Since 2019 we have seen a dramatic rise in the price of NZUs in response to various government policies and regulations. Along with the Billion trees incentives, this have driven an expansion in the New Zealand forest estate not seen since the early 1990s.
Much of this new establishment will be entered into the ETS under the averaging accounting method. However, the government has delayed compulsory entering under averaging until 2023, so forest owners with new establishment from 2019 through to 2023 have the option of entering under the ‘old’ stock change system, or the new averaging accounting method. The averaging scheme results in a much higher rate of return than the stock change ‘safe carbon method’ for standard rotational forestry. Given this fact, and with the increase in NZUs prices, predictions for continued long term strong NZU prices, and increasing uncertainty regarding long term log export prices, is there the possibility that a ‘plant and leave’ regime may be more economic?
Margules Groome has constructed a model forest on the East Coast of New Zealand’s North Island, using yield and costs benchmarks from Margules Groome’s extensive database the AgriHq December 2020 Prices for log pricing. The MPI lookup tables were adjusted by 10% upwards to compensate for some of the conservativeness inherent in the generic tables. Land price was assumed at NZD6 500/ha, to reflect the high prices being paid for unforested Post 89 land currently.
The results of this specific modelling exercise were surprising. As it currently stands, a forest owner looking at establishing a greenfields carbon investment may be better off establishing a plant and leave regime, rather than rotational forestry.
Table 1: NPV comparison for Greenfield Investment regimes
|Stock Change – Full NZU Sale
|Stock Change – Safe NZU Sale only
|Plant and Leave
The Plant and Leave scenario results in an NPV around NZD2 000/ha higher than rotational forestry under averaging accounting. Note also that the full sale of the available NZUs also returns a higher NPV than averaging, but the risks associated with the potential carbon liability at harvest makes this an unattractive option.
The differential between average stumpage/m3 and NZU price for this analysis is NZD77. For the averaging investment to equal the plant and leave scenario under these assumptions, this differential will have to increase to NZD97, or a 17% increase in real log prices with no corresponding increase in NZU price.
This analysis raises the possibility that a large portion of the new establishment currently underway may be left as permanent forests, with the associated negative impacts on log supply, employment, and forestry’s overall contribution to GDP. However, increasing public resistance to permanent exotic carbon forestry in New Zealand, as well as the Climate Change Commission’s recent draft proposals signally a shift away from exotic forestry as a key component to meet New Zealand Nationally Determined Contribution (NDC) will likely impose restrictions on the extent of forests left un-harvested.
For more insights contact Margules Groome.