Thursday, February 15, 2007

Climate change: trading in deforestation

National and the Kyoto Forestry Association are trying to beat up the proposal in December's Sustainable Land Management and Climate Change discussion document for a flat deforestation levy into a "retrospective tax" in an effort to discredit the government's policy and obtain windfall gains for the forestry industry. In response, the government has finally made explicit its preference for a tradable permits regime for deforestation. A full discussion document will apparently be released next week - well before the 30 March deadline for submissions on the main document.

But cynicism about government "consultation" aside, how would such a scheme work? The idea is the same as emissions trading: the government would issue a certain number of permits, and forest owners would be required to surrender permits when they cut down their trees. While the permits could be initially auctioned or grandparented, the ability of forest owners to trade permits among themselves means that the ultimate price of deforestation would be set by the market. Forest owners cutting down trees without surrendering permits would be subjected to large fines.

The general effect of such a scheme is summarised succinctly in the press release: it would "provide a small financial gain for those wanting to stay in forestry, while those planning to change their land use would begin to start paying some of the real costs". How much gain and how much cost would depend on the supply and demand of permits, and therefore ultimately on the cap. However, from previous government documents, we know what that cap will be set at: 21.5 million tons of CO2, or around 27,000 hectares of net deforestation.

Interesting features of such a scheme:

  • The effect of such a system is theoretically exactly the same as that of a tax designed to produce the same outcome. Trading systems simply transfer the work of getting the price right from the government to the market.
  • The government is likely to apply it only to pre-1990 forests. But as far as emissions are concerned, a tree is a tree is a tree. The system should be universal.
  • The cap is effectively a subsidy to the New Zealand forestry industry of (currently) NZ$300 million over five years. That's how much it will cost to buy credits to cover those deforestation emissions on the international market.
  • This bogs us down again in the same old arguments about allocation mechanisms, and a flat liability would be simpler. However, there are definite political advantages to such a scheme - firstly, that it takes the government out of the firing line (they're creating a market, not imposing a tax); and secondly, that it creates vested interests who will then turn around and fight to protect their newly-created property rights, thus making the policy more likely to survive.
  • If the permits are denominated in carbon dioxide, there's an obvious possibility for it to turn into a de-facto offset market, which the government would be foolish to ignore. A hectare of trees is about 800 tons of CO2. An electricity generator buying permits but not cutting down any trees could justly claim that they were reducing New Zealand's emissions by that amount. This possibility makes the question of allocation particularly fraught, as the permits may represent a cash windfall for forest owners, while an auction could see too many permits acquired by the electricity industry.
  • The system could allow the importation of Kyoto credits to allow additional deforestation.

As policies go, I think it is workable, and can easily be linked up with the other markets the government is creating to form a full emissions trading system post-2012. My main concern is time. We needed this system yesterday, but it will likely take another year before it is in place (time for another round of public consultation, and some time to get the required law through Parliament). A flat deforestation charge could be implemented much faster. However, it will be much easier to implement than a flat charge, so it is probably the best course of action.


Good post. But have you noticed that David Henderson is to be a Treasury guest lecturer on climate change issues? I don't know if you've read the paper the Treasury refers to, but the science part of it is complete bollocks. And why would Treasury be providing a platform for a CC denier, when the govt is going hammer and tongs for "sustainability"... I think we should be told...

Posted by Gareth : 2/15/2007 08:35:00 PM

The whole forestry industry seems to be against the Government:

15 February 2007

Forest industry remains united

The NZ Forest Owners Association says the forestry sector is united in its opposition to the Government’s land use climate change proposals.

“Each organisation in the industry is free to respond to the proposals in its own way. But our Association, the Federation of Maori Authorities, the NZ Farm Forestry Association and the Kyoto Forestry Association, fully supports the six point plan which we put to all members of parliament in mid-2006,” said NZFOA chief executive David Rhodes, in response to a media release issued by Forestry Minister Jim Anderton last night.

“It is very important the Government and its support parties understand that the nationalisation of private assets without compensation is totally unacceptable.

“Just because you can’t see the carbon that’s locked up in trees doesn’t make it any less real. It has value, it’s measurable, and it exists only because thousands of individuals and companies decided to invest their money in growing trees on land which was once in pasture.”

He says imposing a deforestation tax on those who planted trees before Kyoto was even thought of is also unacceptable.

"Regardless of the level at which it is set, the tax is forcing forest owners into a three-way dilemma. They can cut their trees down and change land-use before the end of 2007 without penalty, they can change land use after 2007 and pay the tax, or continue growing trees on possibly unsuitable land.

“Our members, and the members of the other industry organisations, are forest owners. For many of them, trees are a lifetime interest and forestry is a career they feel passionately about.

“For people like this to be talking of leaving the industry is a measure of the anger and frustration they feel about a Government that has put them in an impossible situation.”

He says the Government could achieve its goals by providing incentives rather than penalties; putting greater emphasis on carrots rather than sticks.


The forest industry’s 6-point Kyoto plan

The NZFOA, NZFFA, KFA & FOMA agree that the New Zealand Government needs to:

1. Remove the inequitable, retrospective ‘deforestation cap’.

2. Allow land owners with Kyoto-qualifying forests (forests planted from 1990) — as well as those replanting non-Kyoto forests after harvest — to financially benefit from the value of the carbon their forests remove from the atmosphere.

3. Introduce broad-based carbon charges, ensuring that all emitters of greenhouse gases face the same opportunity costs.

4. Ensure that New Zealand's Kyoto policies have the best long-term outcomes for New Zealand, even if they don't exactly mirror current Kyoto rules.

5. Develop a regime which puts a value on the environmental attributes of forestry, thereby encouraging investment in the sector.

6. Act immediately. Because forestry will inevitably be part of any rational climate change policy developed for New Zealand, forestry policies should be developed now to help the country meet its carbon emission obligations in the first Kyoto commitment period.

More details of the industry's plan are available in the joint forest growers' Kyoto policy brochure, Kyoto: Unlocking the potential of forestry.


Posted by Anonymous : 2/16/2007 12:37:00 AM