An open letter to NZ Ministers

Friday 17 Dec 2021

 
NZETS Barriers to Investment in Native Forest Carbon Projects

NB: An earlier version of this story as supplied to Scoop and published in this morning’s edition of Friday Offcuts contained a couple of inaccuracies that have since been corrected and included by the author in this updated version.

Date: 14 December 2021

Dear Ministers,

Problem

Ex-tropical cyclones smash our country and cause huge damage to our economy. Under a warming climate these cyclones will get stronger and do even more damage, harming our rural communities. We need to get ready for this by building climate-resilient and biodiverse landscapes on what is currently erosion-prone marginal farmland with willing farmers. In Hawkes Bay alone the Regional Council estimate that over 250,0000 ha of permanent reforestation is needed. This will require billions of dollars, and the ratepayer and taxpayer cannot afford the bill. But the private sector can afford it when the task is funded through carbon forestry and private investment. In theory.

But there is a problem

Native forests grow more slowly than exotic plantations and the economics of native carbon forestry are very challenging. This is why we do not currently have a native forest carbon industry fixing our landscapes at scale.

But wait, carbon prices are rising now to levels where the economics of native forest carbon are almost beginning to work. These projects need to pay back debt, so they need to be at least a little bit profitable to service this borrowing. Even though the profitability of these projects is still very lean, impact investors are starting to take an interest.

But there is a snag

The economic viability of a native forest carbon projects depends on the carbon returns paying back the debt to plant the forest. Imagine planting a 100ha native forest (200 rugby fields) that has tightened its belt and eliminated all inefficiencies to keep costs down to be profitable enough to attract an investor to fund the plantings.

The ability to repay this debt depends on the carbon returns from this 100ha area. But when the project applies to the Ministry for Primary Industries (MPI) to register in the New Zealand Emissions Trading Scheme (NZETS), MPI decides to rule that only 80% of the area is eligible to register. This is even after the project having done all its homework on demonstrating the eligibility of land planted using the best data available to the public. MPI say “don’t worry – we generally accept 80% of what’s applied for overall.”

But now your carbon project just got a 20% haircut on its returns after spending 100% of the investment. This means only 80 ha of your 100ha forest will deliver a return to that investor. In turn, this means that the originally lean return on investment is now below zero and the investment fails.

When investors understand this risk ahead of time they run for the hills or say: “plant me a pine forest instead”.

The project then asks MPI to explain its reason for it ruling on eligibility and it comes down to an interpretation of the legislation with MPI erring on the side of caution, having to be “satisfied” that land is eligible. So, native forest carbon projects are forced to fly blind into a commercial environment where a crash is far more likely than not. And surprise, surprise investors stay away, and privately funded climate resilience for our rural landscapes does not happen. And this is in a nation that has declared a climate emergency.

But then… The Climate Changes Response Act provides for an ‘emissions ruling’ where the project can apply to MPI to confirm the eligible area before it has been planted to eliminate this risk of a 20% loss to your carbon returns.

Phew!

But no. An ‘emissions ruling’ currently takes up to a year to extract from MPI. When you add this year to the minimum of one year required between seedling order and planting (and typically longer for many nurseries supplying natives) then six months to a year of planning, and then after planting wait a year for your NZETS application to be processed, we have a 4-year process between starting a project and registering it in the NZETS. MPI have also just cancelled the ‘preliminary assessment’ facility that would give an early indication of project eligibility after trees have been planted.

The Solution

Please bring back the ‘preliminary assessment’ facility to provide an indication of land eligibility early in the process to better steer applicants.

Please speed up the emissions ruling processing time to take no more than 3 months instead of the 12 months it currently takes.

Please charge a realistic fee for these services so that you can recover the costs of a rapid processing time.

Private investors want to invest in climate resilience, and we are almost there with the native forest carbon sector. This is just about fine tuning an economic instrument so that it can attract billions of dollars of private investment to build climate resilient, biodiverse landscapes where we need it most.

Yours sincerely

Dr Sean Weaver, CEO Ekos

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