New Zealand's new carbon forestry charge expected to discourage new projects: experts

New Zealand government's move to levy an annual charge on forestry projects registered within the emissions trading scheme to recover administrative costs will discourage new exotic tree-based projects and make some of the biodiverse native tree-based projects unviable, industry experts said.

The government on Sept. 21 said that it would levy an annual charge of NZ$30.25/hectare ($18.05/mtCO2e) on forest land registered in the ETS to recover some of the costs of operating the scheme for the sector.

While the charge is not expected to make the exotic tree-based projects unviable, it will discourage new plantings, said Blair Jamieson, CEO of Tamata Hauha, a carbon project developer.

"Under averaging, we can claim carbon for 16 years, but we have to continue paying the annual fee forever, making the second rotation in particular almost uneconomic," said James Treadwell, president of New Zealand Institute of Forestry.

In cabinet minutes released by the government, it said that the latest charges will increase the costs recovered to an estimated NZ$18.9 million, or 63% of the cost of running the scheme, compared with 6% under a previous tranche of fee increase implemented in December 2022.

"Fees in the forestry ETS had not been adjusted since 2011 while the cost of administering the system has increased," according to the minutes.

Impact on native forestry

With the government's recent drive to encourage planting of more native forests, the annual charge exempts indigenous tree-based projects which are less than six years old.

However, the market participants said that the native tree-based projects are likely to be hit hardest by the charge.

"The biggest effect that this will have is on native plantings in NZ, and while exempting forests less than 6 years old, it will take a significant amount of the returns from natives after this point," Jamieson said.

The charge will be negative for the exotic tree-based projects also and even though the government has to cover some costs of operating the scheme, the charge disproportionately affects native projects, said Matt Cotterrell, co-founder of MyNativeForest, a native tree-based project developer.

"They are not really profitable at the moment anyway and it's a further barrier to people doing it and the government should be trying to encourage more native afforestation and registration under the ETS," Cotterrell said.

The government admitted that the feedback during its consultation indicated that smaller forest owners might be more likely to exit the ETS due to the charge, representing 64% of the total forest owners in the ETS.

However, this exit is expected to have only a marginal impact on the total forestry land registered within the ETS, according to the cabinet minutes.

While the government's modeling showed a marginal reduction in forecast exotic afforestation due to the charge, it expects an increase in afforestation of indigenous forests due to the exemption.

Surprise and challenge

Market participants said they were aware about the possibility of the charge due to an initial consultation but were surprised by the quick implementation.

"I think part of the shock is how quickly it's coming," Cotterrell said. "A lot of ETS participants haven't earned any money from the scheme, so they are going to get a bill without having any income to pay for it."

The annual charge will be calculated from land registered as of Oct. 19 for the 256 days until June 30, 2024, with the first invoices to be sent out in November this year.

The government admitted in the minutes that during the consultation many participants agreed that a fee increase was reasonable but most disagreed with the scale proposed.

"It was consulted on and all submissions I was aware of basically said 'you must be joking.' So, a charge was expected but not of this magnitude," Treadwell said.

The charge was expected to be slightly lower and especially leave out native forests in combination with more policy encouragement, Cotterrell added.

"We have tried without success to help the government understand that slow growing native forest planting projects under the NZ ETS typically do not cover their costs," said Sean Weaver, CEO of project developer Ekos, adding that the charge might derail projects using exotic forests to fund native reforestation.

Climate Forestry Association told S&P Global Commodity Insights that it was set to file a judicial review against the charge along with other forestry groups.

Price and uncertainty

The new charge has created more policy uncertainty for the forestry sector as it comes ahead of the national elections in October as well as other policy consultations on the ETS framework.

The National Party -- a strong contender against the current Labor government -- has set an opposite course by committing to no major ETS reforms and reviewing the extra levies imposed on the forestry sector.

"I think it just reinforces the political risk in the ETS, so investing requires a higher hurdle rate as rules can change at the drop of a hat," a carbon trader said.

The impact of the charge of the NZU spot price was unclear with no strong movement seen since the announcement of the charge.

"It could alter the buying strategy for compliance entities, but I am not sure that will be factored into the market yet," the trader added.

While the charge is not expected to shock the market and drop the price extensively, it might drive some foresters to sell units to pay the bill, Cotterrell said.

Platts assessed the price of New Zealand Units, or NZUs at NZ$65.50/mtcCO2e ($38.85/mtCO2e) on Oct. 5.

"As an industry, we just want some certainty around the parameters we are trying to operate in going forward," Cotterrell said.