Impact on profitability, risk, optimum rotation age and afforestation of changing the New Zealand emissions trading scheme to an averaging approach

Abstract

The current New Zealand Emissions Trading Scheme (ETS) allows forest growers to earn units under the stock change approach. Carbon price risk means that most participants are only trading safe units that they do not need to surrender after harvest provided that they replant. Consequently, the ETS has provided less incentive for afforestation than had been envisaged.This paper evaluates averaging as an alternative approach to carbon accounting. Two variations are considered: averaging based on nominated rotation age and averaging based on realised rotation age (i.e. carbon units are earned and sold up to the average for a base age of 28 years but carbon is only received up to the average for older ages after that age is attained). Both variations produce a higher Land Expectation Value (LEV) than that for the safe approach. Averaging with nominated rotation age has LEV within 90% of the carbon-stock change (i.e. sawtooth) approach but with much less risk. Averaging with realised rotation age has lower LEVs than averaging with nominated rotation age but has much less impact on optimum rotation age.Averaging provides the opportunity for all forest growers, regardless of area, to benefit from improved profitability under the ETS without taking on carbon price risk. Implementing the averaging approach in the ETS is forecast to lead to higher rates of afforestation than under the current ETS.