Climate Change: Solving the forestry dilemma

For a long time now the Climate Change Commission has been expressing concerns about the place of forestry in the Emissions Trading Scheme. Our net-zero emissions target encourages us to plant trees to soak up our emissions, but if we plant too many, then carbon prices will be too low to force actual reductions. Meanwhile, the ability of polluters to buy forest credits directly lets them "plant and pollute" and also avoid reductions. The Commission's preferred solution has been to try and limit forestry's place in the ETS, excluding fast-gowing (and therefore fast-soaking) pine in favour of slower native trees, but this would likely result in deforestation and even more emissions. Now, Climate Change Minister James Shaw has presented a better option: the government buys the credits and uses them to back the ETS:

Speaking to Stuff, Shaw said the government was exploring forestry’s place in the ETS. One option was the Government became a buyer – or even the exclusive purchaser – of units from forest owners. These units could then enter the Government pool, to be allocated for free or sold at auction.

The Government would receive a method to incentivise new native and exotic forests plus, potentially, more precise control over gross emissions.

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If the Government purchased forestry units and then auctioned or gave them to polluters, each unit would be net-zero. Overall, this could decrease the country’s gross and net emissions, compared to the current set-up.

I really like this solution. I'd expect the price paid to forest-owners to roughly track the ETS price (using market averages, or the auction price settings), which should provide a strong incentive to keep planting trees. But those trees will no longer allow additional pollution within the ETS. Which means we get a double benefit: the benefit of those trees on the national carbon accounts, reducing the number of credits the government will need to buy on the international market to meet our interim 2030 target, and the benefit of higher ETS prices further reducing emissions (which will also reduce that international liability). It also allows easy incentives for native over pine forestry - either a differential price to recognise the biodiversity benefit, or allowing native trees to remain in the ETS (though that probably just shifts the problem for a decade).

The big risk is that the government faces clear incentives to penny-pinch and set the price it pays for forest carbon too low, both to save money and due to political pressure from traditional farmers, who are being outcompeted by trees. It would also set a clear incentive against updating the carbon tables for native forestry to reflect new data (and so massively increasing the relative value of natives versus pine), because that would cost the government money. Though you'd hope the Greens would be able to apply enough pressure to keep the government from making such mistakes in the short-term.