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Milner-White, Greg --- "The legal implications of climate change in New Zealand for the forestry industry" [2007] NZJlEnvLaw 6; (2007) 11 NZJEL 141

Last Updated: 14 February 2023

141

The Legal Implications of Climate Change in New Zealand for the Forestry Industry

Greg Milner-White*

This paper examines New Zealand’s commitments under the Kyoto Protocol in relation to reduction of carbon emissions, and the develop- ment of government policy concerning the land management sectors and, in particular, the forestry industry. It explores the implications of emissions trading and other measures, such as the Permanent Forest Sinks Initiative, for the local forestry industry. It also compares New Zealand’s approach to carbon sinks and the management of forestry practices post-Kyoto with the Australian approach. The paper concludes that although there has been significant progress in developing climate change policy, there is still a need to offer appropriate incentives to forest owners to ensure that the Government’s climate change objectives are met. It is also suggested that in light of New Zealand’s very small contribution to global emissions, it is unlikely to be in the national interest to make radical policy commitments and binding commitments about emission targets too early.

1. INTRODUCTION

The direct and indirect effects of climate change and the global response to it represent a major challenge to the global community and New Zealand’s way of life in an economic, social, and environmental sense. New Zealand is particularly vulnerable to the impacts of climate change as a result of its

*Greg Milner-White is a senior associate with Kensington Swan in Auckland. He specialises in acting for local authorities and in particular on resource management issues. He regularly appears before the Environment Court and High Court on consent appeals, plan change, and enforcement matters. This paper was submitted as part of his LLM at the University of Auckland in 2007.

extensive coastline, the importance of the agricultural sector in the economy, its infrastructure, and unique ecosystems.¹

Most climate scientists now agree that the world’s climate is changing and the major cause of this is human activity increasing the level of greenhouse gases in the atmosphere. Sir Nicholas Stern in his report on the economics of climate change said climate change risks were as great as those “associated with the great wars and economic depressions of the first half of the 20th century”.² After much debate as to whether or not climate change exists, the focus is now shifting to the political and economic consequences of any such changes and the appropriate legal framework going forward.

The recent announcements by the Government concerning its proposed Emissions Trading Scheme (“ETS”) represent a major development in policy in this area. The initiative is a bold one and designed to cover all the major six greenhouse gases and all major sectors.³ Typically, other international abate- ment schemes have tended to be single-sector and usually industrial or energy emitters.⁴ Although the proposed ETS may tend to reinforce New Zealand’s “clean and green” international image, it also means there is little precedent for how such a comprehensive scheme will work in practice. Although the scheme will only directly affect a relatively small number of companies, it is likely to have economy-wide implications.

This paper covers:

(a) An introduction to climate change science and expected environmental impacts;

(b) A summary of international efforts to address climate change and, in par- ticular, the Kyoto Protocol;

(c) Comments about the future of the Kyoto Protocol post-2012;

(d) The position of New Zealand under the Protocol and its unique emissions profile;

(e) Carbon Forestry and Kyoto;

(f ) A description of the Government’s policy initiatives in relation to the land management sectors with particular reference to the forestry industry;

(g) Emissions Trading and Forestry;

1. Ministry for the Environment, Review of Climate Change Policies, November 2005, 2, available at <http://www.mfe.govt.nz/publications/climate/policy-review-05/index.html> (at 22 October 2007).
2. Stern Review: The Economics of Climate Change, ii, available at <http://www.hm-treasury. gov.uk/independent_reviews/stern_review_economics_climate_change/stern_review_ report.cfm> (at 22 October 2007).
3. I.e. forestry, transport, stationary energy, industrial processes (non-energy), agriculture, and waste; see The Framework for a New Zealand Emissions Trading Scheme, at 5.
   4. Alistair Hercus, Law News, Issue 38 (Auckland, New Zealand, 12 October 2007).

(h) A comparative analysis of how Australia is currently dealing with the challenges and opportunities of carbon forestry; and

(i) Concluding remarks.

2. CLIMATE CHANGE AND EXPECTED ENVIRONMENTAL IMPACTS

2.1 Introduction

Natural changes to the earth’s climate have occurred over millions of years from ice ages to tropical heat and back again. These changes had been caused by processes internal to the Earth, external forces (e.g. variations in sunlight intensity, volcanic emissions, variations in the Earth’s orbit, plate tectonics), and, more recently, human activities.

The term “climate change” is used in this paper in a narrow sense, i.e. to refer to the effect of human influence on the climate. This is the definition used by the United Nations Framework Convention on Climate Change (“UNFCCC”), which defines climate change as “a change of climate which is attributed directly or indirectly to human activity that alters the composition of the global atmosphere and which is in addition to natural climate variability observed over comparable time periods”.

The “greenhouse effect” is the process by which the emission of infrared radiation by the atmosphere warms the planet’s surface. It is estimated that the Earth’s temperature is approximately 33°C warmer than it would be without the greenhouse effect.⁵ The name comes from a misleading analogy about the way in which greenhouse gases are heated by the sun and the effect this has on Earth’s climate system.⁶

The Earth receives energy from the sun in the form of radiation. About 30 per cent of the radiation is reflected back into space and approximately 70 per cent is absorbed, warming the land, atmosphere, and oceans. For the Earth’s temperature to remain in a steady state (i.e. so that the Earth neither heats nor cools rapidly), solar radiation retained in the atmosphere must be very

5. IPCC Working Group I 4th Assessment Report, Chapter 1, Historical Overview of Climate Change Science, available at <http://ipcc-wg1.ucar.edu/wg1/wg1-report.html> (at 22 October 2007).
6. Independent Summary for Policy Makers of the IPCC 4th Assessment Report, at 9, available at <http://realclimate.org/FraserAnnotated.pdf> (at 22 October 2007). The term “greenhouse effect” is inappropriate as it suggests that there is a parallel between the mechanism that causes warming in an actual greenhouse and the complex influence of infrared-active gases, like water vapour and carbon dioxide, on the Earth’s climate system. The two mechanisms are distinct and the metaphor is misleading.

nearly balanced by energy radiated back into space in the infrared wavelengths. Radiation leaves the earth in two forms: reflected solar radiation and thermal infrared radiation. A key to the greenhouse effect is the fact that the atmosphere is strongly absorbing of thermal infrared radiation emitted from the surface (visible solar radiation mostly heats the surface not the upper atmosphere). Some energy in the infrared wavelengths is absorbed by greenhouse gases and clouds before it escapes back into space.⁷

Water vapour is the most important greenhouse gas, and carbon dioxide (CO₂) is the second most important. Methane (CH₄), nitrous oxide (N₂O), hydro- fluorocarbons (“HFCs”), perfluorocarbons (“PFCs”), sulphur hexafluoride (SF₆), and various other gases are also present in the atmosphere and contribute to the greenhouse effect.⁸

2.2 Effects of Climate Change

The Fourth Assessment report of the Inter-Governmental Panel on Climate Change⁹ (“IPCC”) represents the most authoritative statement to date about the direct effects of climate change. The IPCC¹⁰ has concluded that:

(a) Global atmospheric concentrations of greenhouse gases (carbon dioxide, methane, and nitrous oxide) have increased markedly as a result of human activities since 1750 and now far exceed pre-industrial values.¹¹ The global increases in carbon dioxide concentration are primarily due to fossil fuel use and land-use change, while those in methane and nitrous oxide are primarily due to agriculture.¹²

(b) The warming of the climate system is “unequivocal”, as is evident from

7. See <http: //en.wikipedia.org/wiki/greenhouse effect>.
8. Dr Katja Reidel, “Climate Change: What You Always Wanted to Know (But Were Afraid to Ask)”, paper presented to LexisNexis Climate Change and Law Conference, Wellington, New Zealand, 6–7 September 2007, 2.
   9. Full text available at <http://ipcc-wg 1 .ucar.edu/wg1/wg1-report.html> .
10. The role of the IPCC is to assess the scientific, technical, and socio-economic information relevant to climate change, its potential impacts, and options for mitigation of climate change effects. It was set up in 1988 by the World Meteorological Organization and United Nations Environment Programme (“UNEP”) and is open to all members of the UN and WMO. See Review of Climate Change Policies, supra note 1, at 19.
11. Atmospheric concentrations of CO₂ have historically fluctuated between 180 parts per million (“ppm”) during glacial periods and 280 ppm during interglacial periods. The current level of 370 ppm is unprecedented in history: See K Littlejohn, “Carbon Sequestration through Forest Sinks and Land Use Change”, paper presented to LexisNexis Climate Change and Law Conference, Wellington, New Zealand, 6–7 September 2007, 2.
12. IPCC 4th Assessment Report, Summary for Policy Makers, supra note 5, at 2.

observations of increases in global average air and ocean temperatures, widespread melting of snow and ice, and rising global average sea level.¹³

(c) Most of the observed increase in globally averaged temperatures since the mid-20th century is “very likely” due to the observed increase in human- induced (anthropogenic) greenhouse gas concentrations.¹⁴

(d) Continued greenhouse gas emissions at or above current levels will cause further warming and changes in the global climate system during the 21st century that would “very likely” be larger than those observed in the 20th century.¹⁵

The IPCC has been criticised from a number of quarters. For example, the Independent Summary for Policy Makers published by the Fraser Institute con- cluded that:¹⁶

(a) The actual climate change in many locations has been relatively small and within the range of natural variability. There is no compelling evidence that dangerous or unprecedented changes are underway.

(b) The hypothesis that greenhouse gas emissions have produced or are capable of producing a significant warming of the Earth’s climate is credible and merits continued attention. However, the hypothesis cannot be proven by formal theoretical arguments, and the available data allows the hypothesis to be credibly disputed.

There will remain an unavoidable element of uncertainty as to the extent that humans are contributing to future climate change, and whether or not such change is a good or bad thing.

2.3 Stern Report

The Stern Report predicts that, on current trends, average global temperatures will rise between 2–3°C within the next 50 years or so. Warming will have many severe impacts:

(a) Melting glaciers will initially increase flood risk, then strongly reduce water supplies eventually threatening one sixth of the world’s population (pre- dominantly in the Indian sub-continent, parts of China, and the Andes in South America);

13. Ibid, at 5.
14. Ibid, at 10.
15. Ibid, at 13.
16. See Independent Summary for Policy Makers, supra note 6, at 7–8.

(b) Declining crop yields, especially in Africa, could leave hundreds of millions without the ability to produce or purchase sufficient food;

(c) Worldwide deaths from malnutrition and heat stress will increase, and diseases such as malaria and dengue fever could become more wide- spread.

(d) There will be serious risks caused by rising sea levels in South East Asia (Bangladesh and Vietnam), islands in the Caribbean and the Pacific, large coastal cities such as Tokyo, New York, Cairo, and London. Up to 200 million people may become permanently displaced due to rising seas, heavier floods, and more intense droughts.

(e) Ecosystems will be particularly vulnerable to climate change with around 10–40 per cent of species potentially facing extinction after only 2°C of warming. Ocean acidification as a result of rising carbon dioxide levels will also have a major effect on marine ecosystems and potentially fish stocks.

(f ) Warming may induce sudden shifts in regional weather patterns such as monsoon rains in South Asia or the El Niño phenomenon. These changes could have severe consequences for water availability and flooding in tropical regions and threaten the livelihood of millions of people;

(g) Studies suggest that the Amazon rainforest could be vulnerable to climate change with significant drying in the region; and

(h) Melting will collapse ice sheets, threatening land which today is home to one in every 20 people.¹⁷

3. INTERNATIONAL EFFORTS TO ADDRESS CLIMATE CHANGE

3.1 United Nations Framework Convention on Climate Change (“UNFCCC”)

The first major agreement to tackle climate change was the UNFCCC, adopted in 1992. The UNFCCC sets out broad principles for responding to climate change and sets up a process to enable governments to meet regularly. It encourages scientific research, sharing and exchange of technology, and education about the effects of climate change.¹⁸ The UNFCCC took effect on 21 March 1994. It has been ratified by 189 parties.

The UNFCCC divides countries into groups according to differing com- mitments:

17. See Stern Review, supra note 2, at IV–VII.
18. See <http://unfccc.int/essential_background/con v ention/items/2627.php> (at 22 October).

(a) Annex I parties are industrialised or developed countries that were members of the OECD in 1992 (including New Zealand), plus countries with economies in transition (mainly in Eastern and Central Europe);

(b) Annex II parties consist of the OECD members of Annex I, but not countries with economies in transition. Annex II parties are required to provide financial assistance to developing countries to undertake emissions reduction activities and to help them adapt to adverse effects of climate change;

(c) Non-Annex I parties are developing countries including parties with low-lying coastal areas and those prone to desertification and drought¹⁹ or those which are heavily reliant on fossil fuel production (e.g. Saudi Arabia). Importantly, this group includes China, which is a major emitter of greenhouse gases.

The UNFCCC sets no mandatory targets on greenhouse gas emissions for individual nations and contains no enforcement provisions. Annex I countries, however, including New Zealand, are required to take a number of measures to address climate change effects, including:

(a) Implementing policies to reduce the emission of greenhouse gases, with the aim of reducing greenhouse gas emissions to 1990 levels (i.e. a voluntary target);

(b) Periodically communicating information to the UNFCCC on climate change polices implemented, including projections of future emissions and removals by sinks;

(c) Monitoring and reporting on net greenhouse gas emissions (including establishment of a national inventory); and

(d) Assisting developing countries (non-Annex I parties) address climate change through financial assistance and technology transfer.

3.2 Kyoto Protocol

At the first Conference of the Parties (“COP 1”) in March 1995, negotiations commenced to decide on more detailed and binding commitments for industrialised or developed countries. At COP 3 in December 1997, a protocol to the UNFCCC, which set mandatory reductions for greenhouse gases, was adopted in Kyoto, Japan on 11 December 1997.

The Protocol was required to be ratified by 55 countries (including those responsible for at least 55 per cent of the developed world’s 1990 carbon dioxide

19. These parties are referred to as Least Developed Countries and Small Island Developing States.

emissions) before it could enter into force. This was achieved after Russia ratified in late 2004, and the Protocol came into force on 16 February 2005. A total of 156 parties have ratified the agreement.²⁰ New Zealand ratified on 19 December 2002.²¹ Only countries that ratify the Protocol are bound by it.

The Kyoto Protocol commits Annex I parties to individual binding targets to limit or reduce greenhouse gas emissions. Article 3 of the Protocol requires each country individually or jointly to ensure that their aggregate greenhouse gas emissions do not exceed their “assigned amounts” with a view to reducing overall global emissions by at least 5.2 per cent below 1990 levels in the first commitment period between 2008–2012 (“CP1”).

Each developed country has its own target reflecting its own circumstances. New Zealand’s target for CP1 is to reduce its emissions to a level that they were in 1990.²² New Zealand’s assigned amount is its emission level in 1990 x 5 (i.e. the five years of the commitment period). Emissions may be offset by increasing the amount of greenhouse gases removed from the atmosphere by carbon sinks resulting from land-use change and forestry activities (limited to afforestation, reforestation, and deforestation since 1990).²³

The Protocol also establishes three “flexible mechanisms”: Joint Implemen- tation, Clean Development Mechanism, and International Emissions Trading. They are designed to assist Annex I countries to meet their emissions targets at least cost. Under these mechanisms, New Zealand is able to reduce emissions or increase removals in other countries at a lower cost than might be possible in New Zealand.

The mechanisms are as follows:²⁴

• 3.2.1 Clean Development Mechanism (“CDM”)

The CDM recognises that it may be more cost-effective for a developed country to reduce emissions in a developing country than its own. The CDM provides for Annex I parties to implement projects in non-Annex I parties that reduce emissions in return for Certified Emission Reductions (“CERs”). A key requirement is “additionality”, i.e. that reduction must go beyond a “business as usual” scenario. CDM is intended to assist Annex I countries to meet their

20. It is notable that the United States and Australia have not ratified the Protocol.
21. A key reason that New Zealand determined to ratify the Protocol was that it considered that it was likely to make a small net economic gain from the first Kyoto Protocol commitment period (“CP1”), mainly a result of significant forest planting since 1990.
22. In contrast, the target for the European Community is 92% of 1990 emissions, Australia

= 108%, United Kingdom = 92%, United States of America = 93% (although note that Australia and the US have not ratified the Kyoto Protocol).

23. Kyoto Protocol, Art 3(3), available at <http://unfccc.int/resource/docs/convkp/kpeng.pdf> (at 22 October 2007).
24. See <http://unfccc.int/k y oto_protocol/background/items/3145.php> (at 22 October 2007).

own targets, and allow developing countries to benefit from investment in their country and also be part of the global emission reductions efforts.

There is one significant distinction in the CDM between emissions-avoiding projects and carbon sequestration activities. CDM projects that reduce emis- sions produce CERs, which are tradable once they have been verified. However, CDM storage projects (e.g. via afforestation) produce either temporary CERs (which expire at the end of the commitment period following the one during which it was issued) or long-term CERs (which expire at the end of its crediting period). They were designed to take into account the “relative impermanence” of forests.²⁵ This has implications, however, for viability of CDM carbon sink projects and the price of resulting credits or units.

• 3.2.2 Joint Implementation (“JI”)

JI is closely related to CDM. It allows an Annex I country to implement an emis- sion reduction project (e.g. an energy efficiency scheme) or increase removals by sinks in another Annex I country, and obtain Emission Reduction Units (“ERUs”) against its own target.

The investing country provides financial and/or technical assistance in the host country in return for ERUs. In practice, JI projects are more likely to take place in countries with economies in transition (e.g. in Eastern and Central Europe), where there can be more scope for cutting emissions at low cost.

• 3.2.3 Emissions trading

It is also possible for Annex I countries to trade emissions units with each other that have been assigned to it under the Protocol. These are known as Assigned Amount Units (“AAUs”).²⁶ It may also transfer CERs and ERUs that it has acquired through the CDM and JI mechanisms. Removal Units (“RMUs”), issued for sink activities, are also tradable.

The Protocol rules require Annex I parties to hold a minimum level of AAUs, CERs, ERUs and/or RMUs in a commitment period reserve that cannot

25. See “UNFCCC COP11/MOP 1: LOST IN ABBREVIATIONS? A quick guide to the Kyoto Protocol and the 11th Conference of the Parties to the United Nations Framework Convention on Climate Change”, at <http://www.iucn.org/en/news/archive/2005 /11/kyoto_ q_a.pdf> (as at 22 October).
26. Annex I parties are allocated an amount of AAUs equal to 5 times the level of their 1990 emissions for the five years of CP1. Emissions in 1990 for New Zealand have been estimated at 61.5 MT CO₂e which equates to 30.7.6 million AAUs: see Ministry for the Environment, Projected Balance of Emissions Units during the First Commitment Period, June 2006, 13, available at <www.mfe.govt.nz/publications/climate/projected-balance-emissions-sep07/ index.html> (at 22 October 2007).

be traded. This is designed to address the concern that some parties may seek to “over-sell” units and then be unable to meet their emissions targets.

• 3.2.4 Compliance/enforcement mechanisms

There are detailed compliance mechanisms that have been developed under the Kyoto Protocol.²⁷ A party defaulting on its obligations is given 100 days to remedy or attempt compliance (for example, by purchase of additional emission units). Where it is determined that a country has not complied with its emissions target the following consequences apply:

(a) A declaration of non-compliance is issued;

(b) The defaulting party has deducted from its assigned amount for the second commitment period (“CP2”) a number of tonnes equal to 1.3 times the amount of tonnes of excess emissions;

(c) A compliance action plan is developed; and

(d) The party’s ability to transfer or acquire units is suspended.

These compliance mechanisms are not, however, legally binding on the parties to the Kyoto Protocol. Article 18 provides that any procedures or mech- anisms entailing binding consequences must be adopted as an amendment to the Protocol. Saudi Arabia has invited parties to consider the necessary amendment at the next major UN summit in Bali at the end of 2007. In light of the significant number of states that are currently in default of their Kyoto obligations, it may be that reaching a consensus on imposing non-compliance mechanisms is unlikely.

There are issues with the efficacy of the enforcement tools that are currently available, which are beyond the scope of this paper to discuss in detail. One of the most obvious is that the 1.3 penalty rule will only be relevant if the Annex I states adopt an emissions reduction target for CP2, which is far from certain at present. Also, the adverse publicity associated with a declaration of non-compliance may act as a useful tool in relation to some nations (e.g. New Zealand, which trades on its “clean and green” image), although the effect of this will be diluted substantially if there is a mass default.²⁸

27. See Decision 24 / CP7 of the Marrakesh Accords, available at <http://unfccc.int/resource/ docs/cop7/13a03.pdf> (at 22 October 2007)
28. For further discussion see Ceri Warnock, “Where to from Kyoto?”, paper presented to LexisNexis Climate Change and Law Conference, Wellington, New Zealand, 6–7 September 2007, at 3–6.

3.3 Future of Kyoto post-2012

The Kyoto Protocol in its current form (even if the targets are met) is unlikely to have significant environmental benefit. It only sets targets for Annex I countries and, with some major countries such as the USA and Australia not having ratified, it currently covers only 30 per cent of global emissions.²⁹ It has been estimated that if the Kyoto target of 5 per cent below 1990 levels was achieved this would only reduce global temperatures by about 0.15°C in 2100.³⁰ The IPCC recognises that the CP1 targets are only a small initial step, but far from what is required to achieve stabilisation of CO₂ levels in the atmosphere.³¹

The Government’s 2005 Review of Climate Change policy identified two key approaches for emission mitigation for the future:³²

(a) A top-down approach focusing on long-term outcomes and emissions targets. This is based on total global greenhouse gas emissions over a defined period guided by scientific analysis about the risks of climate change. This approach assumes that industrialised countries will adopt fixed and binding targets, but developing countries do not (although developing countries may be required to undertake other mitigation methods). This is largely the approach used in the Kyoto Protocol currently;

(b) A bottom-up approach which encourages use of technology and supporting polices and measures at an industrial, sector, or national level. This approach is not designed to achieve an explicit emissions target within a particular timeframe. The overall outcome of a bottom-up approach emerges from a variety of domestic and international initiatives.

There have been a number of recent meetings at which the future of cli- mate change policy and Kyoto obligations have been discussed. The parties to the UNFCCC met in Vienna between 27–31 August 2007 to discuss their capacities to reduce CO₂ and future reduction targets. The main outcome was a “recognition” that a 25–40 per cent CO₂ reduction below 1990 levels by 2020 was a valid parameter for negotiations at the next climate change summit (in

29. Business NZ, Submission on Sustainable Land Management and Climate Change consultation dated 30 March 2007, available at <http://www.businessnz.org.nz/file/1217/ 070401%20Sustainable%20land%20management%20 & %20climate%20change.pdf> (at 22 October 2007).
30. Noted in Ceri Warnock, “Where to from Kyoto?”, supra note 28, at 2; see also Parry et al, “Buenos Aires and Kyoto Targets do little to reduce climate change impact” (1988) 8(4) Global Environmental Change, at 285.
31. Ibid.
32. Supra note 1, at 52–54.

Bali in December 2007). No firm targets or process to agree such targets were agreed however.

The recent APEC summit released a joint communiqué on climate change and emissions targets. The most important aspect was an “aspirational goal” of 25 per cent reduction in energy intensity (with 2005 as the base year) on the basis of GDP by 2020. It was also agreed to achieve a goal of increasing forest cover in the region by 20 million hectares, which would store approximately

1.4 billion tonnes of carbon per annum (i.e. around 11 per cent of annual global emissions). The EU has also set a target of 20 per cent reduction from 1990 levels by 2020, which is the most ambitious firm target to date.³³ By the beginning of 2007 the EU had only managed to achieve a 1.2 per cent reduction from 1990 levels.

In June 2007 President Bush announced a proposal to create a “new global framework” to curb greenhouse gas emissions as an alternative to the UN pro- cess. A meeting of the 15 major emitting economies was held in Washington in September 2007 to discuss this initiative. No details of the proposal have been released other than that the participants (who account for the bulk of the world’s emissions) will develop national commitments to promote clean energy projects and a long-term global goal to reduce emissions. This is to be achieved by establishing national mid-term energy targets and programmes based on national circumstances.

There are a number of possible scenarios that may emerge post-2012. These could include some or a combination of the following features:³⁴

(a) The original Kyoto framework continued with new emissions reduction targets agreed for Annex I countries and possibly some developing coun- tries for the second and subsequent commitment periods. These measures would be complemented by international emissions trading and flexibility mechanisms;³⁵

(b) Differentiated but non-quantitative climate change mitigation measures for developing countries (i.e. no emissions targets);

(c) Regional or plurilateral arrangements to reduce emissions by either binding targets or mitigation measures such as promoting technological develop- ment (e.g. as has occurred in the EU already);

33. Presidential Conclusion of the Brussels European Convention, 7224/1/07 REV 1, 8–9 March 2007, paragraphs 29–38, available at <http://www.consilium.europa.eu/ueDocs/ cms_Data/docs/pressData/en/ec/93135.pdf> (at 22 October 2007).
34. See discussion in Ministry for the Environment, Measures to Reduce Greenhouse Gas Emissions in New Zealand Post-2012, 12, available at <http://www.mfe.govt.nz/ publications/climate/discussion-paper-post-2012-dec06/index.html> (at 22 October 2007).
35. As noted, Kyoto provides for three different mechanisms for achieving greenhouse gas reductions: Clean Development Mechanism, Joint Implementation, and Emissions Trading.

(d) A sectoral approach imposing the targets and rules for particular emitting industries (e.g. electricity or aluminium manufacture). This could impose obligations either in combination with an economy-wide target or in iso- lation for developing countries;

(e) Adoption of carbon intensity targets, possibly linked to GDP or by industry, rather than absolute capped emission rates. This would mean that countries or industries would not be penalised for increasing levels of production, but new production would be constrained by agreed emission intensity levels (i.e. per unit of production), which would be based on international best practice benchmarks.

In summary, no consensus has yet emerged about the way in which emis- sions targets should be calculated post-2012. The success or otherwise of the USA’s alternative proposals is likely to influence whether the present Kyoto architecture will survive in either the current or an amended form. The position of non-Annex I countries (including China) is also an important question; the key issue is whether these countries should accept binding or voluntary targets and how this could be achievable. All parties agree that urgent action is required and it is likely there will be considerable pressure to reach agreement at the Bali summit later in 2007.

3.4 Position of New Zealand

New Zealand has several unusual features in relation to its emissions of green- house gases:³⁶

(a) Around half of its total greenhouse gases come from agriculture, i.e. methane produced by cattle, sheep, deer, and goats digesting grass and nitrous oxide from manure, fertilisers, and soils. New Zealand is the only developed country where agriculture plays such an important role.³⁷ For all other developed countries energy emissions dominate;

(b) Seventy per cent of New Zealand’s electricity comes from renewable sources, mainly hydropower schemes but also wind and geothermal energy. New Zealand’s CO₂ emissions per unit of power output are among the lowest in the developed world.³⁸ In addition, its electricity is already relatively low

36. See Ministry for the Environment, New Zealand’s Response to Climate Change, May 2005, 3 and also Review of Climate Change Policies, supra note 1, at 24.
37. The comparable figure for the EU is 12%. Argentina does have a similar emissions contri- bution from agriculture, but is not an Annex I country and therefore does not have binding commitments for CP1. It is also a key competitor for exports; see Review of Climate Change Policies, supra note 1, at 24.
38. For most Annex I countries, CO₂ accounts for 75% of gross emissions; in New Zealand this is only 46%: ibid.

in emissions intensity by world standards (which means there is little scope for mitigation by fuel switching);

(c) New Zealand’s abundant natural energy resources (in hydro and coal) par- ticularly have contributed to relatively low electricity prices. Partly as a result, this has attracted energy-intensive industries such as steel and alu- minium manufacture. The agricultural sector also relies heavily on energy for processing and transport; and

(d) Compared with many developed countries, New Zealand has a high level of forestry, which can offset greenhouse gas emissions to a significant extent.

Challenges are compounded by the existence of a baseline based on 1990 emission levels. At that time New Zealand was coming out of a period of slow growth following economic reforms and restructuring. Growth since that time has been relatively strong compared with other Annex I countries and higher than was expected at the time the Kyoto Protocol was ratified. Effectively, this means that New Zealand’s future emissions targets are tied to a “trough” in the national economic cycle.

Under the UNFCCC and the Kyoto Protocol, New Zealand is required to provide regular “National Communications” to the Secretariat in relation to New Zealand’s progress in implementing the UNFCCC and Protocol. The most recent National Communication notes that between 1990 and 2003 total greenhouse gas emissions have risen by approximately 22.5 per cent. Carbon dioxide is now the major greenhouse gas in New Zealand’s emissions profile. This is caused by an increased growth in the energy sector (notably transport) relative to the agriculture sector. The agriculture sector, however, continues to dominate New Zealand’s emissions, producing 49.4 per cent of total emissions in 2003.³⁹ The 4th National Communication provisionally estimates that New Zealand’s total emissions will have risen by 34 per cent in 2010 and 48 per cent in 2020 (from 1990 levels).

Forecasts of carbon emissions at the time of ratification of the Kyoto Protocol showed that New Zealand would have an advantageous position through the increase in forestry development post-1990 and would be a net seller of carbon credits. This was revised in 2004, and on 16 June 2005 the Government announced that the forecast of net greenhouse gas emissions for the first commitment period showed New Zealand would miss its target by 36.2 MT CO₂e.⁴⁰

According to the latest estimates, New Zealand’s obligation as at 31 May

2007 is NZ$544 million.⁴¹

39. Ibid, at 9.
40. Million tonnes of carbon dioxide equivalent.
41. Financial Statements of the New Zealand Government 2007, available at <http://www. treasury.govt.nz/financialstatements/year/jun07/> (at 22 October 2007).

4. CARBON FORESTRY UNDER KYOTO

4.1 Forestry Sector in New Zealand

New Zealand’s forest resource covers 29 per cent of its total land area and includes a large indigenous forest estate and an extensive smaller non-native forest estate.⁴²

The Ministry of Agriculture and Forestry (“MAF”) estimates that New Zealand has 6.256 million hectares of indigenous forest located mainly in the mountain lands, particularly on the west coast of the South Island. Approx- imately 77 per cent of the estate is in Crown ownership and 23 per cent in private hands. Less than 0.005 per cent of New Zealand’s total commercial wood production is from indigenous forest.

In relation to exotic or planted forests there are approximately 1.8 million hectares or 6.6 per cent of New Zealand’s land area. The total planted forest stem volume is estimated to be 418 million m³ with an average forest stand age of 14.3 years. Seventy per cent of planted forests are located in the North Island and 89 per cent are Pinus radiata.

The timber industry has changed progressively over the past 40 or 50 years from reliance on indigenous forests to use of planted forests established in the 1920s.⁴³ The majority of logging of forests on Crown-owned land was brought to an end in the late 1980s.

New Zealand’s planted forests have removed and stored substantially more carbon (over the period 1990–2003) than has been emitted as a result of harvesting or deforestation. The so called “land use, land-use change and forestry sector” has contributed to the removal of 23 per cent of all New Zealand’s greenhouse gas emissions.⁴⁴

New Zealand exports wood products to more than 30 countries. The total export earnings for the year to June 2006 were $3.2 billion or 10.4 per cent of New Zealand’s merchandised product exports. The industry directly employs about 22,500 people and contributes about 3 per cent of GDP.⁴⁵

The new planting rate, which is often seen as a measure of confidence in

42. Ministry of Agriculture and Forestry, Forestry Resource Index, available at <http://www . maf.govt.nz/forestry/resources/> (at 22 October 2007); see also “Carbon Sequestration through Forest Sinks and Land Use Change”, supra note 11, at 11.
43. Ministry for the Environment, New Zealand’s 4th National Communication, 31, available at <http://www.mfe.govt.nz/publications/climate/national-communication-2006/> (at 22 October 2007).
44. Review of Climate Change Policies, supra note 1, at 140.
45. Ministry for the Environment, Sustainable Land Management and Climate Change, 20, available at <http://www.maf.govt.nz/climatechange/discussion-document/slm-and-cc-full. pdf> (at 22 October 2007).

the forestry industry, has fallen from a 30-year average (1974–2004) of 43,000 hectares to 6,000 hectares in 2005. The Review of Climate Change Policies 2005 notes that there are a number of factors which have caused this including competition from alternative land uses, exchange rate movements (i.e. high NZ dollar), increased shipping costs, and the condition of the international market for forestry products.⁴⁶ In addition, there has been an increase in deforestation of land and conversion to alternative land uses, in particular pastoral farming. It is estimated that there was approximately 7,000 hectares of deforestation in the year ended March 2005. Historically, there has been little deforestation.

Despite this, however, approximately 675,000 hectares of “Kyoto forest”,

i.e. forest planted after 1 January 1990, has been planted between 1990 and 2005. New Zealand’s most recent projection for sink credits over CP1 is a surplus of 57.2 MT CO₂e.⁴⁷ This is the most likely scenario contained in the Projected Balance of Emissions to May 2006 report produced by the Ministry for the Environment.⁴⁸

In addition to the potential benefits of carbon sinks, forestry activities deliver many environmental benefits including reduction of flood peaks during major storms, control of erosion on hill-country land, and improvements to water quality (e.g. reduction of harmful micro-organisms, sediment, and nutrient run-off).⁴⁹

4.2 Carbon Sequestration

In a typical tree rotation cycle, carbon sequestration begins slowly following establishment. Sequestration rates peak when trees are between 10 and 20 years old or earlier in faster-growing species, and then gradually decline.⁵⁰ Trees use sequestered carbon to grow leaves, stems, bark, and roots (or biomass).

The amount of carbon stored in the life of the forest also depends on a variety of factors including: climate, topography of the land, soils, density of trees per hectare, appropriate management to ensure seedling survival, preparation of the site, and ongoing protection of the forest from fire, pests,

46. Review of Climate Change Policies, supra note 1, at 141.
47. This is on the basis of total removals of 78.2 MT CO₂e less the projected deforestation cap of 21 MT CO₂e; see Table 7 in Projected Balance of Emissions 2006, supra note 26, at 20.
48. Ibid, at 29–32. Note that there is a large degree of uncertainty, however, around various factors including applicable growth rates for Kyoto forests, planting rates, values to be used for carbon soil losses from afforestation, ineligible Kyoto planting, deforestation rates, and harvesting age.
49. Ibid, at 72.
50. See Australian Greenhouse Office in the Department of Environment and Heritage, “Growing Trees as Greenhouse Sinks — An Overview for Landholders” (3rd edn, Australian Government, Canberra, 2006), available at <http://www.greenhouse.go v .au/nrm/ publications/pubs/sinks-landholders.pdf> (at 22 October 2007).

and disease.⁵¹ Trees will continue to sequester carbon at a declining rate until approximately 100 to 200 years of age (depending on the species) when growth is balanced by decay. Actively growing planted forests can sequester between 3 and 35 tonnes of CO₂ per hectare per year over the first 30 years of the forest’s life depending on the variables identified. Disturbance of forest cover from harvest, land clearance, or by fire or disease causes release of CO₂ back into the atmosphere through burning or decay.

Carbon in harvested wood products may be retained to some extent depending on the end use of those products; however, under the current Kyoto accounting rules, credit for harvested wood products is not recognised. In other words, once timber has been harvested it is treated as a source of emissions at the time of harvest on the basis that the carbon is returned to the atmosphere.⁵² The accounting treatment of harvested wood products is currently the subject of international negotiations and the forestry industry is lobbying for harvesting or deforestation emissions to be offset in light of the end use of timber.

4.3 Kyoto and Forestry Sinks

The IPCC has developed good practice guidelines for the land use, land- use change and the forestry sector. At the Seventh Conference of the Parties (“COP 7”) held in late 2001, the Kyoto Protocol parties agreed definitions and implementation rules relating to carbon sinks under the Protocol.⁵³

• 4.3.1 Article 3.3 activities — afforestation, reforestation, and deforestation

Article 3.3 requires Annex I countries to account for “net changes in green- house gas emissions by sources and removals by sinks resulting from direct human-induced land-use change and forestry activities, limited to afforestation, reforestation and deforestation since 1990, measured as verifiable changes in carbon stocks in each commitment period”.

Key definitions were subsequently agreed at COP 7. In particular:

“forest” is a minimum area of land of 0.05–1.0 hectares with tree crown cover (or equivalent stocking level) of more than 10–30% with trees with the potential to reach a minimum height of 2–5 metres in maturity in situ. A forest may consist either of closed forest formations where trees of various storeys and undergrowth cover a high proportion of the ground or open forest. Young natural stands and all plantations which have yet to reach a crown density of

51. Ibid, at 8.
52. Ibid, at 11.
53. Decision 11 / CP7, available at <http://unfccc.int/resource/docs/cop7/13a01.pdf> (at 22 October 2007).

10–30% or tree height of 2–5 metres are included under the forest, as are areas normally forming part of the forest area which are temporarily unstocked as a result of human intervention such as harvesting or natural causes but which are expected to revert to forest.

Where ranges are specified in the definition, Annex I countries are able to choose their own definition of a forest from within the specified range. New Zealand has chosen a minimum area of 1 hectare, a minimum crown cover of 30 per cent, and a minimum height of 5 metres.⁵⁴

The implementation rules also define afforestation, reforestation, and deforestation as:

“afforestation” is the direct human-induced conversion of land that has not been forested for a period of at least 50 years to forested land through planting, seeding and/or human-induced promotion of natural seed sources.

“reforestation” is the direct human-induced conversion of non-forested land to forested land through planting, seeding and/or human-induced promotion of natural seed sources, on land that was forested but that has been converted to non-forested land. For the first commitment period, reforestation activities will be limited to reforestation occurring on those lands that did not contain forest on 31 December 1989.

“deforestation” is the direct human-induced conversion of forested land to non-forested land.

Article 3.3 envisages a “stock change” approach to carbon accounting in relation to forestation, reforestation, or deforestation activities. This involves estimating carbon stocks in eligible areas of forest at the start of CP1 and again at the end of 2012. The difference between these figures is referred to as “net sequestration”.

Under Article 3.4 it is mandatory to account for emissions and removals as a result of new forest planting since 1990. Importantly, however, deforestation can occur on any forest land regardless of when the forest was first planted. This leads to the result that deforestation of pre-1990 forest is caught by the Kyoto rules, but harvesting (i.e. felling and replanting) of same land is not.⁵⁵ New Zealand does, however, face a liability associated with both deforestation and harvesting of post-1990 forests.⁵⁶ This important distinction has shaped recent government policy relating to the forestry sector.

54. Review of Climate Change Policies, supra note 1, at 457.
55. Ibid, at 461.
56. This liability is, however, limited to the amount of carbon claimed previously from that forest: Decision 11 / CP7, supra note 53.

• 4.3.2 Article 3.4 — additional greenhouse sink activities

Under Article 3.4 of the Protocol, the parties are able to include “additional human-induced activities relating to changes in greenhouse gas emissions by sources and removals by sinks in the agricultural soils and the land use change and forestry categories”.

At COP 7, it was determined that an Annex I party may choose to account for the following greenhouse sinks:⁵⁷

(a) revegetation;

(b) forest management;

(c) crop land management; and

(d) grazing land management.

These are defined as:

“revegetation” is a direct human-induced activity to increase carbon stocks on sites through the establishment of vegetation that covers a minimum area of

0.05 hectares and does not meet the definitions of afforestation and reforesta- tion contained here.

“forest management” is a system of practices of stewardship and use of forest land aiming at fulfilling relevant ecological (including biological diversity), economic and social functions of the forest in a sustainable manner.

“crop land management” is the system or practices on land on which agri- cultural crops are grown and on land that is set aside or temporarily not being used for crop production.

“grazing land management” is the system of practices on land used for livestock production aimed at manipulating the amount and type of vegetation and livestock produced.

Each party is required to decide before the end of 2007 whether to account for any of these activities. An assessment of the significance of Article 3.4 forest management activities (i.e. excluding other potential carbon pools) for New Zealand concluded that the balance arising from these activities could be anywhere between -92 MT CO₂e and +11 MT CO₂e over CP1.⁵⁸

57. Ibid.
58. Projected Balance of Emission Units, supra note 26, at 33. Note also that New Zealand is subject to 3.67 MT CO₂e for Article 3.4 forest management activities during CP1.

At this stage, the Government has indicated that it will not account for Article 3.4 during CP1.⁵⁹ The main reason put forward is that there are uncer- tainty and measurement problems with verifying the carbon stocks (which appears to be borne out by the preliminary assessment) relating to forest land and it has been determined that this is not practicable in CP1. In addition, the accounting procedures under Article 3.4 require that the level of carbon stocks be established for 1990 and then again during the first commitment period. This may make it difficult to demonstrate significant gains from some Article 3.4 activities.⁶⁰

Whether New Zealand along with other Annex I countries will be required to account for these additional greenhouse sinks during the second and sub- sequent commitment periods is currently being negotiated. If New Zealand is required to account for all emissions for pre-1990 forests under Article 3.4, including, for example, harvesting activities, this could add significantly to our emissions liability.

As the foregoing discussion shows, the Kyoto rules relating to afforestation and deforestation are complex, but need to be fully understood to appreciate the reasons for New Zealand’s domestic policy settings. They can be summarised as follows:⁶¹

59. Ibid, at 33.
60. Australian Greenhouse Office, “Planning Forest Sink Projects — A Guide to Legal, Taxation and Contractual Issues”, March 2005, 41, available at <http://www.greenhouse.go v .au/nrm/ publications/forestsinks.html> (at 22 October 2007).
61. Adapted from Table 32, Appendix 1, Review of Climate Change Policies, supra note 1.

5. GOVERNMENT POLICY INITIATIVES

The Government has announced a number of policies in relation to climate change focusing on energy, transport, industry, agriculture, waste, and forestry sectors as well as cross-sectional policies and measures. Most recently it has announced a new Energy Strategy and New Zealand Energy Efficiency and Conservation Strategy with ambitious targets relating to domestic transport emissions, renewable energy, and improving the building code. There have also been new policies relating to a national emissions trading scheme announced (discussed below), biofuel sales obligations, and stronger waste management legislation.⁶²

This paper focuses in particular on the Government’s responses in relation to the forestry industry, which, along with the agricultural sector, is one of the most vulnerable environmentally and economically to climate changes.⁶³

5.1 Policy Development

In 2002 the Government agreed to a climate change policy package with a number of elements including: a tax on emissions from the energy, industrial, and transport sectors; and an exemption for agricultural emissions. The first two measures have been abandoned in the recent announcements. In relation to forestry, the Government determined to retain sink credits and associated liabilities created under Kyoto for post-1990 forest planting for CP1. The Gov- ernment also determined to assume liabilities for deforestation, up to a specified cap of 10 per cent of forests expected to be harvested during CP1 (equating to 21 million tonnes of carbon dioxide emissions).

The forestry industry did not react positively to the Government’s announce- ments. The Kyoto Forestry Association (“KFA”)⁶⁴ described it as “de facto nationalisation of carbon credits that belong to forestry investors”. It was considered that forest owners had created the credits by investing money throughout the 1990s, were in control of whether those credits continued to

62. Speech notes of Prime Minister Rt Hon Helen Clark for Launch of New Zealand Energy Strategy and New Zealand Energy Efficiency and Conservation Strategy (speech delivered at Great Hall, Parliament, Wellington, 11 October 2007).
63. The Government has also consulted on a variety of other strategies of policies including: New Zealand Energy Strategy to 2050; National Energy Efficiency and Conservation Strategy; Transitional Measures: Options to Move Towards Low Carbon Electricity and Stationary Energy Supply and to Facilitate a Transition to Greenhouse Gas Pricing in the Future; Measures to Reduce Greenhouse Gas Emissions in New Zealand Post-2012; New Zealand Waste Strategy.
64. The KFA represents forest owners who have planted more than 200,000 hectares of forests in New Zealand since 1989. See website at <http://www.kfoa.co.nz/> .

exist, and as such should be entitled to the benefits of them. Earlier this year,

KFA Chairman Roger Dickie said:⁶⁵

“Those were calculated business investment decisions based on the assurances of government officials through the 1990s. Forest owners cannot accept their property being confiscated from them, and it is an insult for the Government to say that we are seeking ‘windfall’ profits. We just want what is rightfully ours.”

In June 2005, following revised projections of New Zealand’s greenhouse gas emissions for CP1 (which showed that New Zealand would likely face a substantial deficit at the end of the period), the Government announced a full review of its climate change policies. The terms of reference were wide- ranging and sought advice about long-term options for climate change policy and how New Zealand may seek to meet the more challenging task of meeting its commitments under the Protocol. In relation to forestry, it was determined that:⁶⁶

(a) The current policy package did not send appropriate signals to land man- agers regarding the benefits and costs of land-use change;

(b) The option for the Government to retain all Kyoto benefits and liabilities and not impose a deforestation cap was not recommended; and

(c) Five options for climate change land-use policy were identified, but further analysis was required of these before making decisions.

Against that background, in December 2006 MAF released a discussion document, Sustainable Land Management and Climate Change; Options for a Plan of Action. There are four key policy pillars proposed in the plan of action:

(a) Adapting to climate change — actions to assist land managers to adapt to the environmental and economic effects of climate change;

(b) Reducing emissions and creating carbon credits — measures to reduce greenhouse gas emissions from agriculture and deforestation, and to create new forests;

(c) Capitalising on business opportunities arising from climate change —

65. Kyoto Forestry Association, “Gov’t divide and rule strategy will fail” (media release, 13 February 2007) <http://www.nzfoa.org.nz/index.php?/news/forestry_news/2007/kfa_gov_ t_divide_and_rule_strategy_will_fail> (at 22 October 2007).
66. Minute of decision of Cabinet Business Committee, CBC Min (05) 20/10, 19 December 2005, paragraph 6.6, available at <http://www.mfe.govt.nz/issues/climate/resources/cabinet- papers/cbc-min-05-20-10.pdf> (at 22 October 2007).

actions to help land-based business to take advantage of new business opportunities; and

(d) Ways the land management sector and government can work together to respond to challenges and opportunities of climate change.

Pillar two, in particular, relates to the forestry industry and sets out policy options Government has identified for reducing emissions from deforestation and increasing absorption through forest sinks. The Government announced that it was seeking at least one afforestation and one deforestation policy measure. It is intended that these should be introduced prior to the commencement of CP1 in 2008.⁶⁷

• 5.1.1 Afforestation options

The Government has identified two possible policies for encouraging greater levels of afforestation:

(a) Afforestation Grant Scheme (“AGS”) — Under this option parties would be invited to tender for payment of a grant in return for establishment of new post-2007 Kyoto-compliant forests.⁶⁸ The Crown would retain all credits and associated harvesting liabilities from AGS forests. Grants will generally be allocated based on carbon storage rates for the lowest tender rate and also co-benefits of particular proposals (e.g. flood protection, erosion control, water quality improvement, and biodiversity). A major advantage of this proposal would be that investors would receive payments upfront and carry no future liabilities for later harvesting or deforestation (unlike the PFSI scheme (see below)). The risk of whether or not forest sink credits continue to accrue beyond CP1 would be carried by the Crown.⁶⁹

(b) Choice between an AGS and Devolution of Sink Credits and their associated liabilities — Under this option forest owners could opt to receive credits and liabilities for afforestation and deforestation activities. The owners would enter into covenants to be registered against the title that would give them the right to receive sink credits. In return they would need to meet any emission liabilities and meet costs of monitoring, verifying, and reporting the carbon in the forest. If a landowner chooses the devolved credits/liabilities mechanism they would take the risk as to whether sink credits would continue to be available beyond 2012 (rather than the Crown). On the other hand, it would provide more choice for forest

67. Sustainable Land Management and Climate Change, supra note 45, at 57.
68. Forests established by direct human activity on land that was not forest land as at 31 December 1989.
69. Ibid, at 59.

investors, allowing them to pursue whichever option they believed to be to their advantage and, as such, could have positive effects on the rate of new planting.

• 5.1.2 Deforestation options

Four options were identified in relation to managing deforestation of pre-1990 forests (non-Kyoto forests).⁷⁰

(a) Flat charge on land-use change from forestry to another use;

(b) Tradable permit regime;

(c) Centrally determined deforestation levels; and

(d) RMA controls on deforestation.

The most developed of these options is the tradable deforestation permit regime. In February 2007 the Government released a design paper for con- sultation.⁷¹ The design paper outlines a number of implementation issues if the tradable permit option was adopted, in particular:

(a) The number of permits to be allocated in CP1 and subsequent commitment periods;

(b) How to allocate them;

(c) A threshold level of deforestation below which the regime would not apply;

(d) Whether owners of land under indigenous forests should receive defor- estation permits;

(e) How long the permits should remain useable; and

(f ) How to administer, monitor, and enforce the regime.⁷²

5.2 Permanent Forest Sink Initiative

In addition to the above policies, the Government has already announced the introduction of the Permanent Forest Sink Initiative (“PFSI”). The intention to encourage permanent forest sinks was announced in the 2002 “foundation”

70. The financial implications are significant. MAF estimates that deforestation of a hectare of mature radiata pine forest will equate to a liability of around $13,000 for each (800 tonnes of CO₂ assuming a price of $15.92 per tonne).
71. Ministry of Agriculture and Forestry, “Design Options for Tradable Deforestation Permit

Regime — a Supplementary Discussion Document for Sustainable Land Management and Climate Change Consultation”, 2006, available at <http://www.maf.govt.nz/climatechange/ discussion-document/tradeable-deforestation-permit-regime/> (at 22 October 2007).

72. Ibid, at 65.

polices, but it was not until after industry consultation and development work that the Climate Change Response Amendment Bill 2006 was first tabled in Parliament.⁷³

In summary, the PFSI involves a contract (to be registered against land titles and binding future owners of the land) between the Crown and the landowner. The Crown agrees to devolve tradable emission units equal to the amount of carbon sequestered in the new permanent forest sinks over CP1. Participants are required to meet all costs associated with generating emission units and agree to replace any units if there is a decrease in carbon stored in their forests.⁷⁴

To be eligible, the land must be Kyoto-compliant, i.e. unforested as at 31 December 1989, and various other eligibility rules apply.⁷⁵ Participants are entitled to harvest timber provided the forest maintains “continuous canopy cover”. Harvesting above allowed levels will mean a participant must replace emission units, plus make a penalty payment.

The Government has amended the Forests Act 1949⁷⁶ to enable the im- plementation of the PFSI. The purpose of the new part 3B of the Forests Act is “to allow landowners to access the value of carbon sequestration on land through the establishment of forest sink covenants”.⁷⁷ “Carbon sequestration” is defined by s 67X of the Act as “the removal of greenhouse gases from the atmosphere”.

The sink covenants are available to any landowners — i.e. for any privately owned forest. In general, Kyoto-compliant land containing exotic forests is only eligible to enter the PFSI if the forest was established after 17 October 2002 (the date that the PFSI was introduced). In relation to indigenous forests, all Kyoto- compliant land is eligible. Participants who harvest more than the regulations allow will be required to purchase emission units to cover CO₂ released, and make a penalty payment.

In relation to harvesting, MAF proposes that participants in the PFSI will be

73. Hon Jim Anderton, “Ministers Announce Permanent Forest Sink Initiative” (media release, 31 August 2006), available at <http://www.beehive.govt.nz/ViewDocument. aspx?DocumentID=26972> (at 22 October 2007).
74. Ministry of Agriculture and Forestry, “The Permanent Forest Sink Initiative: A Consultation Document on the Proposed Regulations, Cost Recovery Methods and Forest Sink Covenant”, March 2007, 3, available at <http://www.maf.govt.nz/forestry/pfsi/consultation- document/pfsi-consultation-web-page.htm> (at 22 October 2007).
75. A forest is defined in the same way as under the Marrakesh Accords, i.e. it must (1) exceed 1 ha; (2) have tree crown cover (or equivalent stocking) of more than 30%; (3) contain species capable of reaching 5 metres or more in height at maturity in situ. In addition, the forest must be greater than 30 metres wide. Previously forested land awaiting replanting may also be eligible: ibid, at 5.
76. See Climate Change Response Amendment Act 2006 which inserts a new Part 3B to the Forests Act 1949.
77. Section 67W, Forests Act 1949.

able to harvest up to 20 per cent of a forest’s basal area per hectare. Harvested areas will be required to recover to the pre-harvest level for each basal area before a further harvesting can occur. Harvesting restrictions are proposed to be removed after a forest has been part of the PFSI for 99 years.⁷⁸

The type of units that are likely to be generated by PFSI forests are RMUs (Removal Units). The consultation document indicates that, if circumstances permit, the Crown may transfer Assigned Amount Units (“AAUs”) instead. This would have the significant advantage that the AAUs do not expire at the end of the commitment period to which they relate (unlike RMUs) and are likely to trade for a higher value. There could, however, be various difficulties for the Crown if it were obliged to transfer AAUs to all landowners with forest sinks and this option may not be implemented.⁷⁹

A landowner will be entitled to have these units transferred to them no earlier than 31 December 2012.⁸⁰ The Government expects to receive RMUs following the submission of its National Inventory Report for CP1 in April 2014. This report should be reviewed within a year of submission and, if New Zealand is not in compliance, there is a 100-day “true up” period within which a country can bring itself into compliance (e.g. by purchase of units). As such, there will be a substantial lead time before the Government is able to devolve units to participants in the scheme. The consultation document indicates that this will not be until at least 2012 as the Crown will not have received any RMUs to devolve.

The key features of the scheme are still unknown. The Government is cur- rently consulting on new regulations relating to sink covenants, cost recovery methods, and a draft covenant. The detailed nature of the regulations to be made is set out in s 67Y(1) of the Forests Act 1949. These will include:

(a) Methodologies for measuring carbon sequestration or emissions from a forest sink;

(b) The manner, quantity, type, and timing of units to be transferred to the land- owner;

(c) The requirements that a forest must meet to be a forest sink;

(d) Reporting, verification, and dispute resolution procedures;

(e) Harvesting restrictions;

(f ) Penalties for breach of forestry covenants; and

78. PFSI consultation, supra note 74, at 7.
79. Ibid. For example, the rules of the Kyoto Protocol require retention of 90% of AAUs allocated to the Crown, and devolution of AAUs under this option would limit the policy flexibility for other initiatives. In addition, allocation of AAUs could be difficult and may suffer from problems associated with a first-in first-served policy, i.e. those who assess their carbon stocks frequently would be more certain to receive AAUs than those who do not.
80. Ibid, at 10.

(g) Other procedural and administration matters.

MAF has also produced a draft sink forestry covenant that places significant obligations on the landowner and limits the responsibilities of the Crown. The landowner is required to establish and maintain a Forest Sink on a Forest Sink Area in accordance with a Forest Sink Plan (cl 3.1). No part of the land may be harvested during the “Restricted Period” (99 years) except in accordance with “Approved Harvesting Practices” (cl 4.1). “Approved Harvesting Practices” are to be determined in regulations and are intended to relate to requirements for continuous cover forestry,⁸¹ traditional Maori purposes, and any other relevant exceptions.

In contrast, the only substantive obligation on the Crown is transfer to the landowner of 95 per cent of such units as are prescribed in regulations in respect of carbon sequestered in a Forest Sink Area (cl 8.1). The landowner’s only remedy if the Crown breaches its obligations under the sink covenant is to require the Crown to transfer units to which it is entitled (cl 8.4). The landowner is also required to agree that the Crown does not make any representations, warranties, or guarantees about the value or tradability of units.

5.3 Industry Reaction/Comment

The New Zealand Institute of Forestry (“NZIF”) has expressed concerns that there is insufficient financial incentive for landowners to become involved in the PFSI and significant and uncertain liabilities transferred from the Crown. It submits that there is an “unattractive mix of high upfront costs, doubtful or uncertain future benefits and potential liability in perpetuity”.⁸² A financially rational decision could be to maintain land clear of trees in the reasonable expectation that the future value of carbon will increase, or that increasing control of forested land will result in greater capital appreciation of other land capable of a wide range of economic uses.⁸³ There has also been academic comment that the terms of the proposed draft covenant heavily favour the Crown, which may act as a disincentive to widespread adoption.⁸⁴

According to the Government, there is some interest in PFSI forests from overseas investors and Maori interests.⁸⁵ Whether in absence of other

81. As noted, it is proposed to allow harvest of 20% of a forest’s basal area per hectare on a rotational basis (i.e. allowing recovery between harvests).
82. New Zealand Institute of Forestry, Submission on the Permanent Forest Sink Initiative consultation to MAF (14 May 2007), para 17.
83. Ibid, at para 23.
84. See Carbon Sequestration through Forest Sinks and Land Use Change, supra note 11, at 9.
85. Bryan Smith, MAF adviser (comments made at Climate Change Workshop for Forestry and Agricultural Sectors, Aotea Centre, 9 October 2007).

inducements (e.g. the East Coast Forestry Project), PFSI attracts significant domestic interest is yet to be seen. Certainly the view of a number of industry stakeholders is that the PFSI in its current form is unlikely to obtain anything but marginal interest. If a general practice does develop over the use and operation of PFSI forests, it is likely to take some time before this mechanism gains market acceptance. The balance of opinion appears to be that the proposal is weighted in favour of the Crown and does not provide sufficient incentives for forest owners to become involved.

6. EMISSIONS TRADING AND FORESTRY

6.1 Overview of the Emissions Trading Scheme (“ETS”)

On 20 September 2007 the Government released its Framework for an Emissions Trading Scheme (“ETS”). It has determined that New Zealand will use emissions trading as its core price-based measure for reducing greenhouse gas emissions and enhancing forest carbon sinks.⁸⁶

The key features of the Government’s proposal are:

(a) The adoption of a “cap and trade” model. The ETS will require participants to hold emission units to cover the emission levels for which they are responsible. A limited number of New Zealand Units (“NZUs”) will be issued each year within the global cap on emissions set by the Kyoto Protocol.

(b) The ETS will apply across the economy to a variety of sectors. It is proposed that all major emitting sectors (i.e. forestry, transport, stationary energy, industrial processes, agriculture, and waste) will be phased in between 2008 and 2013. This is designed to reflect the varying abilities of the sectors to adapt and the price effects of the scheme on the economy.

(c) The scheme will apply to all six greenhouse gases specified in the Kyoto Protocol (i.e. not just CO₂).

(d) The NZU will be the primary domestic unit of trade. NZUs will be fully

comparable to and backed by Kyoto units for CP1.

(e) The ETS will be linked with other international markets, allowing sales to and purchases from these markets. The Government considers this will aid liquidity in the market and act as a safety valve on price.

(f ) There will be penalties and make-good provisions built in to the scheme

86. Ministry for the Environment and the Treasury, “Framework for a New Zealand Emissions Trading Scheme”, September 2007, 3, available at <http://www.climatechange.govt.nz/ files/emissions-trading-scheme-complete.pdf> (at 22 October 2007).

in the event of non-compliance with obligations. The details are yet to be announced.

The ETS has been designed to be adaptable to future changes and inter- national obligations and will continue to function even if there is a hiatus following the end of the first commitment period. The sectors will be phased in as follows:

Notably, the forestry sector will be the first sector to be included in the ETS. The Government considers that a price signal is needed in this sector as early as possible due to forest owners having flexibility to bring deforestation forward if there are incentives to do so. Reduction in deforestation is also considered to be one of the lower-cost options for reducing emissions during CP1. The Government has decided in principle that landowners’ liability for deforestation emissions and to receive emission units for eligible afforestation will commence on 1 January 2008. The details of the proposed system relating to forestry are discussed below.

The agricultural sector is not to be included in the ETS until 2013. In light of the level of greenhouse gas emissions from the agricultural sector in New Zealand, the Government recognises that there is a case for including this sector prior to 2013, but in light of technical difficulties associated with measuring and mitigating emissions in this sector has determined not to do so at this stage. The recent policy announcement signals that the Government intends having discussions with the sector prior to 2013 in relation to opportunities to reduce emissions in advance of that date.

• 6.1.1 Allocation

NZUs will be allocated into the market by a combination of auction and free gifting of units in the early phases of the ETS regime. The Government has announced a number of allocation principles to govern the level and duration of free allocation of units during the transitional period. These are:⁸⁷

(a) Equitable treatment between and within sectors;

(b) A long-term approach, i.e. avoidance of “regrets” in designing and im- plementing short-run policies;

(c) In order to make the transition period manageable, the Government will take a “relatively generous” approach to allocation during CP1; and

(d) No provision of assistance to those emitters whose profits will be largely unaffected by the introduction of the ETS.⁸⁸

The Government has also determined to move toward a zero level of free emissions by 2025 with a linear rate of decline from 2013 to 2025.⁸⁹ A final cut-off date for free emissions is favoured by the Government to avoid possible inequities between sectors (e.g. agriculture continuing to receive free units, but fisheries not receiving any allowance) and within sectors (e.g. where an existing firm continues to receive an allowance but a new market entrant does not).

• 6.1.2 Comment

Anecdotal feedback indicates a general acceptance in industry that, to the extent mandatory, greenhouse gas mitigation measures will be implemented, and emission trading is preferable and a more effective price signal than the imposition of a carbon tax or other direct forms of regulation.⁹⁰ Allocation of units between and within sectors is likely to be the most contentious and complex issue to be resolved. This is particularly the case in light of the comprehensive nature of the proposed ETS (covering multiple sectors over a number of stages and multiple gases) and the fact that the scheme needs to account for future

87 Ibid, at 66–67.

88. Generally, NZUs will not be issued free, however, to emitters where they are able to pass on the cost. For example, oil companies and electricity generators will not be provided with free allocation of units. Instead, such companies will be expected to purchase units from the market or through any government sale of NZUs.
89. Framework for a New Zealand Emissions Trading Scheme, supra note 86, at 66–67.
90. Chairman (comments made at Climate Change Workshop for Forestry and Agricultural Sectors, Aotea Centre, 9 October 2007) [unable to discover the name of the chair from internet sources].

uncertainty surrounding New Zealand’s international obligations post-2012. The devil is likely to be in the future detail for individual businesses and firms.

6.2 Forestry Sector

As noted, the ETS will allow for devolution to landowners of both the credits from forestry activities that lead to removal of CO₂ from the atmosphere and liabilities for the subsequent release back into the atmosphere (i.e. by harvesting or deforestation).

The Government’s previous position was that it would retain all relevant forest credits and future liabilities. The change in stance has been justified on the basis that the previous policy announcements were developed in the context of the Government retaining responsibility for a significant level of emissions elsewhere in the economy. It is said there is now a stronger rationale for devolving credits and liabilities to the forestry sector as the Government’s Kyoto liabilities will be devolved more widely to all sectors of the economy through the ETS.⁹¹ The Government has also accepted that allowing forest owners to opt in to the ETS will provide better incentive for planting of new forests (and therefore maximising carbon sequestration).

In relation to the early date of entry into the ETS, the Government estimates that for every 12 months that deforestation remains outside the scheme increased emissions of 12 to 24 MT CO₂e are possible from deforestation activities. This results in increased costs of $180–$360 million to the Crown.⁹²

The Government has determined therefore that the forestry sector will be included in the ETS from 1 January 2008. The first set of emission units will not need to be surrendered, however, until the end of 2009.

• 6.2.1 Deforestation of pre-1990 forests

New Zealand will not earn carbon credits for increases in carbon stored in its pre-1990 forests during CP1 under the Kyoto Protocol. It will, however, from 1 January 2008, become liable for any deforestation of land that was forested as at 31 December 1989.⁹³ Deforestation is defined in the consultation documents as “the conversion of forested land to non-forest uses, such as farmland, roads, or housing developments”.⁹⁴

91. Framework for a New Zealand Emissions Trading Scheme, supra note 86, at 76.
92. Ibid.
93. Note that this does not include temporary reductions in carbon storage caused by fire, storm, or harvest if the land is replanted or allowed to regenerate.
94. Ministry of Agriculture and Forestry, “Forestry in an Emissions Trading Scheme — Engagement Document”, September 2007, 22, available at <http://www.maf.govt.nz/ climatechange/background-reports-and-analysis/forestry-in-nz-emissions-trading-scheme/

The Government has determined in principle that all deforestation of pre-1990 exotic forest will be covered by the ETS.⁹⁵ This does not include, however:

(a) Landowners with a total pre-1990 forest holding of less than 50 hectares across all landholdings as at 1 September 2007. Owners in this category will be able to apply for an exemption from the ETS requirements;⁹⁶

(b) Owners will also be granted a 2-hectare deforestation allowance in CP1 (2008–2012) which will not need to be reported;

(c) There are also exceptions for weed-control purposes (e.g. the spread of wildling conifers and other weed trees);⁹⁷ and

(d) Possible exemption for papakainga (housing) on Maori freehold land.

No decision has been reached about whether also to include deforestation of pre-1990 indigenous forest in the ETS.

Forest owners of pre-1990 forest land will be required to report annually to an administering body (to be determined) about any area deforested. They will be required to surrender the number of NZUs equivalent to the amount of emissions from deforestation. The quantum of the emissions will be calculated in accordance with a specified methodology.

It has been determined to provide assistance to owners of pre-1990 exotic forest by allocating 21 million NZUs during CP1 and a further 34 million NZUs in the period from 2013–2020. The initial allocation for CP1 is in line with the Government’s previous announcements about a deforestation cap and is based on historical rates of deforestation.⁹⁸ No further allocations are proposed after that. In the event that indigenous forests are included in the ETS an additional

3.1 million units will be made available during CP1 and 5 million units for 2013–2020.

forestry-in-NZ-emissions-trading-scheme.pdf> (at 22 October 2007). Deforestation is deemed to have taken place if four years after harvest land is not protected from stock or other threats and either it has not been replanted or it has not naturally established a significant covering of seedlings of forest species capable of regenerating into forest at least 5 metres in height and 30% crown cover. Land is also deemed to be deforested if, 10 years after harvest, the forest species growing on it has not reached at least 30% crown cover and 5 metres in height.

95 Ibid, at 20–24.

96. Such application will need to be brought within 18 months of legislation being brought into force.
97. The Government’s recent policy announcements indicate that weed trees threaten more than 600,000 hectares of public and private land: ibid, at 25.
98. The allocation level reflects that there is approximately 1.2 million hectares of pre-1990 exotic forest and long-term deforestation rates have been less than 5% (in the 10 years prior to the announcement of the deforestation cap in 2002): ibid, at 26.

• 6.2.2 Post-1989 forests

Owners of forest land planted after 31 December 1989 will be able to choose whether to enter the ETS and receive carbon credits and liabilities associated with the land. In other words, they will be required to surrender NZUs if carbon stocks decrease as a result of deforestation or other activities on the land and receive units in respect of any increases in those stocks. It is proposed that the Government will retain the responsibility (and any credits earned) for the land of those forest owners who choose not to opt in to the ETS. Owners have 18 months to decide whether or not to join the ETS.⁹⁹

• 6.2.3 Comment

The forestry industry has generally welcomed the Government’s decision to enable owners of forests planted after 1 January 1990 to opt in to the ETS (and thereby become entitled to credits and associated liabilities for forestry activities).¹⁰⁰ It is acknowledged that this may act as an incentive to investors to reconsider forestry projects and reverse the current low levels of planting and increasing levels of deforestation.

One important point to note, however, is that credits for post-1990 forest can only be earned in respect of carbon stock changes after 1 January 2008 when the scheme commences. Credits of forest growth since 1990 to the present time will not be awarded under government proposals and are not tradable. This has been described as a “Claytons victory” for the industry.¹⁰¹ This will not affect, however, future business decisions in relation to afforestation proposals.

In relation to pre-1989 forests, the proposed deforestation controls are likely to remain controversial. Inclusion of such forests within the ETS introduces a liability on deforestation which will affect values of forest land. There are likely to be continuing debates about the nature and extent of compensation to be provided for pre-1990 forest land.¹⁰²

Finally, the Government needs to determine whether or not indigenous

99 Ibid, at 30–33.

100. Kyoto Forestry Association, “KFA thrilled with post 1990 Carbon Credit Announcement” (media statement, 20 September 2007), available at <http://www.kfoa.co.nz/PDF/ 070920%20FINAL%20ETS%20Announcement.pdf?StoryID=790> (at 22 October 2007).
101. Roger Dickie, Chairman of Kyoto Forestry Association (comments made at Climate Change Workshop for Forestry and Agricultural Sectors, Aotea Centre, 9 October 2007).
102. The Government recognises this liability should be compensated and an assistance package of 21 million units has been made available to owners of pre-1990 forest to offset the economic impact of the deforestation requirement to some extent. This is based on 10% of the area of the pre-1990 forests expected to be harvested during CP1 (21 MT CO₂e): see Review of Climate Change Policies, supra note 1, at 87. Although the Government considers that this would exceed all reasonable expectation of deforestation over this period,

forestry should be included in the ETS. Generally, it is expected that indigenous forests will be included as there are already strict controls in place in relation to deforestation and therefore credits are likely to arise to current owners.¹⁰³ This would appear to be a win-win scenario for the Crown and industry.

7. CARBON FORESTRY IN AUSTRALIA

7.1 Overview

Although Australia has not ratified the Kyoto Protocol it has announced that it is committed to meeting its target under the Protocol of reducing greenhouse emissions to 108 per cent of 1990 levels in CP1.¹⁰⁴ Australia has both national- and state-based schemes designed to reduce emissions and enhance removal of greenhouse gases. These have a variety of approaches including regulatory, voluntary, and incentive-based programmes.

At a national level, there is the Mandatory Renewable Energy Target (“MRET”), which places an obligation on wholesale purchasers of electricity to contribute to generation of renewable energy. The target is to generate 9,500 GWh of renewable energy by 2010.¹⁰⁵ In addition, the Australian Greenhouse Office has developed generator efficiency standards to encourage power companies to achieve best practice in terms of efficiency and greenhouse gas emissions.¹⁰⁶

There has also been significant work undertaken relating to the design of a National Emissions Trading Scheme for Australia by a task force comprised of representatives from all states and territories.¹⁰⁷ In August 2006 a detailed discussion paper was released containing possible design options for the Scheme. The federal government, however, has not made a firm commitment to implement a national emissions trading scheme. In February 2007 the state and territory governments produced a joint communiqué that, in the absence of

some industry participants consider this is effectively a “retrospective tax” on deforestation relating to the other 90% of forest land affected.

103. Bryan Smith, MAF adviser (comments made at Climate Change Workshop for Forestry and Agricultural Sectors, Aotea Centre, 9 October 2007).
104. “Planning Forest Sink Projects”, supra note 60, at 3.
105. Dr David Kemp, Federal Minister for the Environment and Heritage, “MRET: adding muscle not fat” (media release, 15 June 2004), available at <http://www.greenhouse.go v . au/markets/mret/> (at 22 October 2007).
106. See <http://www.greenhouse.go v .au/ges/index.html> .
107. Independent Pricing and Regulatory Tribunal, “Compliance and Operation of the NSW Greenhouse Gas Reduction Scheme during 2006 — Report to Minister”, June 2006, 61, available at <http://www.greenhousegas.nsw.gov.au/documents/SchRep05.pdf> (at 22 October 2007).

a commonwealth commitment, they would implement a national scheme by the end of 2010.¹⁰⁸ The federal government responded in June 2007 by announcing that it would work towards the commencement of a national cap-and-trade emissions trading scheme by 2012 at the latest.

At a state level, the governments of Victoria, New South Wales, South Australia, Tasmania, Western Australia, and Queensland have enacted specific legislation to recognise Carbon Sequestration Rights (“CSRs”) from forest sink projects.¹⁰⁹ In broad terms, these statutes enable ownership of CSRs to be separated from ownership of trees and land. This allows investors who do not wish to own and manage trees to buy and sell carbon without affecting the ownership of the trees, or the land, and without the high costs and lengthy investment periods which are often associated with forest investment. A CSR agreement will be part of the legally recognised interests of a forestry rights holder under a “forestry property agreement” or similar contract. This agreement is able to be registered on the title and will run with the land (i.e. binding future purchasers of the underlying land).¹¹⁰

With the exception of New South Wales (discussed below), state legislative measures do not guarantee that carbon trading arrangements will operate. This will most likely require federal-level legislation. Despite this uncertainty, investors are able to take advantage of the mechanisms now in place to estab- lish rights to sequestered carbon. As and when an emissions trading scheme is operational, this will enable holders of CSRs to trade these on the market or sell to industrial emitters directly.¹¹¹

7.2 Greenhouse Gas Abatement Scheme (“GGAS”)

New South Wales has one of the first mandatory greenhouse gas emissions trading schemes in the world. It is designed to reduce emissions associated with the production and use of electricity and to encourage activities to reduce or offset the production of greenhouse gases.¹¹² The Scheme commenced in

108. Council for the Australia Federation, Communiqué, 9 February 2007, available at <http:// www.greenhouse.nsw.gov.au/actions/nsw_government_and_national_partnerships/council_ for_australian_federation_caf/council_for_australian_federation_-_communique._9_ february_2007> (at 22 October 2007).
109. “Growing Trees as Greenhouse Sinks”, supra note 50, at 10. For example, in Victoria a land- owner may enter into a Carbon Rights Agreement with a forester under s 12 of the Forestry Rights Act 1996 (Vic).
110. E.g. ss 8–9 of the Forestry Rights Act 1996 (Vic), s 7 of the Forest Property Act 2000 (SA).
111. Which will also have the potential benefit of assisting Australia to comply with any future obligations under the Kyoto Protocol or any successor treaty.
112. The legislative basis for the NSW Scheme is the Electricity Supply Act 1995 (NSW) and the Electricity Supply (General Regulation) 2001 and five greenhouse gas benchmark

January 2003 in NSW, and following the passage of similar legislation in the Australian Capital Territory, a similar scheme commenced in ACT on 1 January 2005.

The Scheme is a “baseline and credit” form of emissions trading where participants obtain credits for actions that abate emissions compared to “business as usual” or existing industry practice. The Electricity Supply Act 1995 (NSW) imposes benchmark targets on all electricity retail suppliers, certain generators, and large electricity customers. These companies are known as “benchmark participants”.

Each benchmark participant is responsible for its proportion of the total of electricity sales in NSW. If, for example, a retailer sells 20 per cent of the electricity in the state, it is also responsible for meeting 20 per cent of the required reduction applied to the sector. The scheme allows for the creation of abatement certificates (i.e. trading units or credits) for the following activities:

(a) Low-emission generation of electricity;

(b) Reducing consumption of electricity (“demand side abatement”);

(c) Capture of carbon from the atmosphere in forest sinks; and

(d) Activities carried out by participants that reduce onsite emissions (not directly related to electricity consumption).

Benchmark participants are required to meet their targets by surrendering abatement certificates. They can also claim credits for a limited number of Renewable Energy Certificates surrendered under the nationwide Mandatory Renewable Energy Target (“MRET”) Scheme. These must, however, be associated with electricity purchases in NSW (i.e. not elsewhere in Australia or the world).

The scheme is administered by the Independent Pricing and Regulatory Tribunal (“IPART”), which manages the creation, transfer, and ownership of abatement certificates. It also accredits organisations undertaking greenhouse gas emissions deductions under the Scheme rules.¹¹³

The 2006 report from IPART notes generation activities represent the large majority (76%) of abatement certificates surrendered.¹¹⁴ Qualifying generation activities include producing electricity at lower-emission intensity than the “NSW Pool Coefficient” (i.e. the industry benchmark).¹¹⁵

rules. The ACT Scheme is governed under the Electricity (Greenhouse Gas Emissions) Act 2004 (ACT).

113. “Compliance and Operation of the NSW Greenhouse Gas Reduction Scheme during 2006”, supra note 107, at 5.
114. Ibid, at 16.
115. Ibid, at 20.

7.3 Forest Sinks

The Scheme makes provision for participants to obtain certificates for carbon sequestered in eligible forests in NSW. Australia’s national carbon inventory rules have adopted specific rules (consistent with the Kyoto Protocol) relating to crown cover, height, and area of qualifying forests. In summary, forest sink projects need to have:¹¹⁶

(a) Trees which have the potential to reach a minimum height of at least 2 metres at maturity in situ;

(b) Tree crown cover (or equivalent stocking level) of at least 20%;

(c) Land which was predominantly non-forest as at 31 December 1989 and forest has been established since that date.

In addition, the Scheme Administrator is required to assess in relation to carbon sink projects:

(a) The ability of the organisation to account for carbon sequestered through forestry activities and maintain the commitment required;¹¹⁷

(b) The status of the land as at 31 December 1990 and that the forest’s physical characteristics including height and crown cover comply;

(c) Evidence that the applicant has ownership or control of CSRs in relation to the eligible land.

During 2006, the first carbon sequestration certificates were surrendered to offset emission liabilities in NSW. These comprise only 4 per cent of the total number of certificates surrendered. It was also noted that there were only five organisations which have been accredited under the Scheme to earn certifi- cates under the carbon sequestration rule since the Scheme began in January 2003.¹¹⁸ The forestry activities accredited range from permanent conservation-

116. NSW Greenhouse Gas Abatement Service, “Guide to Applying to Become an Accredited Abatement Certificate Provider: Carbon Sequestration”, November 2005, V 2.0, 13; and see also “Planning Forest Sink Projects”, supra note 60, at 11. It is interesting to note that these limits are more generous than those New Zealand has chosen (which required a minimum height of 5 metres and crown cover of 30%).
117. See Greenhouse Gas Benchmark Rule (Carbon Sequestration) No 5 of 2003, Rule 6. The person is required to demonstrate that they are able to meet the requirement to maintain the Greenhouse Gas Abatement secured by carbon sequestration activities for 100 years from the compliance year in which an abatement certificate may be registered.
118. “Compliance and Operation of the NSW Greenhouse Gas Reduction Scheme during 2006”, supra note 107, Table 5.1. This indicates that of a total of 44,239,412 certificates issued from 2003 to the end of 2006 only 1,300,207 certificates were issued under the carbon sequestration rules.

style forestry to commercial or rotational forestry.¹¹⁹ In 2006 only one new organisation was accredited as an abatement certificate provider.

The 2006 IPART report notes that an Australian standard for afforestation and reforestation has now been completed.¹²⁰ IPART considers that the final- isation of the standard (which aims to provide greater flexibility about eligibility criteria) and the growing experience of carbon sequestration projects may mean that participation under the GGAS forest sink rules is likely to grow in coming years. Whether that does occur and the industry sees such projects as viable remains to be seen.

7.4 Comment

Overall, the measures to encourage carbon sequestration through forestry sinks in Australia have not been particularly successful to date. The scope of the NSW GGAS scheme is considerably narrower than the comprehensive measures recently announced by the New Zealand Government. Carbon credits for forestry are currently only available in NSW and it may be a number of years until similar schemes are operational in other states or territories or on a national basis.

The NSW Scheme has not had significant take-up, with only five organisa- tions joining the Scheme, and the large majority of abatement certificates have been issued for generation activities or electricity demand side abatement, rather than for carbon sequestration activities. No doubt the Australian Government, which is committed to building the capacity of its land management sectors to reduce emissions of greenhouse gases,¹²¹ will be watching the New Zealand Government’s proposals with interest.

8. CONCLUSION

New Zealand has made significant progress in developing its climate change policy over the last five years. A variety of initiatives have been introduced including: a comprehensive emissions trading scheme, the development of a suite of policies to address climate change issues across various sectors (e.g. New Zealand Energy Strategy, Sustainable Land Use Policies, Energy Efficiency

119. Ibid, at 32.
120. A previous interim standard has been replaced by “Quantification, Monitoring and Reporting of Greenhouse Gases in Forest Projects Part 1: afforestation and reforestation” (AS 4978.1 — 2006).
121. Australia has committed $20.5 million over four years to this project. It has also established the Greenhouse Action in Regional Australia programme to enhance sustainability in regional Australia. See “Planning Forest Sink Projects”, supra note 60, at 3.

and Conservation Strategy, New Zealand Waste Strategy), and changes to the RMA to require decision-makers to consider climate change issues. The details of these various policies and initiatives and the effects that they are likely to have in an environmental and economic sense are yet to be fully worked through.

The Government’s proposals relating to the forestry sector have been controversial. Forestry will be the first sector to be included in the ETS and as such is likely to bear costs and challenges associated with being a “guinea pig” for the Scheme. As the experience of the PFSI consultation has shown, there is a need to offer appropriate incentives to forestry owners to ensure that the Government’s climate change objectives are met. The uptake of the scheme is likely to be considerably greater in the short to medium term if it is not entirely reliant on future cash flows contingent on current international negotiations and the state of the carbon market post-2012. This is likely to be considered too uncertain for most investors.

Possible incentives may be implemented directly through government initiatives such as the East Coast Forestry Project, but also via appropriate district plan incentives. One suggestion that has been made is that mechanisms could be introduced into district plans to encourage protection of vegetation (in particular, indigenous forests) in return for subdivision rights.¹²² Such plan policies and rules already exist in some districts around the country.

Whatever incentives are considered appropriate, the success or otherwise of the Government’s forestry policies will be judged by whether they achieve the overall goal of changing behaviours, i.e. increasing afforestation and decreasing deforestation rates. It is also important that the final shape of the PFSI scheme and other forestation measures encourage not only creation of carbon sinks but also achieve good environmental outcomes and are economically sustainable for the industry. The correct policy settings to achieve a balance between these factors is complex and not easy to strike.

New Zealand’s response to the challenges of climate change has the potential to have a substantial impact on economic and environmental conditions over the next few decades. In light of the current uncertainty around the future of Kyoto and the evolving nature of the science, it is unlikely to be in the national interest to make radical policy changes or binding commitments about emission targets too early. It is important to bear in mind that New Zealand accounts for just 0.14 per cent of global carbon dioxide emissions, and it is likely the major effects of

122. “Carbon Sequestration through Forest Sinks and Land Use Change”, supra note 11, at 12. This has already occurred in Rodney District for example where it is possible to apply for further titles (up to a maximum of 5) for every 6 ha of property to be planted with native trees (to a maximum of 30 ha). This provision in the Proposed Plan 2000 is currently subject to appeal. The location of any resulting titles is also controlled under the plan rules to prevent unsustainable growth in rural areas.

climate change in New Zealand will be indirect rather than physical effects.¹²³ Decision-makers need to factor this in to their thinking before making far- reaching and long-lasting commitments in response to climate change.

123. Dr D Skilling, “The Economic Effects of Climate Change: Positioning New Zealand to Respond” (Essay, New Zealand Institute, 6 June 2007), available at <http://www.nzinstitute. org/Images/uploads/The_economic_effects_of_climate_change_-_060607.pdf> (at 22

October 2007).