Rather than waiting until the end of the forest rotation for income the forest owner can now begin earning income from an early stage.

Carbon forestry is a unique investment in that it can dramatically improve the terms of trade of forestry at the same time as being a truly green, environmentally friendly investment.

By ratifying the Kyoto Protocol, the New Zealand Government offered the New Zealand forestry industry a huge opportunity to diversify and increase income from their forests.

For the first time forest owners can gain income from sequestering CO₂ as well as selling timber.  The time value of money is the major advantage of carbon trading for a forest owner because rather than wait until the end of the forest rotation for income the forest owner can now begin earning income from an early stage.

Carbon markets are established and operating throughout the world.  In 2007 carbon trading sales of US$64 billion were transacted around the world.  In 2011 that figure had grown to US$176 billion. In New Zealand our first forest carbon transactions took place early in 2009 following the enactment of NZ Emissions Trading Scheme (ETS) legislation in 2008.

An “ideal” carbon sequestration forest is one where the owner is able to sell carbon credits each year until the forest sequestration rate plateaus, at which time the forest could be harvested and the harvest revenue used to repay the carbon liability.  The forest could then be replanted and start sequestering CO2 for another rotation of carbon sales. 

New Zealand has a distinct advantage in that the country is a signatory to the Kyoto protocol and has legislation in place that means carbon credits allocated to forest owners are government verified and are therefore highly regarded by the international community as being quality carbon credits.

The principle behind carbon forestry is that by photosynthesis a growing tree absorbs and converts CO2 from the atmosphere into carbon in the form of wood. 

All carbon credits and liabilities are expressed in “carbon dioxide equivalents” (CO2e).  Dry wood is almost exactly 50% carbon by weight.  It takes 3.67 tonnes of CO2 to make one tonne of carbon. This means that each tonne of dry wood has sequestered approximately 1.8 tonnes of CO2 in its formation.  The amount of CO2 stored each year in the tree can be calculated and then sold on the international market in units equivalent to tonnes of CO2 (A carbon credit).

Different countries including New Zealand have developed trading mechanisms to enable those who reduce their emissions of Green House Gases (GHG) to receive carbon credits that they can sell to those who increase emissions of GHG.

The New Zealand government has passed legislation that will allow landowners to establish permanent forests, gain Kyoto emission units and participate in forest carbon trading under rules first promulgated in the Kyoto Protocol. 

There are different types of carbon credits and they have different values depending on their source but each carbon credit is equivalent to one tonne of CO2.  From the CO2 sequestered in their trees, New Zealand foresters can earn New Zealand Units (NZUs). 

The Emissions Trading Scheme is created by the Climate Change Response Act 2002 (the Act). The ETS is designed to eventually cover all significant greenhouse gases (covered by the Kyoto Protocol) and involve all sectors in New Zealand.

The objective of the ETS is to support global efforts to reduce greenhouse gas emissions by helping New Zealand to:

• reduce net emissions below business-as-usual levels; and
• comply with our international obligations, including our Kyoto Protocol obligations.

Emissions trading has been preferred because:

• There is broad consensus that it is an effective and economically-efficient approach;
• It is the most flexible option;
• It provides an incentive for industry and private individuals to improve their resource use;
• It is consistent with the principles of the Kyoto Protocol.

The ETS essentially puts a price on the emission of greenhouse gases and provides incentives that will encourage sectors to search for the most efficient paths to lower net emissions across the economy.

Participants in the ETS will have three core obligations: 

• Monitor the emissions they are responsible for
• Report these each year to the Government
• Surrender emissions units to cover their reported emissions.

The Government will issue a number of emissions units for forest carbon sinks (that meet the required criteria) and these may be held, or bought and sold (that is, traded), within New Zealand. The primary unit of trade in the ETS will be the New Zealand Unit (NZU). One NZU represents one tonne of carbon dioxide (CO2) either released to the atmosphere (emissions) or removed from the atmosphere (removals).
 
The ETS will be linked to the international Kyoto Protocol market. NZUs will be generally interchangeable with New Zealand Assigned Amount Units (AAUs), held by New Zealand under the Kyoto Protocol. AAUs can be used by any country to meet any of their obligations under the Kyoto Protocol. They are not, however, automatically allowed into all countries’ domestic emissions trading schemes. For example, the European Union (EU) currently does not allow New Zealand AAUs to be used by companies with obligations under the EU Emissions Trading Scheme. However European countries have purchased NZ AAUs.

Ownership of NZUs will be recorded in a central registry (the New Zealand Emissions Unit Registry, NZEUR) NZUs are transferred between registry accounts when they are surrendered or sold. Participants wishing to sell NZUs can instruct the registry to transfer them from their account to another account.

Similarly, Participants who are required to surrender emissions units for compliance purposes will do so by instructing the NZEUR to transfer units from their account to a ‘surrender account’ in the registry. If a participant does not have sufficient units in their account, they will be required to buy sufficient units to cover the shortfall and then surrender them.

Forest owners will meet all costs of administration, monitoring, auditing and compliance and also carry the liability for maintaining the carbon stocks. If credits have been sold then at harvest they will have to be repaid.

If a forest owner sells NZUs then they are committing themselves to maintain the CO2 stock they have sold.  They must either maintain that carbon stock forever or alternatively they will need to buy back units to cover any loss of carbon in their forest. This loss of carbon stock in the forest could be brought about by natural and climatic events eg disease, fire, windthrow, earthquake or natural degradation as the forest reaches maturity and trees start to die, or by harvesting.  Climatic events will be covered by insurance, however this does not include disease.  Harvest needs to occur at some time before the forest starts to degrade. 

With a newly planted Radiata Pine Forest there is the potential to sell enough carbon in the first 10 to 12 years to recoup the capital cost of establishing the forest.
 
The desired long-term outcome for a forest carbon venture is one where the harvest receipts repay the carbon credit liabilities.  Of importance in this assumption is the relationship in price between the wood harvested and the purchase price of the replacement credits. 

However, it is worth noting the owner of a newly planted (post 2008) Radiata forest can sell up to approximately 200 tonnes of carbon per hectare without creating a liability as long as the forest is replanted.  This is because at harvest 200 tonnes per hectare remains in the stumps roots and soil.  The new plantings offset the loss of carbon as the stumps and roots slowly decay.