March 25, 2010 / 1:02 PM / 7 years ago

Factbox: NZ foresters cautiously embrace CO2 trading scheme

5 Min Read

(Reuters) - New Zealand's plantation forests are a major store of carbon dioxide, soaking up millions of tonnes of the planet-warming gas and helping the country meet its binding emissions target under the U.N.'s Kyoto Protocol.

Following are details about the sector, which will play a key role in the country's emissions trading scheme (ETS), the first national scheme outside Europe.

Pollution Permit

The scheme's currency is called "New Zealand Units," or NZUs, each of which represents a tonne of carbon dioxide-equivalent and can be traded among different companies, banks and brokers.

Forestry First

Forestry was the first industry to enter the scheme in 2008 and received the first NZUs last year.

Under revisions passed by parliament late last year, stationary energy, industrial processes and transport and liquid fossil fuels, are next to enter, joining on July 1 this year.

Companies in this group emit more than 40 percent of the nation's greenhouse gas emissions that totaled 75.6 million tonnes of carbon dioxide-equivalent in 2007 and will, in theory, be major buyers of NZUs.

What Does This Mean for Forestry?

Forest owners are set to become major sellers of NZUs to industry, receiving millions of the permits as credit for locking away carbon in the trees. The final amount allocated will depend on the number of owners who opt into the scheme, which classifies forests as either post-1989 or pre-1990.

Pre-1990 forest owners are in automatically unless their forest area is less than 50 hectares (125 acres). Only post-1989 forest owners can choose whether or not to opt in.

So far, only a small amount of NZUs have been allocated to owners of post-1989 forests, which have to meet strict rules under the Kyoto Protocol. Kyoto uses 1990 as its baseline year.

Less than 700,000 were given to forestry owners in early 2009, with some sold domestically or converted into sovereign Kyoto instruments called Assigned Amount Units and sold overseas.

This year, the allocation is roughly estimated at between 2 and 3 million for owners of post-1989 forests.

Such forests can earn carbon "sink" credits for soaking up CO2 for growth from Jan 1, 2008. But also face liabilities for any loss of carbon stocks, such as harvesting or fires.

Two Types of Forest

Owners of pre-1990 forests are also set to receive millions of NZUs as a sweetener to keep their forests standing but face costly carbon liabilities if they cut them down after receiving the free credits. They have four years to replant to avoid the carbon liability.

Pre-1990 forests are those that were forest as of December 31, 1989, and remained forested on December 31, 2007.

The original plan was to allocate 21 million NZUs to pre-1990 forest owners and a further 34 million between 2013 and 2020. But the government has begun a consultation process to adjust this, with the idea to offer either 18, 39 or 60 NZUs per hectare depending on when and how the land was acquired.

Owners of pre-1990 forested land of less than 50 hectares can choose to opt out.

If a land owner is granted 60 NZUs per hectare, 38 percent of these will be granted by 2012 and the remainder after that. The government hopes the amended pre-1990 allocation plan will go into force by June this year, with allocations after that.

Forest Cover

New Zealand has about 1.9 million ha of plantation forests, about 1.2 million of which is pre-1990 forest. There was rapid planting of forest from 1992 to 2000 covering about 500,000 ha but much less since then in part because of a lack of incentives.

Some analysts estimate about 12 million NZUs as a reasonable potential total from Kyoto forests per annum if all the owners opt in.

Problems

Not all forestry owners have opted in to the scheme. Some are unclear how it will work and what their emissions liabilities will be during harvest or if their forest is destroyed by fire.

Of those that have opted in and received NZUs this year, many are likely to hold on to them, uncertain about pricing or demand in the scheme's initial years.

Some analysts say demand from big emitters is likely to be small initially, potentially depressing prices of NZUs. Demand for AAUs is also sporadic and trade is secretive, with prices thought to be between 6 and 8 euros (NZ$11.5 to NZ$15.4), below the fixed NZ$25 price for the scheme from July 1, 2010 to 2013.

Japan has been a major buyer of AAUs, mostly from Eastern Europe.

(1 euro=1.89 NZ$)

(Source: EITG, Frazer Lindstrom, Carbon Market Solutions, Ministry of Agriculture and Forestry and www.climatechange.govt.nz)

Editing by Himani Sarkar

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