Ag-researcher Keith Woodford says there's currently nothing to stop overseas investors from gaming the carbon-offset system.
If that sounds melodramatic, one seasoned ag-researcher can go one better. “It’s been said that it doesn’t matter who owns the land, because it can’t be taken away. But, in a sense, this is the net effect these policies could have,” says Keith Woodford, formerly of Lincoln University, but now primary consultant at Agrifood Systems.
He’s concerned that unless some clever and responsive brakes are designed around our forestry and emissions-trading policies (ETS), overseas firms could effectively render any number of forestry blocks uneconomic and derelict in future decades.
The Government’s goal of net zero carbon emissions by 2050 depends heavily on forestry sequestration of carbon. This in turn will depend on extensive take-up by overseas emitters investing in our forestry to offset their emissions.
Political debate is focused on the potential for land-price distortion towards forestry pushing out productive farming, but there’s an even bleaker possibility to come once those carbon-sink forests are ready to be harvested in 30-odd years.
Woodford says, depending on the future costs of harvesting and market prices for timber and wood products, some of those carbon-sink forests might be uneconomic to harvest, let alone replant when the ETS carbon cycle comes to an end for each block.
At present, the carbon-offset system is a no-brainer in investment terms, he says. But once an investor has optimised all the benefits from the first cycle, the land then becomes a carbon – and financial – liability. He can’t see anything to stop an overseas emitter from setting up a structure whereby its New Zealand-based forestry company is simply allowed to go into receivership when the carbon-farming benefits expire. The annuity, meanwhile, has been remitted to the holding company domiciled overseas, outside New Zealand’s legal jurisdiction.
“Once it has been exploited, you write it off and walk away.”
Woodford stresses that this is just one of a range of potential scenarios. “But the sheer pace of change and the uncertainty around how it will play out mean we need to recognise that what we’re seeing now is only a very small proportion of what we will see if these settings continue.”
The current snapshot, which shows farmers comprise 1700 of 2100 ETS-registered entities, will quickly be out of date, Woodford says. Considering that New Zealand forestry is already dominated by overseas investors, we can expect carbon farming to become similarly foreign dominated.
These are mega-enterprises, he says, giving as an example the sale by corporate farmer Lone Star of 1700ha of Wairarapa farmland to an Austrian buyer, which is reported as intending to put 1200ha into forestry.
The Government will impose an averaging system in 2021 to avoid the post-harvest trough in which foresters are expected to repay their carbon credits. Woodford says it is thought this will cap the carbon that can be sold to 60%, so no repayment will be necessary upon felling, provided the forest is replanted.
“But the reality is, once you start talking about $200 a tonne, we could have a situation where the big international companies can look at this just as they look at a mine. If you can get away with it, you leave it and leave the restoration work to someone else. You may or may not be interested in carrying it through to harvest stage.”
If the overseas investors are not required to thin, prune and generally manage the carbon-sink forests, they might have reduced harvest value anyway. The ETS will have had the effect, within these big companies’ risk-diverse portfolios, of substantially removing the risk from this investment, but without a clear picture of how New Zealand’s longer-term national interest might be protected.
The Government is still working out how the ETS market will operate. Agriculture Minister Damien O’Connor has said speculators won’t be allowed to control or game the system. But it’s not yet clear how the auction system will work or what measures could prevent hyperinflation. One possibility is understood to be the carbon equivalent of quantitative easing in monetary policy: if the market overheats, the Government will dilute it by issuing more credits.
Forestry Minister Shane Jones has also held out the possibility of revisiting the loosened overseas-investment rules for forestry, though he says he doubts that will be necessary.
But Woodford’s vision of a potential worst-case scenario suggests that, never mind throwing out the baby with the bathwater, the bathwater could become more important than the baby. Abandoned, dying, carbon-re-emitting forests are nobody’s idea of a good future.
This article was first published in the July 6, 2019 issue of the New Zealand Listener.