Forestry and carbon credits – new opportunities

Since residential property investment rules changed in early 2021, more and more landowners have been seeking advice on carbon credits. With carbon prices rising significantly over the past few years – and forecast to go even higher – those with a bit of marginal land are seeing tree planting as an increasingly attractive proposition.

Time to read: 5 mins

For businesses, there’s also an imperative to do more than simply trade credits, but to take an active role in shifting New Zealand towards a sustainable economy. Investing in forest land rather than traditional property is a great way to generate income while also supporting the environment – and as people look more closely at businesses’ social and environmental credentials when applying for work, it’s also a great way to stand out as a conscious employer.

However, many are still receiving advice from unqualified “experts”, which has led the government to introduce new legislation that will apply from August 2022, requiring forestry advisers to be formally accredited. It pays to do your homework and get up to speed on the options before making the leap.

Here are some rules of thumb and considerations for landowners and businesses looking to invest in forests to generate carbon credits.

The forecast for forestry

Since April 2021, the price of carbon credits has risen from $35 to $68. With supply strictly limited by the government, every auction of carbon units is hotly contested, leading to significant jumps in pricing. The auction in December 2021 saw the value of carbon credits reach new highs. However, the Climate Change Commission report modelled auction control settings at around $140 in 2030.

Many don’t realise keeping land as forest could be more lucrative than rotational harvesting for this reason. For those with steep or marginal land unsuited to traditional livestock farming or crops, permanent forests offer long-term returns for very little effort beyond maintaining the trees.

What should you consider ahead of investing in forests?

The first thing to weigh up is whether to establish a permanent forest or carry out rotational harvesting. Switching between the two isn’t really an option, considering any carbon credits earned must be surrendered on harvesting. Those who have chosen to use their newly registered land for rotational harvesting from the start can earn credits under averaging accounting and, provided they replant immediately, no surrender obligation will arise.

Those who choose rotational harvesting will potentially receive large amounts of income in the year(s) of harvest. There are two options to spread the harvest income over multiple tax years.

  1. Income spread-back - return the income in the year derived, and/or allocate over the three preceding tax years. This gives the ability to spread the income over four tax years and utilise lower marginal tax rates if available.
  2. Income equalisation – where you defer declaring the income by depositing the cash (or portion) into an income equalisation deposit. This income can then be realised in the subsequent five tax years.

Having a plan around the expected income and tax payable from harvest is essential to maximise the cash position of an individual or business.

It pays to get advice on all of the requirements, as the ETS settings, categories and accounting methods will change depending on the choices made. The Ministry for Primary Industries (MPI) website contains advice on the Emissions Trading Scheme (ETS) and how this applies to forestry. Forestry advisers will be able to discuss the options in more detail with landowners.

The other consideration is about values. Planting a permanent forest leaves an intergenerational legacy, not only from the financial returns it generates, but in reducing the long-term impact on the environment and helping create a secure future for generations to come.

On the other hand, rotational harvesting provides work and resources for locals and the economy. It’s worth noting that small communities rely on farming to create jobs and food, so the kind of land that’s planted on is also important. While permanent forests are an ideal use for steep land that would be dangerous to fell trees on, good arable cropland might be better put to other uses. Consider the Māori principle of using the right land for the right purpose.

The final thing to consider is the amount of time it can take to plant. Forestry management companies can order plants and help oversee the forests on investors’ behalf, but there will be a significant lead time on getting seedlings in the ground. For pines, expect around one year, while natives can take up to two years to arrive.

Are all forests created equal?

The types of trees planted affect the value of carbon credits, and the classification of forests is changing. Pinus radiata, Douglas fir and indigenous forests (including Manuka) all have different values, according to how much carbon they sequester. Information about this can also be found on the MPI website.

While pinus radiata is the most valuable species for carbon yield, native forest can live for hundreds of years and provide supplementary sources of income, including honey and bee products (from Manuka), therapeutic and beauty products and even hunting lodges. Access to forest walks and more habitat for native bird life are also valuable assets for future generations.

Can’t afford to buy a forest?

Interest and investment in forestry is increasing, and so will the opportunities. Ask your adviser to keep you informed about developments in this area.

Regardless of what ultimately results from the latest round of COP26 talks, businesses and farmers have the power to act now and literally grow a sustainable legacy for the future, while reaping the rewards.  

For more information on investing in carbon credits and using land for forestry, contact kathryn.cropp@bakertillysr.nz or jamie.sicely@bakertillysr.nz