the ETS.
However, these forests can still earn NZUs by increasing their carbon storage – for example, by increasing their rotation length or changing species. They would earn NZUs past their existing average age up to the point of the new average age.
Forests using the current stock change approach will be treated the same as at present. They can earn units on their second rotation but are likely to have to surrender all of those units at harvest, even if they replant.
This means that if an ETS participant wants to convert forested land to another use, they don’t have to repay the NZUs they had earned for their forest – they can instead plant a forest in another location that has the same carbon storage. Both forests must have been actively established rather than left to regenerate naturally.
This is intended to give foresters greater flexibility over their own land, while still making sure New Zealand is encouraging carbon storage.
Under the stock change accounting system, foresters are required to repay NZUs (carbon units) after adverse events (such as forest fires or wind-throw), as the amount of carbon their forest is storing has been reduced.
As the averaging accounting approach reflects long-term changes in carbon storage, participants won’t have to pay back NZUs after a significant adverse event, as it is unlikely to affect the long-term carbon storage of their forest.
As a result, foresters using the averaging accounting approach will not have to surrender NZUs for carbon storage lost after an adverse event, as long as the affected area is re-established within 4 years. Foresters that were earning units for a forest on its first rotation will pause earning units until the re-established forest has reached the age at which the event occurred.
The status quo will remain in place for ETS participants using the stock change approach. As the stock change approach measures short-term changes in carbon stock, allowing participants exclusions from accounting for adverse events would be a much more significant change from the accounting principles and leave the Crown exposed to a larger fiscal risk.
The “average age” for a forest is the age at which it reaches the average level of carbon it’s expected to store over the long-term (several rotations).
The default average age is based on the typical age at which that type of forest is commercially harvested. For example, a forest type that is typically harvested at 30 years will store more carbon over time than a forest that is typically harvested at 20 years. It will therefore have a higher average age.
Foresters who use averaging accounting will earn NZUs through their forest's growth up until it reaches the average age. After that point they won’t earn any more units, but they also won’t have to pay back units each time they harvest.
Comparison of forests earning under averaging v stock change accounting
Currently under stock change accounting a forester in the Emissions Trading Scheme earns carbon units until their forest is harvested, and then the majority of units are paid back. Once the forest starts growing again, the forester again earns units. This is compared to the proposed system for averaging accounting where a forester in the ETS will earn NZUs until their forest reaches its average age but doesn’t pay them back when the forest is harvested and doesn’t earn more units after that point either.
If a forest is left to grow for longer than the typical age of harvest, it will store more carbon than it otherwise would have. As a result, its average age will increase, and the owner will receive more NZUs for that increased carbon storage.
If a forest is harvested sooner than usual, it will store less carbon than it otherwise would have. As a result, its average age will decrease, and the owner will have to surrender NZUs for that decreased carbon storage compared to the previous average.
Adjusting the NZUs earned by a forest owners should encourage people to extend their rotation lengths to store more carbon. The longer the rotation length, the more NZUs are received.
Although the average age is based on the age at which the forest is typically commercially harvested, in reality there is a range of ages at which forests are actually harvested.
From a climate change standpoint, it wouldn’t make sense for small changes in rotation length to be reflected in the ETS. For one thing, increasing rotation length by a year above the norm doesn’t represent a significant increase in average carbon storage. For another, it would mean that foresters would have to fill out returns every time they changed their rotation length even slightly.
We have therefore introduced “rotation bands”. These split the possible ages of harvest into bands, meaning that small changes to the time you harvest will not result in additional reporting, nor additional NZU obligations or earnings. A default rotation band will sit around the standard harvesting age for that forest, while non-standard rotation bands will sit on either side of this for foresters who choose to extend their rotation length for increased credits or choose to harvest earlier.
Radiata pine harvest ages and a range of rotation bands
For example, a rotation band for radiata pine could span from 25 to 30 years' of age. All forests harvested between 25 and 30 years old would be part of this rotation band, meaning that changing rotation lengths within it (for example, harvesting at 26 instead of 27 years) wouldn’t require you to surrender NZUs or fill out returns. We’re still working out the details of what the size and frequency of rotation bands will be, and will consult on them before they become regulations.
This means that if an owner increases their rotation length past the norm, subsequent owners will either have to maintain that rotation length or surrender some NZUs if they change to a shorter rotation length.
It also means that if an owner decreases their rotation length to below the norm, subsequent owners can increase their rotation length and earn NZUs.
This is consistent with the current rules, where obligations (such as for harvest) stay with the forest.
Only first-rotation forests will be able to earn the full amount of units under averaging, as these forests are storing increased carbon above the baseline set at 1 January 1990 which helps New Zealand meet its climate change targets. To make sure forests being entered into the ETS as first-rotation forests are actually first-rotation forests, and will store increased carbon above the 1989 baseline, a stand-down period will apply before deforested land can be re-entered into the ETS as a first-rotation forest.
The length of this stand-down period will be set in regulations, and will be able to be lengthened or shortened retrospectively. The reason for this is that as the carbon price increases, there is more of an incentive to wait out the stand-down period and earn credits as a first-rotation forest.
On 17 December 2018, the Government announced decisions to discontinue the Permanent Forest Sink Initiative (PFSI). A new permanent post-1989 forest activity will be introduced into the ETS to replace it.
Reviews of the Permanent Forest Sink Initiative (PFSI) scheme found it was complex for participants, costly to join and difficult to comply with. There was strong support from PFSI participants to move the administration into the ETS.
The revised ETS will have important improvements to the new permanent post-1989 forest category that help make it simpler to participate in, and offer better incentives to register new forests for carbon units.
In 2021, PFSI participants must decide for all of their forest whether they:
- join the ETS, without eligibility being reassessed, either as:
- a permanent post-1989 forest using carbon stock change accounting, with the 50 year period starting from the date the covenant was agreed.
- a post-1989 forest using the new averaging accounting method.
- leave the PFSI scheme altogether, removing all their forests from carbon accounting.
If you don’t tell us your decision in 2021, all of your forest will be moved into permanent post-1989 activity.
If you want to deregister a small area of forest, which is currently registered as PFSI, you could move all of your forests into the post-1989 category. You could then reconfigure your Carbon Accounting Areas and move the forests you wish to the permanent post-1989 category.
If participants do leave the PFSI scheme completely and later want to enter the ETS, their forest land would be assessed as new as with any potential ETS forest. If a participant registered their land as a permanent post-1989 forest, participants would start their 50 years as a permanent forest from the date of registration.
We will talk with PFSI participants about their choices later in 2020.
When the 'Permanent post-1989 Forest' activity was approved in 2018, Cabinet determined that land registered for this activity must not be clear-felled (all trees removed) within 50 years. This change penalises a forest owner if they breach this requirement.
What the change means
If land registered as 'Permanent post 1989 Forest' is clear-felled on purpose before the 50-year timeframe:
- the owner of the land (or of the forest rights) needs to pay a penalty. The penalty will be linked to the value of the wood that was clear-felled, and the maximum penalty will be set at a level so that the owner receives no revenue from clear felling.
- they also need to surrender carbon units for the emissions created from the clear-felling.
- if the forest is not re-established after clear-felling, the owner will need to surrender units for the deforestation and pay a financial penalty based on the value of the units surrendered for the C arbon Accounting A rea containing the clear-felling and the deforestation.
These penalty provisions won’t apply if the land is cleared as a result of an adverse event. If the clear-felling was outside your control, is this also a defence against the penalty.
These proposed operational improvements will make sure the ETS works as planned for forestry.
Overall, the changes will:
- improve how fair the scheme is, and make it easier to work with
- enable future changes to improve the ETS over the long term
- apply further minor and technical improvements.
People wanting to buy or convert their land into forestry that can be in the ETS, need to know whether land they're considering could be eligible for registration in the ETS. Currently, it can be difficult for buyers and landowners to get the information they need to find this out, such as, aerial photographs, satellite imagery, or legal land documents that prove when the land was not a forest.
What the change means
This change will enable people to have better access to land information to determine the ETS eligibility of land.
This change will be put in place over time, as better and more information becomes available. We're working on options and it likely the first information published will relate to existing ETS decisions, for example current post 1989 registrations and land which has received an allocation under the forest allocation plan.
Until then, we're improving the emissions ruling process. This means people could get determinations on the eligibility of land before they apply for the ETS. This will reduce the risk of investing in land for forestry, and make it easier to assess land eligibility.
Radiata pine forests that the One Billion Trees (1BT) Programme helps establish have a stand-down period before the forests can join the ETS or claim NZUs. As at March 2019 (before the changes we're making), the ETS system can’t recognise this stand-down period and withhold the correct amount of carbon credits.
What the change means
An Amendment to the Climate Change Response Act 2002 will enable new regulations to define how carbon credits are allocated in relation to grant-funded forests. This will ensure the Act doesn’t force people to breach their 1BT contracts.
Implications for forest owners
If you're a radiata pine forest owner and get 1BT funding, your contract with the Crown will set out that:
- you can’t register in the ETS for 6 years, and
- if you register after this, you can’t claim units for any of the previous 6 years.
You will also have to do a slightly different emissions return for the forest which contains the grant-funded forest.
When the ETS was established, Mandatory Emissions Return Periods (MERPs) were aligned to the Kyoto Protocol’s First Commitment Period (2008-2012) and then to 5-yearly periods. For example, these would have been from 2013 to 2017, and 2018 to 2022. The international Paris Agreement sets new targets for the period from 2021 to 2030.
While the current MERP from 2018 to 2022 will continue, also be a one-off shortened ‘mini-MERP’ from 2023 to 2025. This will align New Zealand’s accounting for our emissions reduction target under the Paris Agreement to end in 2030.
What the change means
Some participants will have to surrender harvest NZUs earlier, in 2025 instead of 2027. Deferring the ‘mini-MERP’ to start in 2023 enables time to plan for this.
Regulations will also reduce the compliance costs for the shorter ‘mini-MERP’. This will likely be by removing the need for foresters to collect Field Measurement Approach data in the mini-MERP.
When registered post-1989 land is bought, sold, or transferred, there are a set of requirements and actions known as transmission of interest (TOI). These must be done if some areas of land go through this process several times (like if there are successive changes to members of a trust).
The most common type of non-compliance by ETS forest owners is failing to complete TOIs. In some areas, compliance with TOI requirements can be as low as 1.5%.
What the changes mean
We are making a number of changes to help ensure that ETS obligations are correctly transferred. We're also making a new process to resolve issues.
Main changes to help make sure the TOI happens correctly are:
- making a TOI optional (opt in) when a forest lease or right is granted. This will simplify the ETS for participants as there will no longer be two mandatory TOI to complete if you use a forest lease or a right for harvest. This will be particularly useful when harvesting an averaging forest as there are no unit surrender obligations.
- removing the need for executors/administrators of estates to become participants in the ETS and undertake a TOI when they begin to administer the estate. This means that there is only one TOI for an estate (i.e. once it is distributed).
We're also introducing a new process to make it easier to resolve non-compliant TOI. When a forest is non-compliant, it won't be eligible to earn units. The forest owner would not receive units for that part of the land until they become an ETS participant. The Environmental Protection Authority (EPA) will receive the power to deregister forest land (requiring a surrender of units) if the new owner refuses to become an ETS participant.
Under Section 60 of the Climate Change Response Act 2002, pre-1990 land is eligible for an exemption for liabilities under certain circumstances, which are considered by the Minister for Climate Change on a case-by-case basis. For instance, a Section 60 exemption applies if deforestation must occur because it is an archaeological site. This means the owner of that land could get an exemption from paying back NZUs for deforesting.
A similar option for the Government to grant exemptions will now apply to post-1989 and permanent post-1989 forests.
This will provide pre-1990 landowners more flexibility over their land, while maintaining New Zealand's long-term carbon stock. It is particularly important for Māori landowners and farm foresters. These groups hold large areas of pre-1990 forest land which may be suited to another land use.
Current offsetting provisions could be improved. For example, if any part of an offsetting application fails, the entire application is revoked. If 0.2 hectares of offset forest fails in a 100 hectare application, the applicant becomes liable for all deforestation from their application (roughly $1.3 million for an average 100 hectare block).
The improvements will make offsetting more effective to:
- allow flexible use of pre-1990 forest land
- allow more flexibility in how you achieve an offset forest and an ability to adjust your application once it’s approved
- apply enforcement action only to the areas of forest land that fail to establish.
This decision introduces changes to the CCRA to enable better management of tree weed exemptions.
These changes are intended to support management and removal of tree weeds in compliance with regional pest management plans, without a cost to the landowner under the ETS.
Limiting the spread of tree weed species, and eliminating the seed source, is important for New Zealand as most tree weeds species spread very quickly and cause a range of economic and ecological problems. Wilding conifers are able to modify and rapidly invade New Zealand’s natural ecosystems so that native plants and animals are affected by loss of habitat.
This enables MPI to exclude all future post-1989 and permanent post-1989 forest land registrations for sites that contain predominantly tree weeds, regardless of who applies to register.
Forest land that is already registered in the ETS, and is in a tree weed species, can remain registered as forest land eligible for earning NZUs.
This is because a very small number of participants have registered tree weeds in the ETS and are using the income from their land to pay for management (the removal) of the tree weeds.
This will enable owners of land that has multiple owners, to access the same provisions as land with single owners.
It allows an appointed or professional trustee to apply for the exemption (rather than each landowner from 1 September 2007).
Exemptions from all, or proportions of, the emission costs associated with deforesting pre-1990 land are available for landowners under the CCRA to allow some flexibility under unforeseen circumstances.
Currently, landowners with less than 50 hectares of pre-1990 forest land can apply for an exemption from deforestation liabilities. However, it has been difficult to apply this to multiply-owned land in trusts, and Māori land under the Te Ture Whenua Māori Act 1993.
Other ETS improvements
The Government has also announced other improvements to the overall ETS.
Information on these changes is available on the Ministry for the Environment (MfE) website.
Introducing an emissions cap will not affect the availability of New Zealand Units for forestry participants with forests registered in the ETS.