Which carbon accounting model is best for my forest in the Emissions Trading Scheme? 

When a forest owner is registered in the Emissions Trading Scheme (ETS) they are allocated carbon credits as their forest grows and sequesters carbon.  

In  June 2020, the New Zealand Government passed legislation which sought to improve the Emissions Trading Scheme. These improvements included changes to the ways carbon is accounted and granted within the ETS. This meant that, for a short period, there were to be 3  categories of carbon allocation.   

A forest registered between 2019 and 2022 could enter under 3 different carbon categories: 

  • Sawtooth  

  • Averaging   

  • Permanent  

If  you registered before the end of 2022, you were to the option of all three. However, if you register after 2022 , you will only have the option to enter the Averaging and Permanent carbon categories.  Furthermore, MPI released a consultation document in March 2022 which proposes restrictions on exotic forests being registered into the new permanent forest category.   

The key question for forest owners is: Which model is best for me and my forest? This article aims to provide some insight into how each carbon model works  to aid in making a decision.   

The main questions to be asked when thinking about a carbon category are: 

  • What is the age class distribution of the forest estate?
  • When is it planned to be harvested?
  • What is the long term strategy for the forest or business?
  • What is the risk appetite of the forest owner and what means are available to manage risk?

Category 

        Advantages 

Disadvantages 

 

Sawtooth 

 

 

    Full allocation of carbon credits 

 

Surrender of credits required at harvest 
 

Averaging 

 

    No harvest surrender required Limited volume of carbon credits allocated 
 

Permanent 

 

    Full allocation of carbon credits  Restricted harvesting activity 

Table 1: Advantages & Disadvantages of various carbon categories. 

Sawtooth Carbon Accounting 

Sawtooth or ‘stock change’ accounting is the current category but will only be available until  31 December 2022.  Under the sawtooth category, forest owners are allocated carbon as their forest grows but must surrender credits when the forest is harvested. Carbon is allocated on all rotations.  

When a harvest has occurred, the decay, or slow release of carbon from the first rotation harvest and the new growth/carbon sequestration of the second rotation forest must be accounted for. When these balance out, positive carbon accrual starts again. Figure  1  shows this over multiple forest rotations.   

Figure 1: Multiple rotations of carbon allocation and surrenders under the Sawtooth carbon accounting category.

Averaging Carbon Accounting 

Averaging relates to the average volume of carbon that would be stored in a forest over multiple rotations. The assumption is that, as a forest is grown and harvested, total carbon fluctuates but there is an ‘average’ volume of carbon that would be stored in the forest. This will remove the ups and downs (allocations and surrenders) of carbon credits for a forest owner involved in timber production (see Figure 1).  

Under averaging, a forest will be allocated carbon up to the ‘average’ level in the first rotation (for Pinus radiata this age has been determined to be age 16). No carbon will be surrendered at harvest provided the forest is replanted.  Although you do not have to surrender carbon back at harvest if you replant, in the subsequent rotations you will not receive any further carbon allocation for growing your forest over the same rotation length, e.g., a business as usual forestry rotation of 28-years. 

The red line in Figure 2 shows carbon allocation up until the long-term average line, approximately 16 years. From this point on no further carbon allocation is granted.   Averaging will be optional for any forest registered between 2019 and 2022, but mandatory from 2023 onward unless you choose to enter the ‘permanent’ category, which is currently under review.  

Figure 2: Carbon allocation under the Averaging carbon accounting category. 

Permanent Carbon Accounting  

The ‘permanent’ category involves committing to growing a forest for a minimum of 50 years. This category will replace the permanent forest sink initiative and will be available after 2022. Selective harvesting is permitted under this model provided a canopy cover of over 30% is maintained.   

Carbon allocation is granted via stock change (sawtooth) accounting whereby forest owners receive the full allocation of credits as their forest grows.  

The most recent consultation on the ETS has proposed that exotic species should not be eligible to enter the permanent carbon accounting category. The full document can be read on the MPI website here. 

Figure 3: Carbon allocation under the Permanent carbon accounting category. 

Summary 

The most appropriate allocation model always requires a case by case assessment. As an example, a bare land planting (out of pasture) is likely to be suited to ‘averaging’ because they will receive a significant number of credits they will not have to surrender at harvest. Any older or second rotation forest will have very little opportunity from ‘averaging’ because they will have already reached their ‘average’ this type of forest should register under ‘sawtooth’.  

The ‘permanent’ category is a great option for any indigenous forests where this is no intent to harvest. Not only does this provide full carbon allocation, the credits issued will be distinguishable in the marketplace and could command a premium price.   

For all carbon accounting models, if the forest is impacted by an adverse event, no surrender liability exists provided the forest is replanted.  

It is important to note any older or second rotation forests will be severely disadvantaged once averaging becomes mandatory and they should register under sawtooth while they still can.  

MPI provided an interim deadline for submitting applications for them to have confidence that they could process these before the end of 2022. This was the 30 April 2022. As this date has now lapsed, there is a lower chance that MPI will process this application by the end of the year.