The realities of climate change are starting to sink in for a range of sectors – farming included. The recently released recommendations of the He Waka Eke Noa working group have highlighted some of the challenges (and opportunities) facing the rural sector in coming to grips with climate change and reducing emissions. One obvious way of helping to reduce carbon emissions (at least in the short to medium term) is to plant trees.

Forestry has been an important part of the Emissions Trading Scheme (ETS) since its inception because of the ability of trees (particularly fast growing exotic timber species such as Pinus radiata and Douglas Fir) to quickly store carbon and earn carbon credits. With the current price of carbon sitting at around $75/tonne and predicted to climb even higher, the ability of forestry plantings to earn income through sale of carbon credits makes forestry an increasingly attractive land use option – especially for marginal land.

The Government through the Ministry of Primary Industries (MPI) has been reviewing forestry in the ETS and one of the decisions made has been to bring in a new method of carbon accounting. Until now, changes in carbon stocks have been calculated using a “stock change” approach which accounts for short-term changes in carbon stock. This means carbon credits can be earned quickly as stocks increase but the downside is that credits must be repaid if carbon stocks decrease (e.g., on harvest).

The new method is “averaging accounting”. Under averaging accounting, carbon credits are earned to a certain point for the first rotation of a crop, but not for second or later rotations. Credits do not have to be repaid on harvest so long as forests are replanted. Although fewer credits are able to be earned under averaging accounting, there is less risk that these credits will need to be repaid – thus providing more certainty for on-sale of credits to the carbon market.

Permanent forests (i.e., forests planted primarily for storing carbon) have been around since 2006 under the Permanent Forest Sink Initiative (PFSI) and, because of their permanent nature, carbon credits from these forests are sought after by parties wanting to off-set their own emissions. However, the inflexibility of the scheme and the requirement to repay credits if forests are damaged by adverse events has proved to be a disincentive for entry into the PFSI and there are currently only a few such forests.

The Government has decided to close off the PFSI and to enable a new category of forests (“permanent post-89 forests”) to be entered into the ETS. Permanent post-89 forests are forests that will not be clear-felled for a period of at least 50 years but will earn carbon credits through the stock change approach. The credits earned will be tagged in the ETS as coming from permanent forests. It is expected that the penalties for deforestation through adverse events will be more flexible than the current PFSI scheme.

The increasing price of carbon has resulted in an upsurge in interest in planting permanent forests. However, the prospect of large-scale transformation of farmland to “plant and forget” permanent forests has been of concern to many rural communities. As a result, MPI has been consulting on ways of addressing these concerns including restricting permanent forests to slower growing indigenous species only. This is proving to be somewhat controversial and it will be interesting to see what announcements are made as a result of this consultation later in the year.

Many farms have incorporated forestry or woodlot plantings as a way of utilising marginal land or for soil conservation or shelter purposes. The recommendations from He Waka Eke Noa make it clear that on-farm sequestration using tree planting will continue to be an important part of the agriculture sector’s response to reducing or off-setting emissions.

However, the process of deciding where and what to plant and how to manage the resulting plantings (including whether to enter the ETS and on what basis) is complex and requires careful consideration. Legal mechanisms such as forestry rights or joint venture arrangements can help to manage the associated financial and legal risks but there are a range of factors to consider.

If you are thinking about forestry as a land use option for your farm, we recommend that you get expert forestry and legal advice before you start. Our Rural team has plenty of experience in advising clients on forestry related matters and would be pleased to provide advice and answer any questions you may have.