Things to consider when deciding whether to enter the ETS

With ever increasing environmental regulation, severe weather events and economic uncertainty more farmers are considering adding or increasing their forestry footprint. Some things to consider when making this decision are as follows:

1. Pre 1990 or Post 1989 Land?
   
   1. Pre 1990 Land was in trees before the 1^st January 1990 and qualified for a one-off payment of carbon credits. Pre 1990 land has to be replanted, if not you could be eligible for a fine. Carbon credits or NZUs received on Pre 1990 land are deemed to be held on capital account and are generally not taxable on disposal. However, you should seek specific tax advice about this.
   2. Post 1989 Land was not in trees after the 31^st December 1989. You can choose whether or not you wish to enter Post 1989 Land into the ETS. Carbon credits or NZUs received in relation to Post 1989 land are deemed to be held on revenue account and are generally taxable on disposal. However, you should seek specific tax advice about this.
   3. These rules apply regardless of whether you claimed your carbon credit entitlement or not.
   4. Determining what your land looked like historically can be difficult and the onus of proof is on the landowner to prove this when entering the ETS. Some useful resources for accessing historical imagery are Retrolens and CarbonCrop online.

 

2. To register in the ETS with Post 1989 Forestry, the forest must:
   
   1. Cover at least 1 hectare
   2. Contain species that can reach at least 5 metres in height when mature in that location. Eligible natives most commonly include Manuka and Kanuka. Most exotics will meet this criteria.
   3. Have or expect to have 30% canopy cover in each hectare.
   4. Be or expect to be 30 metres across on average.

 

3. Some reasons why you may wish to add or increase your forestry footprint:
   

Geographical

1. Trees grow well in New Zealand
2. Close proximity to major export port (within 100-150 km)
3. Biomass opportunities as industrial and commercial businesses switch from coal to renewable energy for their heating processes.

Integration

1. Erosion control
2. Stock shelter
3. Potential for emission offsetting in He Waka Eka Noa (HWEN)

 

Financial

1. Annual income stream from carbon credits up to average age of trees
2. Diversified income streams on farm
3. Timber can return approximately $20 – $30,000 per hectare for forests that are mature, close to major export ports and have been well maintained.
4. Opportunity cost of spraying unproductive gorse land every 2-3 years for extra capacity of 1-4 SU.
5. Planting Cost is approximately $1,500 – $2,500+ per hectare for Radiata Pine depending on accessibility and gradient of land.
6. Negative cashflow for the first three years then positive.

 

4. Other Factors to Consider:
   
   1. Does it stack up financially – ie SU capacity / net income vs forestry net income.
   2. Realising that it is a permanent decision – once you’re in the ETS the cost of exiting is very expensive.
   3. How will the decision to enter the ETS affect the value of your land & your succession plans.
   4. Will the farm still be an economic unit after a portion of it is converted to forestry.
   5. Species classified as permanent forestry are not yet defined. Unlikely to be Radiata Pine. Could be Redwood and Poplar but this is still unknown. If your property is particularly inaccessible or highly erodible then establishing a permanent forest may be a good option to consider.
   6. Forests registered before December 2025 may qualify for retrospective claim of carbon credits from the start of the eligibility period. However, if you register after this date and your Radiata Pine trees are older than 16 years old then there is no benefit of entering the ETS as you will have missed the carbon credit cashflow period.

 

1. The ETS compliance costs can in some cases outweigh the benefits.

 

Deciding whether to enter the ETS is an incredibly complex decision so the most important thing is to seek advice from a professional. We can assist you with tax advice but the following contacts maybe helpful if you are looking for investment advice and/or forestry planning or management advice:

IFS Growth Limited
Brendan Horrell
Regional Development Manager
[email protected]
Can assist with ETS, forest planning, establishment, management and harvest advice

Forest Management Limited
Craig McMiken
Director – Tasman Forest Management
027 277 4001
[email protected]
Can assist with ETS, forest planning, establishment, management and harvest advice

 

Summit
Angus Malcolm
Rural Sales & Marketing Consultant
Qualified rural valuer, NZIF registered forestry consultant & has personal investments in forestry
027 544 1814
[email protected]
Can assist with property valuations, sales and investment enquiries