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Market Insights

Forestry, carbon and the general election

We are just over a week from the general election, and it seems the day can’t come quickly enough. If the election had occurred earlier in the year, Cyclone Gabrielle and climate change would have been more in our minds. Nearly eight months down the track, the electorate has downgraded climate change to number six on the list of concerns.

Nevertheless, the policy promises of the two major parties, Labour and National, are interesting and could shape the future of our rural landscape, and the role forestry and carbon sequestration play in that.

The following is a review of climate change policy focusing on land use change.

Put simply, for those who support forestry and the role it can plan in carbon sequestration and climate mitigation, the policies put forward by National appear the most supportive.

While both main parties are looking to manage the amount of afforestation undertaken and registered in the Emissions Trading Scheme (ETS), National’s approach of limiting ETS) registrations by Land Use Capability classification appears simpler and more pragmatic to the Labour Party’s proposed approach of running different schemes for carbon emissions and removals.

One area that all parties have agreed on is the importance of native forests, and it seems registrations of indigenous plantings as well as existing permanent forest registrations will remain unaffected whoever takes the top seat after October 14th.. MyFarm operates an existing portfolio of four high-performing Manuka forests on behalf of our investors, so this is good news for what we expect to be an expanding part of our asset base.

Exotic Afforestation

Both National and Labour are looking to manage the rate at which newly planted pine forests can be registered in the ETS, but each are taking a different approach to achieving that goal.

In their recently released climate manifesto, Labour aims to reduce the incentive for tree plantings through re-working the ETS to prioritise gross emissions reductions rather than offsetting through tree planting. As per Climate Change Commission (CCC) recommendations, they are committing to set different targets for reductions and for removals. Their consultation on this change via the Ministry for the Environment appeared chaotic, and was a leading cause of the collapse of NZU prices mid-year. The concern that spooked the markets is that Labour’s policy would create a new regulatory setting for the ETS, subject to government interference. This proposed reset of the ETS has had significant pushback from the forestry industry.

By contrast, National promises to take a more hands-off approach to the ETS, noting that the market needs certainty to maximise participation and to optimise price discovery. Rather than adjust ETS settings, they propose to manage the supply of forestry removals by controlling forestry registration in the ETS via the Land Use Classification (LUC) system.

Under National, they are proposing no limits on poorer quality Class 7 land being converted to forestry, of which there are circa 3 million hectares in New Zealand. Most of this land is steep hill country (though there is some sand country). A fraction of this land is suitable for forestry due to soil type, location, and access.

National has proposed a cap of 15,000 ha p.a. of Class 6 land (via whole farm conversions) for the next three years, of which there is circa 8 million ha in New Zealand. This forms the bulk of the forestry estate, and they propose to operate a licencing system, presumably much like the licencing of SunGold kiwifruit licences where licenses are bid on each year.

Outside of this, there is a proposed prohibition or moratorium on whole farm conversions that have class 1 to 5 soils, although existing farmers would be able to convert and register up to a quarter of their farm in the ETS.

The implementation of a licencing system for ETS registration raises interesting questions. MyFarm has been heavily involved in the Kiwifruit licencing system, with the value of a license now worth 2 to 3 times the bare land value. Targeting the funds raised from license sales back to rural communities affected could be a nice feature, but the government would need to consider unintended consequences (for example, the potential collapse in the value of class six farmland).

Whilst others may hold differing views, MyFarm prefers the National approach with some caveats. Ultimately, 15,000 ha of class 6 land able to be registered in the ETS doesn’t seem enough.

Native forests

Both National and Labour propose continuing to allow native forests to be registered in the ETS. Labour promises to explore reforesting or restoring 2.1 million hectares of native forest over the next ten years, eventually expanding to 5.5 million hectares. This is a promise that looks hard to deliver. Native plantings can be expensive and are slow to sequester carbon, offering limited returns for a much higher cost than exotic forests, so Labour would need to underwrite the model one way or another.

MyFarm has had a good experience with Manuka forests with our honey and carbon investment assets that partner with Comvita, so continued access to the ETS for natives is encouraging.

Overseas ownership of forests

Both National and Labour appear to retain the permissive approach to overseas ownership of forestry land by allowing overseas parties to buy existing forestry land under the special forestry test. Afforestation is more difficult, however, with National planning to specifically ban overseas owners from registering new exotic forests under the ETS.

Ute tax (Clean car discount).

Labour would continue with the policy to incentivise the purchase of EVs and PHEVs at the cost of SUVs and Utes. The policy has been difficult for farmers and tradies to swallow, given the absence of available clean energy options. National propose to abolish the programme.

Farming in the ETS

Whilst neither party proposes farming be part of the ETS, Labour would adopt a version of He Waka Eke Noa, with farmers needing to account for a small amount of their emissions using a split gas approach (differentiating between long-lived gases and methane) by 2025.

National proposes that farming enters some form of carbon accounting scheme by 2030.

Farmers will need to do their bit in limiting emissions, but the debate lays around when these commitments would need to start.

What do the centre-right possible coalition partners say?

ACT would retain the ETS but disable much of its supporting framework. It would let the market operate freely without limitations on forestry registering in the ETS but would abolish the Climate Change Commission.

NZ First is famously supportive of forestry but would exclude plantation forestry on LUC Class 1, 2 and 3 land while limiting it to no more than 25% of LUC Class 4 land.

Whatever the election result in the coming week, it is clear that the most important thing for an effective and efficient Emissions Trading Scheme will be to increase the amount of confidence and trust in the market and its future settings. A market cannot operate effectively without this. Market participants cannot make decisions without it.

We look forward to a more stable and transparent policy approach from whichever party or parties take the reins after October 14th. One thing is for sure, climate change won’t wait.

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