Farm Foresters Carbon Options

July 2008
The current suite of carbon options available to farm foresters or wait for 18 months until the situation is a little bit clearer.

Piers Maclaren, independent forestry scientist, first heard about carbon in 1970 and has been working in this field since 1988. He was a scientist at the Forest Research Institute in Rotorua, transferred south and has been working as a consultant for the past eight years. He estimates half his time is spent on carbon issues, half on general forestry consulting.

When he first heard about carbon he was pretty skeptical, but over time discovered it to be based on good science and not exaggerated. He says we should take the issue seriously.

When Simon Upton was Minister for the Environment and Science he took Piers as his science advisor to a conference about climate change and carbon in Berlin.

He has worked for the full range of business, emitting industries, government agencies, research organizations and environmental groups.

He has also been involved in farm forestry for a long time been to 14 national conferences, and has his own trees. One is a block of native forest with associated woodlots in Golden Bay which he describes as the probably the worst woodlot hes seen, and the other is a very good woodlot he is part owner of in the Bay of Plenty.

He has recently been involved in a study with the forestry school at the University of Canterbury which involved Professor Bruce Manly and all the fourth year students. The study was commissioned by MAF to look at all the option on costs and prices of carbon for growers. There were 10 outcomes from the report.

What worries him is that he has been involved in this issue for decades, and he says it takes quite a while for people to come to grips with the issue, and its not possible to be able to do that very quickly because its so complex.

Details of story:

The 10 outcomes from the MAF report:

1. If you sell your carbon credits it will greatly increase the profitability of all species and regimes, which is good news for forestry

2. At present land prices are so high that for a typical site you cant afford to pay $3000/ha for land to grow trees; but at $30/t of Co2, you can afford to spend at least $3000/ha, and still get an 8% return over and above inflation

3. If carbon is priced at zero, then the best things (in order) to grow are first Pinus radiata clearwood, then radiata framing, then radiata to plant and leave, then Douglas fir, then Eucalyptus nitens, then indigenous forestry. (these were the only options looked at)

4. If you get paid for carbon, the order of the list changes to the best thing to grow is radiata for plant and leave, followed by framing, and Eucalyptus becomes more profitable than radiata clearwood regimes.

5. As the carbon price increases, it favours radiata regimes with later thinning, production thinning, higher final crop stocking and it discourages pruning. The higher the carbon price the longer the rotation age for all species and all sites.

6. We compared stands planted in the 1990s to stands planted now. Any carbon we sequester up to 2008 doesnt count, it is a free gift to the international community. So the carbon sequestered as a result of the planting boom in the 1990s mostly has been wasted.

But it is still an advantage to opt into the ETS and accept carbon credits even if the stand was planted in the mid 1990s. One option for these stands is to extend the rotation by a few years.

7. Although the ETS makes forestry more profitable it comes with a cashflow risk, because you have to pay these credits back at harvest. The most profitable option is to sell your carbon every year, but it is the most risky because you have the biggest cashflow deficit at harvest.

8. There are ways to reduce the risk: mix up the species and regimes and age classes to smooth out the cashflow issues. If you are really risk averse only trade up to the level of the minimum carbon stocks, so you only sell the carbon in the stem wood which is cut out at harvest. Or you could plant trees every year until you have a normal forest, with an even spread of age classes. That would be carbon neutral, and you can harvest every year and it wont matter.

9. A better way is to plant all the trees at once and then cut down some earlier, some later. Or you can plant one ha each year for 30 years, and then harvest one ha each year etc. After a couple of rotations you end up with a normal forest.

10. We looked at if it would pay to sell special carbon trees with higher growth rates and higher wood density. It turns out the greatest advantage is in growth rate rather than wood density.

Piers advice to farm foresters:

First, theres an issue around deforestation of trees planted before 1990. If you have less than 50ha, you can register to opt out of the ETS so that means you can deforest that area with no liabilities. Or you can decide not to register, in which case you have opted into the ETS, and you will receive some credits. This is compensation for not being allowed to deforest, and works out at 60 units/ha, which is a welcome and unexpected bonus to income. If you werent intending to deforest, this is a nice windfall.

For trees planted after 1990 or trees about to be planted, you can also opt out of the ETS. That means there is no change at all to what you do now, you just carry on growing trees, and if you choose to deforest, you can do that. The government will take the credits but also the debits including deforestation.

But do you trust government to stick to this in future?

The second option is to opt in, accept the credits and bank them, and dont do anything. You only have the registration costs of opting into the scheme. This way if you have the credits, they are yours.

The next option I am a bit worried about because farm foresters who need the cash might be tempted to sell their credits. The price of carbon could rise, in fact it should rise. It should be much greater in five years than it is now. But selling the credits and spending the money is a gamble and it scares me the Government is making ordinary honest people into gamblers.

Another option, advocated by the Forest Owners Association, is to bank your credits and not sell them until the situation becomes clearer.

There is a cunning loophole that Government probably will block. Say you planted trees in 1990, they are now 18 years old, and all of that carbon isnt counted. But your trees have been absorbing carbon dioxide. So opt out of the ETS, deforest, and then plant trees and claim the credits for the new crop. You will get credits from year one, rather than missing out on the first 18 years of growth.

Another option is not to harvest. A lot of people will do this for several reasons. The land where the trees are might be too rocky or inaccessible, the trees not good enough quality to harvest. Now you can get paid money for having them but not harvesting the block. But if you dont harvest, the trees harvest themselves, but by that time you might be dead.

You mightnt want to incur any liabilities on your successors so you put all the trees into a limited liability company, collect all the credits, pay yourself, and when the trees collapse in a big storm at age 50 Government says you owe us, but the company cant afford to pay, it has gone bankrupt. This option gives you an assured stream of income from the trees, and no worries about harvest in the future.

Another option is to hedge your risk, where you still want to harvest the trees but dont want a huge cashflow problem from paying back credits at harvest. A complex multi-species planting is possible, which lowers the profitability but lowers the risk.

The last option is you can get two lots of credits for the same piece of wood by growing a stand and getting credits and then selling the wood for bioenergy, which generates all sorts of credits. For example a school decides to change from burning coal to burning wood, it can get credits for doing that.