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The Emissions Trading Scheme impacts land transactions

Rural

Property Brokers 06 Jul 2021

Rural-blog-image_Ideal-sizeThe Emissions Trading Scheme (ETS) is New Zealand's main tool for meeting our domestic and international climate change targets.

The ETS operates as a domestic carbon market, with emitters being required to surrender New Zealand Units (NZUs) for their emissions. An NZU, also known as a 'carbon credit', is equivalent to 1 tonne of CO2.

Some forests can receive NZ Us for the carbon they remove from the atmosphere. These NZUs can be sold to emitters, creating a price, and lead to cashflow for the owners.

The ETS defines two types of forest land, which are treated differently:

  • Pre-1990 forest land was forest land on 31 December 1989 and remained forest land that contained mostly exotic forest species on 31 December 2007
  • Post-1989 forest land is forest land established after 31 December 1989

Pre-1990 forests
Pre-1990 forest land can be harvested and replanted without liability. Deforesting - for example, by failing to re-establish or converting out of forest - is highly likely to incur an ETS liability. Deforestation liability should be considered when valuing forest land.

As mature forest has a high carbon storage per hectare, even small areas of deforestation can result in significant liability. For example, a 28-year-old Pinus radiata forest can have up to 814 tonnes of carbon stored per hectare. Deforesting 10 hectares would result in a liability of up to 8,140 NZUs, which at $37 per NZU amounts to more than $300,000. Moreover, as pre-1990 forests provided the baseline for carbon storage, any deforestation results in emissions, making it harder for New Zealand to meet its climate change obligations.

When deforestation occurs, the land owner is usually liable. When buying or selling land, particular care needs to be taken with recently harvested or cut over land. 

The ETS treats this as temporarily unstacked forest land, rather than deforested, and therefore the new landowner could be liable. Therefore, the new landowner could be liable if the land gets deforested in the future.

Post-1989 forests
Post-1989 forests can be registered in the ETS to earn NZUs for increases in carbon stock as they grow. This can have significant value. Depending on where it is planted, 20 hectares of fast-growing radiata pine forest receives up to around 16,000 NZU per hectare by age 28, worth almost $600,000. The same area of slower growing indigenous forest would receive 4,844 NZU, worth $179,000, over the same period.

When registered post-1989 forest land is cleared (for example, harvested), NZUs must be surrendered to cover the emissions. This can be around 70% to 80% of the carbon stock at the time of harvest. For the 28-year-old radiata pine forest above, this surrender liability could be as much as 12,700 NZU, which is $470,000 at current prices. When the forest is replanted, and the net carbon storage begins to increase again, it will begin to earn NZUs.

Obligations when the land is bought or sold
When registered post-1989 forest land is bought, sold, or transferred, the buyer automatically becomes the ETS participant and inherits all associated ETS obligations. This includes all reporting obligations as well as the unit balance for the land. The unit balance is the net number of NZUs the land has earned in the ETS, which is the liability the land carries that must be met at harvest or deregistration. There is no requirement for the NZUs earnt to be transferred to the new owner.

When buying, selling or transferring registered post-1989 forest land, both parties in the transaction have obligations:

  • both parties must tell Te Uru Rakau within 20 working days of the date of transfer, and
  • the seller must submit an emissions return within 20 working days of the date of transfer, which calculates the carbon stock change up until that date

The ETS participant is a forestry right holder or lessee. A change in land ownership does not affect participation, and all associated ETS obligations remain with the forestry right holder or lessee.

However, buyers need to be aware of what happens when a forestry right or lease ends. If the land remains in the ETS, participation and all associated ETS obligations automatically transfer back to the landowner.
Check land titles for ETS notices.

Forest land that is affected by the ETS is likely to have a land status notice registered on the land title, as required under section 195 of the Climate Change Response Act 2002. Before buying forest land, it's important to check the title for these notices.

A notice indicates that the land is somehow affected by the ETS - the instrument number can be ordered from Land Information New Zealand to check this.

Even if there is no notice, the land - or part of it - may still be affected by the ETS. Anyone looking to buy forest land should conduct due diligence before purchasing.

For more information or enquiries:
Visit: mpi.govt.nz/ets
Email: climatechange@mpi.govt.nz
Ph: 0800 CLIMATE28 and select option 2

Reproduced from REINZ Real Estate Magazine (Winter 2021, pages 26-27)
Author: Oliver Hendrickson,
Director Forestry & Land Management. Te Uru Rakau - New Zealand Forest Service.


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