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Permanent Forestry Sink Initiative

31 August 2006

Ministers announce Permanent Forestry Sink Initiative

The Labour-Progressive coalition Government has confirmed today that it will proceed with the Permanent Forest Sink Initiative (PFSI), a major initiative that provides a new economic use for some of New Zealand’s most difficult and erosion-prone land.

Minister of Agriculture, Jim Anderton and Minister Responsible for Climate Change Issues, David Parker said that the PFSI allows landowners to get the economic value of removing carbon dioxide from the atmosphere and sequestering (storing) it in the form of new forests. They said that under the Kyoto Protocol, this process generates so-called forest sink credits, which can be sold on the international market.

"New Zealand land managers now have access to a radically new business opportunity from which to generate income-carbon farming. Because carbon farming does not necessarily require roads to be built or trees to be harvested, it is particularly well suited to isolated and highly erosion-prone land," Jim Anderton said.

"The PFSI provides an important new opportunity for land managers to protect vulnerable land, while still generating an economic return from it. Consequently, we expect regional authorities will be particularly interested in how the PFSI can help them respond to the risks of adverse weather events," Jim Anderton said.

David Parker said climate change was expected to increase both the frequency and intensity of storms. "The recent storms and serious erosion of hill country around New Zealand have highlighted the need for better protection of our hill country and the rivers and lowlands into which it drains."

The PFSI has been under development for a number of years. Following a review of climate change policies in 2005, the government took another look at the PFSI. This was in light of the findings of the review and the analysis of various work programmes considering long-term climate change policy, including for forestry.

"Though the Government is developing other policy options under the climate change work programmes, we are now satisfied that the PFSI is consistent with any likely climate change policy scenario," David Parker said. "We are also satisfied that it has significant potential benefits, not only for climate change, but also for the environment and the economy."

Jim Anderton said the sooner forests can be established the sooner economic and environmental benefits dividends will begin to flow. "The government is aware that a number of investors are keen to establish forests in the winter of 2007, and this means placing orders for seedlings now. Consequently we have decided to announce the PFSI decisions today."

"The Government is still developing other options for consultation to encourage afforestation and address deforestation as part of the forestry climate change work programme. These are challenging issues, and Ministers are still working through a range of options. Importantly, the announcement today on the PFSI does not close off any options for addressing deforestation or other options encouraging afforestation," the Minister of Forestry, Jim Anderton concluded.

The Government also agreed to a number of changes to operational details of the PFSI. These included:
o changing the way harvesting restrictions will be applied and removing the 35 year prohibition on harvesting;
o changing the date of eligibility for forests entering the PFSI to forests first established after October 2002 (the date the PFSI was initially announced), with an exception for indigenous forests, which are eligible from 1 January 1990.

Details of these changes and other operational details of the PFSI are covered in the attached Q&A.

To make the PFSI operational, legislation must first be passed. This legislation has already been through a Select Committee process and has been reported back to the House.


The Permanent Forest Sink Initiative: An initiative to support reforestation carbon sinks

Questions and Answers

 The principles behind the permanent forest sink initiative
 What land qualifies?
 What forests qualify?
 What activities qualify?
 What would forest owners actually receive?
 Can trees be harvested?
 What is continuous canopy management when harvesting?
 Why are clear-fell plantation forests not included in the permanent forest sink initiative?
 What are the benefits of the permanent forest sink initiative?
 What are the costs, risks and liabilities?
 What is meant by ‘replacing’ units
 How will landowners’ rights and obligations be specified?
 Is land locked into the permanent forest sink initiative forever?
 What if the forest burns down or blows over?
 Is insurance required?
 What if the harvesting limitations are breached?
 What if the land is sold?
 When can landowners get started?
 Are other consents needed?
 How will carbon storage be measured?
 What happens after 2012 (the end of the first commitment period)?
 Are exotic and indigenous species allowed?
 Who will run the permanent forest sink initiative?
 What other activities can take place in the forest?
 Do these forests get rates relief?
 Can emission units be forward sold?
 Who might purchase emission units?
 What are emission units worth?
 Are any mechanisms like this already in operation?
 Where can potential investors go for more information?

The principles behind the permanent forest sink initiative
Forests contain more carbon for a given area than bare land. This extra carbon comes from removing CO2 from the atmosphere, which in turn reduces human-induced climate change. The Kyoto Protocol recognises this and allows emission units (sometimes referred to as ‘sink credits’) to be generated when new (post-1990) forests are established. The emission units generated are equal to the increase in CO2 stored in a given area of forest between 2008 and 2012. This period is referred to as the first commitment period.
By ratifying the Kyoto Protocol an opportunity has opened up for landowners, particularly of largely marginal land, to establish permanent forests and gain Kyoto emission units.
In return, landowners will have to meet all costs associated with generating emission units and agree to ‘replace’ any units should there be a decrease in the carbon stored in the forest.
These rights and obligations will be formalised in a contract between landowners and the Crown. These contracts will be registered against land titles and will bind all future landowners.

What land qualifies?
To enter the permanent forest sink initiative, the land must be eligible to earn emission units under [Article 3.3] of the Kyoto Protocol. Essentially, this means the land must not have been covered in forest as at 31 December 1989. “Forest” is defined under the Protocol. However, in areas of mixed scrub and pasture the boundaries may not be clear and eligibility will have to be determined on a case by case basis.

What forests qualify?
Kyoto-compliant exotic forests established after 17 October 2002 (the date the policy was first announced) and Kyoto-compliant indigenous forests established from 31December 1989 would be eligible to enter the permanent forest sink initiative.
Mature indigenous forest is not covered by the permanent forest sink initiative.

What activities qualify?
To qualify for emission units the new forest must be “direct human induced …… through planting, seeding and/or the human-induced promotion of natural seed sources.” This means some form of active management will be required in establishing the forest. However, this does not mean landowners would necessarily have to plant or even fence the new forest area.
Landowners will need to consider what actions they plan to take to establish the forest and agree this with the administrators of the permanent forest sink initiative. These actions will be set out in a simple management plan, which will help assure the international community that the forests are indeed “direct human induced”.

What would forest owners actually receive?
Owners who meet the requirements will receive tradable, Kyoto Protocol compliant emission units, which they will be free to sell to whomever they wish. The amount of units received will be equal to the increased CO2 stored in the forest for the period between 2008 and 2012 (the first commitment period of the Kyoto Protocol). Units would not be transferred to landowners until verification of the amount of increased CO2 stored in the forest has occurred.
The rules of the Protocol have only been negotiated internationally for the first commitment period. However, landowners will have rights to emission units beyond 2012 also, provided the future Protocol rules allow for this.

Can trees be harvested?
Yes, timber will be able to be removed on a continuous canopy basis. Clearfelling of the forest will not be permitted and will incur penalty payments. However, these harvesting restrictions will be removed after 99 years.

The previous 35-year non-harvest restriction has been removed.

What is continuous canopy management when harvesting?
Continuous canopy management is an approach that aims to ensure the ground is always covered by a canopy of tree species, even after some harvesting has occurred. For the purposes of the permanent forest sink initiative, continuous cover forestry will basically allow the harvesting of 20 percent of the trees (as measured by basal area per hectare) and the forest must be allowed to recover before this amount of trees can be removed again.

Why are clear-fell plantation forests not included in the permanent forest sink initiative?

This permanent forest sink initiative is clearly distinguished from plantations by allowing only limited timber harvest. Limiting timber harvest also limits the carbon liabilities arising to landowners (and the Crown) when trees are harvested. This helps protect the interest of both parties to the contract.

What are the benefits of the permanent forest sink initiative?
The permanent forest sink initiative is principally designed to allow greater economic benefit to be derived from land, especially marginal land. However, it will deliver many other benefits, including improved biodiversity; soil, water and flood protection; better protection of existing natural forest remnants; diversification of forest timber species; development of a sustainable special purpose timber supply; and funds for natural forest restoration.

What are the costs, risks and liabilities?
Landowners will be required to meet all the costs of entering and administering the permanent forest sink initiative. This will include the costs of ongoing forest monitoring and verification (probably once every five years) as well as ‘replacing’ units from any carbon that is lost from the forest where this results in emission liabilities for New Zealand under the Kyoto Protocol.
What is meant by ‘replacing’ units
Every emission unit generated creates an equal contingent liability which would crystallise if and when the carbon stored in the forest decreases. If this occurs, any such liabilities will have to be covered by the landowner through ‘replacing’ units equal to the carbon stock change. Obligations for ‘replacing’ units will be part of the permanent forest sink initiative contract.

How will landowners’ rights and obligations be specified?
Landowners’ rights and obligations will be specified under contract and registered against land titles.

Is land locked into the permanent forest sink initiative forever?
The contracts will be in perpetuity. However, they will be able to be changed with the mutual consent of the Parties.
If the Kyoto Protocol no longer allows emission units to be generated from the forest, then all harvesting restrictions will be removed – though, to the extent that CO2 emission liabilities remain in respect of units already claimed; these liabilities will need to be met by landowners if the CO2 is released into the atmosphere.
Finally, landowners will be allowed to convert the forest into some other land use at any time. The only restrictions on this will be that trees cut down will not be able to be removed (except those removed in accordance with allowable harvest provisions) and landowners must ‘replace’ emission units for if carbon is lost from the forest.

What if the forest burns down or blows over?
Landowners will be required to ‘replace’ emission units for any CO2 released back into the atmosphere for whatever reason.

Is insurance required?
The contracts will need to contain a way of assuring that landowners’ obligations (in particular, the obligation to ‘replace’ units if carbon is lost from the forest) will be met in the event of default of payment.

What if the harvesting limitations are breached?
Landowners who deliberately breach the harvesting restrictions (that is harvesting outside of the allowable limits) will be required to ‘replace’ emission units for the CO2 released, plus make a penalty payment. The penalty payments will be additional units calculated on the basis of an annual compounding rate of 10 percent applied to each year’s units received, commencing from the earliest year in which the units were generated.
Penalties are only payable for breaches of the restrictions on harvesting and NOT for CO2 emitted for other reasons such as fire, disease or windthrow.

What if the land is sold?
The rights and obligations run with the land and will bind future owners.
When can landowners get started?
The legal framework to register contracts against land titles needs to be provided for in legislation and regulations. The necessary legislative backing is included in the Climate Change Response Amendment Bill, which is currently before the House. No contracts can be signed or registered before this legal framework is established.

Are other consents needed?
This will depend on the requirements specified by local District and Regional Councils.

How will carbon storage be measured?
The development of a series of forest growth and carbon accumulation models that will be applicable to many forest types is planned. It is intended that these models are the basis on which carbon storage is measured.

What happens after 2012 (the end of the first commitment period)?
Should the Kyoto Protocol no longer allow emission units to be generated from these forests, then the harvesting restrictions will automatically be removed. However, to the extent that CO2 emission liabilities remain in respect of units already claimed; these liabilities will need to be met by landowners if the CO2 is released into the atmosphere at some future point.

Are exotic and indigenous species allowed?
Yes, there are no restrictions on eligible species. In some areas local authorities may impose their own restrictions or controls on the establishment of certain species. Exotic forest and indigenous forests, however, have different eligibility dates.

Who will run the permanent forest sink initiative?
The permanent forest sink initiative will be administered by the Ministry of Agriculture and Forestry’s Indigenous Forestry Unit, which has offices in Christchurch and Rotorua.
What other activities can take place in the forest?
Apart from limiting the harvesting of timber, no other restrictions will apply to the use of the forest.

Do these forests get rates relief?
Rates relief is usually provided only where land has no commercial value. The permanent forest sink initiative will allow ongoing income to be generated from the land. Should landowners wish to retire land completely they should discuss their options with their local authorities.

Can emission units be forward sold?
This would be a private matter between the landowner and a third party purchaser of the units. Nothing in the registered contract will legally prevent landowners from forward selling units at any time.

Who might purchase emission units?
A number of markets are developing for the trading of emission units. It is anticipated that companies or countries with obligations under the Kyoto Protocol may be interested in purchasing emissions units. Third party traders and speculators may also wish to purchase the units.

What are emission units worth?
At this stage it is difficult to say what units are worth. Landowners should seek their own advice on this issue.

Are any mechanisms like this already in operation?
Yes. Landcare Research, as part of its EBEX21 Programme, operates a mechanism where landowners can reserve land in return for ‘certified carbon credits’, though at this stage these credits can not be used by countries to meet their obligations under the Kyoto Protocol.

Where can potential investors go for more information?

In the first instance potential investors may wish to contact:

Indigenous Forestry Unit

Ministry of Agriculture and Forestry
Postal: PO Box 25022, Christchurch, Address: 138 Victoria Street, Christchurch

ENDS

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