New Zealand, home to Asia Pacific's oldest emissions trading system, is facing an unenviable challenge of managing an accelerating growth in carbon-based forestry underpinned by a jump in carbon price in 2022.

The island country in the southwestern Pacific Ocean has seen an uptick in land being diverted for the development of exotic forests. Around 86% of the registered forests in the country's ETS are exotic, with the remaining 14% being indigenous, according to data from the government.

The landowners in New Zealand can register their forestry land in the country's ETS and earn carbon allowances known as New Zealand Units, or NZUs. These NZUs can be sold in the spot market to the emitters participating in the country's ETS, which covers nearly half of the country's total emissions.

The price of NZUs touched a record high of NZ$88.50/mtCO2e ($53.70/mtCO2e) in November 2022, according to market sources, making carbon forestry an attractive undertaking for landowners.

Total afforestation increased from around 6,000 hectares in 2015, when the NZU price was less than NZ$5, to an estimated 65,000 hectares in 2022, when the NZU price has been over NZ$70, according to government data.

While the NZU price has been on a downtrend in 2023, it is still the highest carbon price in Asia and remains an attractive driver for landowners to divert land to forestry. Platts, part of S&P Global Commodity Insights, assessed the price of NZUs at NZ$56.50/mtCO2e June 9.

Native versus exotic

While an increasing forest cover is the envy of any country on a warming planet, New Zealand is scrambling to find ways to manage the rapid expansion of its forests.

New Zealand has around 468,000 hectares of exotic and nearly 76,000 hectares of native ETS-registered forests, according to data from the Ministry for Primary Industry. Pine trees account for 85% of total exotic cover.

"I think there's exotic versus native and then there's biodiverse versus monoculture. Monoculture is problematic," said Jo Blundell, CEO of CarbonCrop, which helps landowners register their forest land in the ETS.

The pine trees, when grown as a monoculture, are more susceptible to attack by pests and diseases, and are likely to be more vulnerable to natural disasters such as forests fires and cyclones, the government said in a consultation released in 2022.

With a notable chunk of ETS-registered exotic forests falling in permanent category, under which they cannot be altered for at least 50 years, the ecological impact of such forests can be long lasting.

"Pine changes the pH of the soil, which is a good thing if you are harvesting it but if you are leaving it there, not much else native will grow underneath that," said Blair Jamieson, founder of Tamata Huaha, a company that helps landowner plant forests and register with ETS.

On the other hand, native forests with long-lived tree species, such as Tōtara and Kahikatea, continue removing and storing carbon for centuries as the forest reaches maturity, according to a government report. They also provide a better habitat and food sources for New Zealand's native birds, insects and animals.

Carbon profit

Despite their environmental impact, market economics strongly favor exotic trees due to their faster growth rate and higher survival rate, allowing them to sequester more carbon compared to native trees.

"We do have some of the tallest trees in the planet, which are long-lived and straight, but some of our native trees are lucky to grow by a foot in a year," Jamieson said.

It takes nearly 40 years to break even on current pricing for natives, and it only becomes profitable to sell them when the price of carbon is over NZ$356/mtCO2e in New Zealand, Jamieson added.

"So we've got scenarios in New Zealand where people are earning NZ$200 a year from a native, and they're getting NZ$2,500 a year for an exotic," said Jamieson.

The profitability of exotic forests has also led to the diversion of land from cattle farms to plantations, raising concerns in the sheep and cow farming community about forestry's impact on productive land and employment.

"The reality is that a sheep and beef farmer can't earn anywhere near what they could earn turning their land into a pine plantation. They could probably 10 times their revenue per hectare by planting pines," Blundell said.

The total farmland in New Zealand is estimated at 11.5 million hectares, with nearly 769,702 hectares of that land converted into forests between 1990 and 2019, according to government data.

Based on a carbon price of NZ$70/mtCO2e, government estimates showed that while returns from permanent exotic forests could reach up to NZ$35,000/hectare, the returns from natives could be a maximum of NZ$1,500/hectare, and sheep and beef farming at NZ$4,500/hectare.

The carbon spot market is also not placing any premium on NZUs generated from native forests due to a plentiful supply of NZUs from exotic forests, an Auckland-based carbon trader said, thus further diminishing incentives for native carbon projects.

The increasing registration of forestry projects under the ETS has also resulted in concerns about an oversupply of NZUs from these projects flooding the secondary market and pressuring the spot price.

Government action

The government in 2022 launched a consultation on a new set of rules that would limit the participation of exotic forests in the ETS starting 2023.

The rules had political ramifications as around 30% of New Zealand's 1.7 million hectares of plantation forestry is estimated to be on indigenous Māori land.

The administration held off on new rules and proposed to redesign the forest category eligible to enter ETS to support forests, which are managed to transition from predominantly exotic trees to indigenous species over time.

The exotic trees can be used to create an environment in the soil that is more ideal for harder-to-grow native trees, said Jamieson, whose company works pre-dominantly in the field of transition forestry.

In 2023, the administration led by Prime Minister Chris Hipkins said that it was conducting a review to refocus ETS on cutting emissions at the source rather than depend on forestry credits to offset emissions.

NZ ETS is forecast to drive between 410,000 hectares and 670,000 hectares of new forests by 2035, according to cabinet minutes, with the review also expected to help frame the future policy for exotic forests and have a major impact on NZU price.

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