CarbonCurious Transcript - ETS market update: Supply, demand, and 'safe' carbon - April 2025

In this CarbonCurious session, CarbonCrop Co-founder and CEO Nick Butcher takes a closer look at supply and demand in the New Zealand Emissions Trading Scheme (ETS), and unpacks what people mean when they talk about “safe carbon.”

With the carbon price trending down, uncertainty around the March auction, and questions arising around forest carbon liabilities, Nick explains what’s going on behind the scenes. From the size of the NZU stockpile to the difference between safe and unsafe units, this session covers key insights for landholders, forest owners, and anyone trying to make sense of the current market.

Watch the recording or read the full transcript below.

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Nick: [00:00:00] All right, everybody. We've crossed my self-declared magic boundary of 10 attendees, so I think we'll still have quite a few more filtering in, but I'll get started. Welcome to this week's Carbon. Curious this month, this, this quarters, I forget exactly where we're at. Today we're gonna be talking a little bit about the ETS market, but in particular, we've had a lot of questions over the recent months around what drives supply and demand factors within the market, and especially what is safe.

Carbon, which is a term that's been around for a long time, but has been used slightly more recently and prompts a lot of questions. I'm Nick. Oh, what are we going through? So this is recorded, it's shared on our website. After the session, we've muted your microphone and we're video. If you do want to ask any questions, use the q and a function at the bottom bar.

So it's a little thing that we can type in a question. We'll try and cover them at the end. And if we don't cover them live, we will try to follow up with an answer with the transcript on our blog. I'm Nick Butcher, I'm CarbonCrop, CEO [00:01:00] and cofounder and this is probably especially relevant today, but the usual disclaimer, so none of this is advice.

None of this is a forecast or a prediction. All of this may have errors, either in fact or in analysis. Really what we're trying to do with these is give you some sort of point you in a certain direction that might be worth exploring and doing your own analysis. You shouldn't treat this as. The only source of, of information especially not if you have a major decision that's hinging on the interpretation.

We dunno what the ETS price is going to do much as we're routinely asked what it's going to do. And we certainly can't provide any information on future policy or legislative changes beyond what's publicly available. So do not trade on this information. That said, what is happening to the carbon price is a pretty frequent question at the moment.

And here's an extract from emsTradepoint from last Friday. And you can see that what's happening is that it's trending pretty steadily down. With the most recent trading action today, it's sort of in the low fifties. So it's, it's falling even further. The. [00:02:00] There haven't really been any major obvious catalysts for this other than the failure of the auction on March 12th, so coming up a month ago which did not clear at the $68 floor, which is unsurprising when you look at the price trends prior to that, like $68 is up, up here somewhere.

It was pretty clearly not gonna clear. But the. There has been some sort of speculation as to what might be driving the changes and, and there's a lot of volatility within, within the daily trading, which among other things suggest that people don't have a particularly strong opinion on what the price should be.

Often what you see mentioned around carbon price falls at this time of year is that it's sort of a. Cash strapped farmers and foresters have received the units because there's the, the emissions return period runs January to June. So over, especially sort of February, March, April, may, people are increasingly getting the units in hand.

And if they need money, then they'll be looking to sell those units, which means that there's an increase in the available supply. And the demand is often [00:03:00] sort of. The relatively longer term game in terms of procurement because they tend to be larger entities and they may well be hedging a year or in advance.

I won't comment as to whether there's any particular truth or issues with this. I can certainly see why it would be the case. And, and as far as we're concerned, we receive carbon units each year and we do tend to sell them more or less as we receive them for our own revenue and cash flow. And relatively new, at least in terms of me being aware of it.

Narrative is that, sort of speculation that there is more supply than was expected and whether some forest owners might be selling beyond their quote unquote safe carbon. Which might be a bit of a meaningless statement to you if you don't know what safe carbon is, and that's what we're gonna try and unpack today.

So yeah, welcome to More Than You ever Wanted to know about supply demand and safe carbon. Looking at supply and demand to begin with in sort of a bulk aggregate view. So these charts are direct from the MFE website. I've shared them in the past. These are the most recently [00:04:00] updated ones. On the left, you can see a summary of things that lead to supply in the ETS.

So this is the auctions, the industrial allocations, forestry removals, and other removals, which includes things like the destruction of, high greenhouse emitting gases. I forget the exact names, but like I think Fluorocarbons are one of them. So if you destroy those gases, you prevent 'em going to the atmosphere.

You get some carbon credits. Something that's interesting to note here is that in the past, the auctions have been the significantly dominant source of carbon removals, at least by volume available in a given year. The 2024 auctions did not fully sell out, and the 2023, I think from memory completely failed to sell.

So they're not always the main source of supply. But in upcoming years. Even were they to sell out unless you include the cost containment reserve, which is up in the sort of hundreds of dollars price point, they're actually a very small factor in total supply, which means that they're less of a driver of the carbon price than they used to be.

So sort of for 2025 estimated [00:05:00] total aggregate removals or supply is around about 28 million tons on the demand side. Over on the right we have liquid fossil fuels, stationary energy and industrial processes. These are things like coal power or gas power or steel production and then waste and synthetic gases.

And we also have the, the sort of flip side of forestry, which is when you get an emission from forestry, which is when you harvest the trees. And these are forecast to generate 50, 42 million tons of demand. So there's a big difference here, which MFE helpfully calculates is 14 million tons more demand than there is supply.

Which there's also an excellent chart of how that's sort of gonna trend over time. But these are all based on forecast and assumptions. And if you look at that, you'd probably be wondering how on earth is that ever gonna work? There's clearly not enough units going around, even if the auction does clear.

Unless we, maybe, maybe we'd get close if we hit the cost containment reserves, but there's no way this can work. The price is gonna go through the roof because there'll be a, a massive supply shortage. Unfortunately we [00:06:00] prepared a lot of units earlier and they're sitting there in what's called the stockpile.

And that stockpile at the moment is about 157 million units high. And to put that into some context, we've got. 51 million units of aggregate total demand forecast in 2025. And if we just look at the net demand, including the units being sold through auction, is about 16 million tons. So the, the stockpile of units that have accrued through one thing and another over the past looking back through the unit transaction summary to 2007 is vastly more than the total annual demand, and especially even more than the total annual net demand.

There's a lot of things around which can show you sort of the composition of the stockpile and how it's trended over time, and we've pulled some of that together. This is from the EPA, and just to sort of explain through that, participants are people who are registered in the ETS. They'll usually be, I think this is usually.

Actually, I can't remember this well enough to start off. I'm pretty sure participants are someone who has registered, either they've got a [00:07:00] surrender obligation or they're registered for forestry received NZ use are people usually, as you can see from the distribution that did not register but did receive NZ use anyway.

So usually that's a pre 1990 forestry entitlement recipient. But there may be others as noted doubt here. Other, I honestly can't remember, so I'm not gonna try and say it off the top of my head. And then clearly the total N-Z-U-A-U-C are units that have been made available through the auction mechanism.

N-Z-U-F-A is units that come from pre 90 forestry. These ones here are all post 1989 forestry and then other nzs are from memory things like industrial allocations or I'm not actually sure about what other greenhouse gases get. Again, I won't speculate. And the EPA produces these sort of summaries of holdings.

So these are oh, critically important. These are privately held units, so this isn't the government's units that they have one way or another. It's units that are in the hands of people who, one way or another are ETS participants and could choose to transact those units depending on some combination of their [00:08:00] wishes and their obligations.

And the EPA publishes an update of this, which is basically a snapshot of the status. Every three months at least in recent years, more further back, it was sort of every 12 months or so. If we look a long way back from time, we can see that the stockpile hasn't really produced a lot in the past. Certainly not in the past two years.

And prior to that, it's actually been fairly steady and then increased. And there's been a lot of column which is written around how it's, it's going to fall and there's going to be a massive shortage of, supply and we're gonna use up the remainder and the price is gonna go through the roof. But it's especially important to note that in these sort of periods through here, to some degree, this was the unit the unit stockpile not really falling despite the fact that in from memory 2023, the auctions didn't sell any units at all.

And in 2024, they sold only a small fraction of the available unit. So we still had these other sources of supply. Which makes it seem like there's an enormous volume of units available. You [00:09:00] can, and also not that much change annually in that volume. You can look back through time in the sort of how much it's changing on a, a quarter by quarter basis from this data, from the EPA, although this chart's one we created.

And there's, there's a little bit, if you're familiar with the ETS, you can sort of read the story of what's going on here. So these big, big negative spikes that you see once a year, that's because. At the end of March, that's when annual surrenders are due. So if you're a big oil company or power company that's emitting a lot of CO2 or using a lot of coal you have to finalize your returns at the end of March.

And generally they do wait until literally the end of March, which is why you see the the sort of draw down on the stockpile appears in the end of June, results because at the end of March they're still there. Then they get taken out at the last minute and in the end of June they're removed. In the first sort of march and June returns, you'll also see the, some sort of upticks due to the forestry returns coming in. So this is particularly clear in [00:10:00] 2024 when the first two auctions didn't go through. So pretty much all of this release, most of it will be forestry. And forestry is also the reason that the drop here isn't as dramatic as it otherwise might have been, because there's something like 35 million tons worth of surrenders, but you've also got a lot of new units coming in.

And then in recent years, you don't actually see a lot of action in September, December. This is because the auctions aren't clearing. If we look back into March, 2022, there was a huge amount of units in that period because that auction sold out, including most of the cost containment reserve, and then the two auction and the remainder of the year also sold out 2023.

Not so much. So it's important to note that this a hundred seventy, a hundred fifty seven megatons is a very large amount when you consider it in terms of what the annual net difference between supply and demand is expected to be. And the $8.64 billion question, which is 157 point something, something tons, it, I forget what price I used.

I think it was [00:11:00] $54. How much of that is actually available to the market? Like, could this be used by the market? Might it be sold on the market today? If you flip that around, oh, oh, no, sorry, that is what is the surplus? And you might sort of be going, isn't it all surplus? It's all units that's sitting there held by private actors that all of it is available to the market.

Which is true and untrue. The, the usual analysis of the sort of non surplus amount assumes that some fraction of these units are held in reserve for some other purpose, and that they're relatively inelastic in response to price. So even if the price goes up by $10, those, those people still might not sell because they need them for something else.

Although certainly all of the analysis I've seen does acknowledge that the. Private active behavior will be responsive to the price. And if the price goes up, then you would expect more people to sell. So yeah, these, these units are treated as less likely in general to be released to the market than the surplus units.

So an extra disclaimer here, just because [00:12:00] we, everybody loves those quite a bit of what sort of the unit volumes and the following is from analysis that was either from or commissioned by MFE. It's not analysis that we've done, we haven't assessed the assumptions in it or the conclusions from it in any detail.

And so we're not saying that it's either correct or incorrect, it's just what's available. I do have a couple of opinions on it. Which I've sort of added as commentary. I'll try and differentiate between what's my opinion and what was in the source data. But again, if you're wondering, go and read the source data and then you'll see what's there.

And it's also worth noting that like, certainly the ministries behind this work have spent a lot more time on this topic than we have. We may well be wrong, so just take our interpretations with a grain of salt. So the, the three identified categories of these sort of. Non surplus units, people, units that people are holding for some other reason that they might not want to sell there.

A lot of them are units that are held to meet future P 89, harvest liabilities. So if you are if you've got a unit, the forest that's registered in the ETS and you've received units for it [00:13:00] and you cut it down, then depending on the registration framework, you have to give some of those units back. And you might not, if, if you don't hold those units in reserve, then the amount that you have to give give back, you have to go out to the, the secondary market and buy those units at that time and it might cost you a lot of money.

So people might choose to just not take the risk and hold onto the units instead. There's also a fraction that are unsold pre 1990 units. So these are units that people with forest that was already. Well, it falls into the pre 1990 category. I won't get into the details of what that requires. I think it's was established in exotic species at 2008, which is a and, and was, yeah, I, I won't, I won't try and unpack all of that, but these units were sort of, you get to keep them, even if you harvest the forest.

But though you have a separate obligation and a much larger liability if you don't reestablish the forest. But there are quite a few of them that haven't been sold, and the the metric used here is have they been even transferred out of their original counts? If not, then they're [00:14:00] included in the sort of the unavailable category.

And then finally there's an allocation to units that are held by big emitters, held by big emitters to hedge against sort of future changes. So if you know that you're gonna have an emissions surrender obligation in March of 2026, now you probably don't just wanna leave it until the last minute and then go and try and buy 10 million units at whatever the price might be in March of 2026.

You'll want to be sort of building up a portfolio over time so that you don't face any undue price risk. And if we sort of stack those together coming up to our 157. Million, whatever it is, tons from earlier on. We see that the, the P 89 units are the bulk of that fraction. These are again, the numbers from the MFE commissioned analysis hedged unit quantity, which is a bit smaller.

And then the P 90 units are really just a fairly small fraction, I think 7 million or so. On the top of that. This is all for the central case. Under that central case, there's sort of 52.4 million tons of surplus units, which are available to the market, and then there's a [00:15:00] sort of a, a higher and a lower around that, which are roughly as indicated end.

If you want to know the details, go and read the reports. My take on it is that it's the P 89 units, which are really the massive unknown amount. Like it, I think that's unlikely to be more than what's estimated that's unavailable. With certain changes though, it could very much be less than what's estimated and possibly that's part of what we're seeing at the moment for the pre 90 units.

I am skeptical about treating those as though they're unavailable to the market on any meaningful timeframe. Our general experience has been that lack of awareness is the main obstacle with these holdings that we, we occasionally encounter people who have tens or hundreds of thousands of dollars worth of P 90 units that they literally didn't know they had.

And once they know they have them, they're often quite inclined to sell 'em. Potentially very quickly. So I mean, this is acknowledged in the MFE analysis. They're sort of assuming a certain drawdown of that volume over time. I think there's a lot of uncertainty in that estimate. Almost by necessity.

It could [00:16:00] be that that whole volume just stays there sitting with people unaware of it. It could be that there's some new way identified to engage those people. And that all comes to market quite quickly. There's high uncertainty. And finally, on the hedging units. I feel like these, counting these as though they're unavailable is a little bit like, sort of borrowing demand from the future and hoping, I mean, it's all gonna come to market eventually.

Let's say that you are, you're a big oil company and you've got a, a 10 million unit portfolio for hedging. But you know that. Over time, you're gonna transition to fully synthetic fuel. You won't need any units for hedging anymore. And so you'd gradually erode away that amount. But the timeframe over which that happens is probably quite long.

I think it's reasonable to assume, at least in the short term, that there's the volumes as they've calculated them. And certainly I've never discussed the hedging strategy with a major emitter, and I suspect MFE and the other, both those I've worked with have. So let's say that there's. [00:17:00] 67 million unsafe P 89 units which is this, this amount of sort of the forestry issued units that the theory is that people aren't going to sell because they need them.

Is that a lot? Yes, it is. Like there's 108 million in total within this P 89. This is the sort of un unsafe units that are gonna be held onto, it's the majority of the stockpile like. Close to 70 ish percent eyeballing that, and the majority of that is P 89 units. And even if you look at the distribution of holdings here, so you can kind of say that it's relatively unlikely that auction units are going to be bought by entities other than emitters or speculators.

There's sort of in your head, I'm not saying these are the exact mappings, but you could say the hedge units correspond to the oxygen units. The P 90 units correspond to the NZFA units. Although note that most of the 7 million here, those, those are those who've received the units and aren't participants.

Quite a few of these units may be held for hedging purposes or future sale purposes or whatever by other parties. And then there's a pretty [00:18:00] close correspondence between the 67 million of P 89 held and reserve units and the total of 74 million NZFE and basically post 89 forestry units that existed as of 31st December.

The number's gone up by about 6 million now, but this analysis was released late last year. And then this. Sort of in the 20 million over here, this could very just basically think of that as it's not allocated. It's very much available to. If for some reason a larger fraction of that 67 million of post 89 units of unsafe units, then, then expected becomes available to the market.

So, for example, people decide that they want to sit, that they are actually safe or that they want to sell 'em despite them being unsafe, then that increases the supply and at the margin that's gonna suppress prices. So this is sort of what's hypothesized may be happening at the moment with the market.

So questions that arise from this, what is safe carbon? When might unsafe carbon become safe and when might unsafe carbon be sold despite being [00:19:00] unsafe? So safe carbon is, it's not like a technical term, it's a almost like an analytical a. Aid to understanding what's going on with your forest. And it's the fraction of the carbon removals that have been issued for a forest that you can sell while retaining enough carbon to meet whatever your future expected liabilities are, which is gonna be based on how your forest is managed over time.

So this depends on the registration scheme that your forest is registered under. It depends on the timing of your registration versus the forest cycle like. When did you register versus when you planted the forest? And what was the history of the forest at the time that you planted it? It depends an enormous amount on your future plans for the forest.

And those plans might change with the change in the carbon price or the log price. So now we're gonna go through a bunch of scenarios. 'cause time is as always taken by. I will go reasonably quickly. I'll try and talk slowly enough that it's comprehensible if you wanna watch the video later on.

But, and first, just a little bit of a caveat. I haven't been especially careful with the exact timelines on these [00:20:00] forests, like the, the age of the forester within the year or the surrender obligations within the year. 'cause I was trying to put these graphs together reasonably quickly. If you are gonna take any action on this, we'd have to do a forest specific analysis, but it's broadly correct and it certainly captures the general dynamics.

So there's, there's two parts to this graph. One is the overall balance of units that you would have, assuming a certain forest type forest registration methodology and registration timing. That's the blue line. And then the red bars are the number of units that you receive if it's above the zero or have to surrender if it's below zero in any given year.

So in this case, we've got a forest that was established eight year zero. Pine trees, I think I chose pine and Gisborne region. And they grow very slowly to begin with. But then you can see sort of around year three, year four, it suddenly starts kicking off and grows and grows and grows and grows and grows until at year 30 you decide to harvest it.

And the way it works is that at the time of harvest, the. [00:21:00] Carbon stock and your surrender obligations are equal to the stock pre-harvest minus the residual stock, which is like how much carbon's left there, and the bits and pieces of trees on the ground that aren't harvested away, or the tree roots or whatever.

And then that steadily declines at 10% per year over the next 10 years until you get to zero. So if this is your forest, and this is your forest management plan, your safe carbon is zero. You will need all of the carbon that you receive even despite registering right at age zero. You'll have to give it all back again.

Oddly enough, there may still have been reasons to do this to register, even if you did ultimately do this, but I would say. If you knew for sure that you were gonna do this, then it wouldn't have made any sense to register in the ETS. It's just gonna be a whole bunch of costs and you'll have to give all the money back unless you, you really have a longer term perspective and you've got some plans out here, but this is not how most people manage their forest.

Let's say instead that we still are under the stock change methodology, you still registered it as soon as you put the trees in the ground, [00:22:00] but you're planning more than one rotation. So we've got this first rotation, but then there's sort of. The second one that you plant a year after you do the harvest, which is pretty common.

And these get added together, so they're sort of superimposed on top of each other, which I've done here just to illustrate it. But combining the two charts, it actually looks like this. You can see that the, the overall balance now, it sort of still falls when you cut the trees down and then it begins to fall away still in the years to come, but it begins to trail off.

And then before it gets anything like zero, it turns around and starts going up again because you've got this new forest going through and that's contributing to the total carbon stock and hence the annual change in stock as well. And under this, with the. Sort of rough assumptions I had. You've got, now you've got some safe carbon 143 tons.

And it's, it's important to note you could have solved that 143 tons in anticipation way back when the forest was eight or nine years old. It's just that you, the remainder of it, you're keeping in reserve and planning to surrender it later on. You don't have to wait until this [00:23:00] point to sell it. But we can do a lot better than that.

So let's say that we've got oh, sorry. No, this one isn't better. This is worse. Here we're assuming that you sold the, that you registered the forest right from day dot. It's actually pretty hard to have done that at the moment with the current forest cycles, because if you're harvesting your forest now.

It's probably around 30 years old, and that means that it was planted in about 1995. You couldn't register your forest in the ETS in 1995, and you can't claim the units of removals for your forest back to the start of time. So let's say instead that you, you delayed your registration. You, you didn't get it registered until the forest was about 10 years old.

So you only start receiving carbon at year 10. Now. You're back to having no safe carbon again because you, you only received a subset of the units. You have to give them all back fairly shortly after harvest and you, you run out. Though, though again it could be that this was still worthwhile for some time value of carbon or leasing or that you were blending it with other forests or some sort of thing like that.

There's a lot of ways that you can combine [00:24:00] different rev carbon sources to still produce some benefit. And one of the extreme versions of that is like, let's say that we not only had the. Subsequent rotation of forests, but we had two forests, which were slightly offset in their rotations and are also planning to have subsequent rotations.

And here I'm, I'm choosing this scenario where they're almost ideally offset. But if you're a large forestry company, you've probably got so many forests that you can interleave them all to get pretty close to the optimal relationship between the forest that are growing and the forest that have been harvested.

And if we combine all of that together. You can see here that my playing somewhat fast and loose with the, the ages of the forest has led to a little bit of an inconsistency. We get a much higher average carbon level, and I think the value used in, well, first to note here, this forest is now twice as big as it was before.

So where here it looks like 650 ish, 700 is actually per, per nominal hectare of forest 350 ish. And this is very much an approximate figure. It depends on the [00:25:00] average. Rotation length on the species, on the region, on whether you're under the FMA or under the default tables, but the, the sort of rough dynamics are captured here.

And finally as of the start of 2023, there's the new averaging category which means that for landowners who effectively it's, if you had a first rotation forest that was below the average age, which for radiata is 16 years, as of the, sort of 1st of January, 2023, you could elect to move it over into the average counting method rather than the stock change method.

And that means that it doesn't matter how many forests you've got you don't have to surrender any carbon when you harvest it, as long as you replant it again. And if you don't replant it, you have to give all of the carbon your receipt back. And this means that the safe carbon could. Basically the, the average, even single rotation forest owner ends up in a fairly similar situation to very large production forestry companies that can carefully interleave things.

They get, they [00:26:00] get to keep effectively the average standing carbon stock for their management regime, assuming that they started claiming it early enough. So. Safe carbon's pretty complicated. Whether it's safe or not depends a lot on what you plan to do. And that means that you can change the safe carbon depending on either the management that you're undertaking or a, the management that you plan to undertake, because sometimes you're selling, you're selling safe carbon based on an anticipated future liability.

And one of the most dramatic things that can change the safe carbon is a change in decision from I'm going to harvest my forest to I go that for a game of Skittles, the A price is terrible. This land's too difficult to access. Harvest is gonna be uneconomic. I'm going to just. Change this over to permanent forestry.

I'm not gonna harvest it. I'm gonna manage it as a, basically retire the land in the forest, at least for now. And if you did that, let's say this, let's say your forest was about 24 years old and you just decided that it was a [00:27:00] lost cause. You don't have to, obviously if you've harvested it, you can't then decide to unst it.

But at any point pre-harvest you could be sitting there going, well, at the moment I'm gonna have to replant it. And I've only got 143 tons of safe carbon if I decide to not replant it and not harvest it. I've actually suddenly got 600 tons of safe carbon, which you know, the delta there, 450 tons at current prices is worth say, I dunno, 400 times 50 is $20,000 for 2020 $4,000 ish.

I think 22 it, it's a lot of money in any case compared to typical log prices. And then you keep on earning year after year for that as well. Like there are risks with that, this approach. You are making a bet on the carbon market. You're making a bet on whether your forest gets blown over by the wind shortly after, whether there's some protections against that for surrender liabilities.

If it's a an accidental event and then you could get a. Oh, you don't have an obligation to repay the units as a temporary adverse event waiver that you can fill out, but it still means that you don't earn any carbon for a long time [00:28:00] and you have to replant the forest. So it's, I'm not saying that this is the obvious answer, but it's certainly a possible pathway, and it is certainly a pathway that we have customers who, they've taken this, they've got to this point going like, this is not gonna be a goer.

I'm going to take the carbon. And suddenly the safe carbon has quadrupled in this case, and it's even roughly doubled versus the the default case, and it just keeps going up and up year after year at the rate of 30 to 40 tons a year. Even if you just delayed your registration, like you might be thinking to yourself, why on earth would somebody bother registering in the ETS in the first place if they thought they might cut their forest down?

The answer is that it buys them optionality. Like you, you now have another ible pathway that involves not cutting your forest down and can be quite lucrative, rather than just like being locked into harvesting it and having to take whatever the prices might be at or around the time that your forest becomes ready for harvest.

So similarly here the amount of safe carbon that you have with this delayed registration, it should, [00:29:00] could suddenly go from zero to 400, which again, I'm try and do the mass better. 400 at $50 a ton. That is $20,000 a hectare. So why on earth would anybody do this? I've sort of covered this to some degree already.

To not harvest your trees. When your trees are worth money your land use intentions might change for that area. You might decide that. Harvest and rotational forestry is a bad idea. Choosing not to harvest because of the carbon available value. It can give you money now and it can even give you more money over time.

MPI commissioned a bunch of very useful work back in about April, 2021, which was then very helpfully, proactively released. And it gives a, an indication of stumpage values over sort of a range of scenarios and regions in New Zealand. And stumpage is basically. At least as I understand it, please do check with a true forestry expert.

But it's, it's the amount of money that someone would pay you for the rights to harvest your trees. You don't have to worry about getting the trees out and you don't have to worry about cutting them down. You don't have to worry about the log price, although obviously all of those things [00:30:00] are gonna have a huge influence on what they're prepared to pay for stumpage.

But it's a, it's a pretty good proxy for how much your tree's gonna be worth, net of all of the costs of realizing the value of your trees for timber. And you can see here that if we look at the average in the median, there's only a couple of regions where it was above $30,000 a ton. And by a couple, I mean two Bay plenty in Gisborne, every other region, the average in the median was less than 30,000.

And even the 75th percentile was sort of rarely over 40. I mean, review this at your leisure later on. But worth noting at that at $30,000 a hectare and $60 a ton of CO2. Granted, we're a bit below that now. $50 a ton would be 600 tons, but that's only 500 tons of CO2 equivalent, which is a hell of a lot less than you might have potentially received for a mature radiata or similar forest.

So you might well look at that and. I want to stress, this is a very simplistic economic analysis, but it's not unreasonable. [00:31:00] If you're harvesting a hectare, you might get $30,000 in stumpage. You might have to for it $30,000 in ended use though if you've saved all of those ended use up. But you can plant and eventually harvest another forest.

Which will be worth money. And you can sort of figure out the discounted value of that. If you don't harvest the hectare, you don't get any money at all for the harvest. So you've sort of given up that value, but you can now sell the $30,000 worth of CO2 that you might have sitting there. And obviously this will depend on when you registered it.

It could be, could be a lot more than that, could be less. And that will. Inform your decision of whether to harvest or not. You don't need to pay to replant. I missed out a tea. And also the very next year you get another $1,300 on because your forest is continuing to grow. Assuming the carbon market stays roughly as it is.

But eventually your forest is gonna get mature and you don't get another forest though in principle, at least you could start doing some sort of continuous canopy selective harvest, which roughly maintains the carbon stock and doesn't give you much of a carbon liability. But it's more expensive to do [00:32:00] that.

So how common might that change in behavior from sort of, we we're talking about is the amount of safe carbon likely to be much higher? Does that mean that much more of the carbon stockpile is actually available to the market? The main thing that's gonna make. Safe carbon higher is people going, actually, you know what?

I don't have to worry about my harvest liability 'cause I'm not gonna harvest my forest. So the analysis being done assumes that it is very rare that 80% that there's an 80% harvest race rate, basically only 20% of forest is unharvested. It is worth noting that permanent forest registrants are pre-comm permitting effectively to not harvest.

Like you. There are a whole bunch of obligations that mean that you can't clear permanent forest land. Quite a lot of that's probably native forest, but certainly there are areas of forest being registered under the permanent category that are not native and those won't be harvested. And. Standard forestry participants, whether they're under stock change or averaging, they can change their mind at any time to basically not harvest, and they'll usually [00:33:00] respond to the market, and in particular, the log prices and the carbon prices.

So I think that assuming an 80% harvest rate. Especially given recent years, carbon prices is not conservative. I think it could lead to an overestimate in the, the sort of non-safe amount. And that could lead to larger amount of unit supply available than was expected in the models. But there are a lot of factors that inform this, and we haven't done enough analysis to have a strong opinion.

Part of the reason that we haven't done a huge amount of analysis is that. As an individual, there's not actually a lot you can do to change this broader situation. And we really are just sort of, we provide support to a whole bunch of individuals. You just have to decide what you think might happen to the market and what that means for what you want to do with your forest.

And it's completely up to you and it's often a function of what you see in the relatively short term and what sort of, what options and what money you have on the table right now. So if you're asking, is my carbon safe, it's very much one of those usual [00:34:00] consultant answers of it depends. It mostly depends on what your plans are and your current status.

If you don't have any carbon because you didn't register your forest, you can be pretty clear you don't have any safe carbon. If you have a large amount of carbon because you registered your forest a long time ago and it's all forest that you plan to manage as permanent forest and you have no intentions of harvesting it, probably it's all safe.

But it, you need to consider these scenarios and if you want help that's what we're for. Come and talk to us about it. Onto the questions, and I'll quickly, before I get into that check, whether any came in by the little, if I can figure out how to use the question and answer, send me. All right. I don't think we have any questions.

Wait, I could be wrong. Q and a. Yes, there is a question. On an average basis for regional variation and for pinus radiata, what's the carbon accumulation rate per hectare? So I'll give a qualified answer to this, which is. 25 tons per hectare per year. But there's significant variation in that.

And it depends on [00:35:00] both the region, the time, and the, the monitoring framework. There are published tables the default lookup tables from MPI that give this information by region and certainly we can help with the modeling for any given region. Alrighty. Into the pre-submitted questions and I'll try to find things.

Any insights on whether the LUC, this is the land use classification category, I always forget which limits will actually have an impact. So for background, these are the new constraints on registration and the ETS that are working their way through legislation, which say that in effect you're not allowed to, well.

What they say is you won't be allowed to register any exotic forest in the ETS if it's on LUC one to six. And then there are a number of exceptions to that rule, including up to 15,000 hectares per year on LUC six. If you get a special permit or like you, you fall within a threshold of availability up to 25% of your total LU one to six land.

And how that's calculated is very much an open [00:36:00] question. And if you. If you have an investment in process or if your forest is exists prior to these rules coming into effect we'll talk more about that once the rules are a bit clearer, probably in another couple of sessions. But the. I think they will have an impact.

Yes, certainly. We're, we're seeing an impact in at least people's considerations around planting and registration right now. How much they change annual A forestation? I'm not sure because the, there's a lot of LUC one to six land in New Zealand. I. If people still wanted to plant 25% of it, that would still be a lot more than the annual a forestation.

But it's, I think it will have an influence on patterns of a forestation and it's especially likely to have an influence, I expect, on instances of whole farm conversion, except where those farms are, at least LUC six or LUC seven, because you won't be able to register potentially up to 75% of it unless it's already registered.

The intent guidance we've. Got a upcoming newsletter, which covers some [00:37:00] of the details of this, but in, in a nutshell MPI provided a helpful update on around the 25th of March, which talked about the. So qualifying investments, so there was a provision indicated that if you had made a qualifying investment in a forestation of LUC one to six land prior to the announcement of this intended legislation, which was 4th of December last year, then you'll.

You might have an exemption from the constraint. And NPI provided a list of what those could be. My view is that it was really helpful to provide the list. There's still a couple of questions on especially certain things like what qualifies as undertaken due diligence, but I think it was a very helpful add-on.

And, but it's still just guidance of intent. It's not legislation. Yeah, we, we provide a list of what we recommend, but I, I think the key points are if you have any evidence, make sure that you collect it and keep it somewhere that's robust because you may well need it. And if you [00:38:00] personally are totally indifferent as to whether you undertake a forestation this year or next year and it's highly sensitive for your business case, I'd be considering waiting until you have more certainty because, the risks of carrying on ahead. If you're in one of the, sort of the high risk categories, like you don't have good evidence, you don't have another exemption are quite high. If you don't have a reason that it's costly for you to delay, you should have a think about it. But there's, there's a lot of other factors if you consider there, including your contractual obligations, there's costs of delaying as well.

Potentially. It's, it's not a simple answer. Do we have the ability to look at what carbon is safe, sellable, nice to have a simple question to follow the previous one. Yes, we totally do. As I mentioned, it depends a lot on what you actually want and plan to do. By one metric, all of it is safe by another.

Arguably none of it is. And where your you fall is sort of depends on what your plans are, but we can help explore those options. What I plant a forest today for carbon credits. I basically don't think that I can give an unbiased answer [00:39:00] to this question. I think that a forestation, because like, to be clear, we support people doing this.

Obviously, I'm not gonna say no, I think it's the worst idea ever, blah, blah, blah. But trying to be honest, despite that, I, I would, depending on where I was planting it and what I was planting I think that. Reversion to forestry for carbon purposes is a really good use of some land in New Zealand. We do need carbon sinks and robust ones, and if you can do it in a way that ultimately results in the kind of forest that we want to have long term, then I think it's good use of land.

I would not be encouraging. And we generally do not encourage people to plant out their, like high quality grazing land in monoculture pine trees. I, I think that's a bad idea and I'm not crying Any tears over the fact that there's legislation being introduced to make it more difficult? If New Zealand withdraws from the Paris Accord?

Very good question. I dunno, I suspect that it would certainly hurt the carbon market and suppress the carbon price, but it's worth noting that both of the major parties in New Zealand have committed to [00:40:00] New Zealand remaining within the Paris Accord and to continuing to support the ETS. So I think it's, you can't say it's a low risk in the global political environment at the moment, but it's no more than a moderate one.

So how safe is it and what does it mean by safe carbon? I hope I've mostly covered this, but how it can impact the global warming is a really interesting question. The safe carbon is really the amount of carbon that's not going to be released again. So it's the bit that you think is going to be a net carbon sink.

And per permanent forest makes a very good long-term carbon sink, which is why if you have your forest managed under the permanent, the safe number goes. They're sort of directly related. I'll just check the live questions again because there's some coming in and there may be others. Can you move your forest from stock change to averaging following the first rotation harvest?

Excellent. Question. Answer. No, you can't. For two reasons. The first is that if you're registered under stock change, you had to make a decision on whether or not to move to averaging, and I think the first emissions [00:41:00] return cycle after averaging was introduced. And secondly, yeah, I'd wanna double check this, but I'm pretty sure that's the case.

And secondly, like generally, yeah, what am. I think I'm thinking of the case where if you're in the permanent category and you want to move back to averaging and under standard forestry, there are some situations there where you can do it. It takes a very long time because in general, you're not allowed to move from permanent into standard.

But were you too, there are some rules around the amount of carbon that you'd have to surrender and it gets very complicated. If you, if you really want to do this and you want us to explore it for you, please get in touch. I don't want to give a definitive answer that might rule out options, but in general.

My recollection is that under standard forestry stock change, you had the chance to change your registration scheme at the time. If you didn't do it, I think the Window's now closed. Do I think the comments from New Zealand first regarding pulling out of Paris is having an impact on price? I don't think necessarily that it's the comments from New Zealand [00:42:00] first that are doing that, but I do think that the general global sentiment to the sort of commitment to and economics of climate change might be having an impact.

I do think that there was a lot there's a lot of commentary around the extent to which people are considering abandoning these commitments that I don't agree with and I really liked. A comment from James Shaw and I think an interview piece and maybe the press a month or two back, which said that in the short term, there's a lot of talk around like immediate economic priorities and paying for schools and not worrying about like long-term implications.

But this problem is not going away. Climate change is continuing to get worse. Carbon sinks remain essential. That the sort of the, the short term ups and downs, but the long term trend is certainly of still increasing atmospheric CO2 levels and the need to do something about them, which is likely to ultimately drive incentives to reduce atmospheric CO2 [00:43:00] levels.

This one's more of a, a personal preference. One if it results in the kind of forest that we want long term for me, that's the kind of forest that supports, diversity of species, both animal and like plant. That's resilient to disease, that's resilient to climate, that's relatively resilient to fire.

And that I would like to be around and, and that can be production, forestry. But I suspect that in many cases it's. Especially on these highly erosion prone areas, which I think should be the highest authority for a forestation as carbon stores. It's gonna be at best continuous canopy cover. Forestry, not clear fell.

And then a final question before I jump back to the other list, and we're gonna have to wrap up fairly soon. Is there any visibility about how many units are held by emitters and their proxies versus how much is held for by traders or investors? Really great question. I don't actually know. I haven't seen a breakdown by there.

There is this sort of, are you a participant [00:44:00] or not? Yeah, good question. It might be in that EPA data, but I haven't done the analysis. And then another one, do I anticipate any additional restrictions potentially being considered by MPI or MFE? There's none that I'm aware of at the moment, but that doesn't mean that there won't be any right.

So another question from the submissions around the real cost of carbon. So there's sort of this real cost of carbon that's sometimes calculated in terms of the social harms and the long-term cost of global warming and similar, which is not to dismiss those, I think they're very real. But it's, it's usually in the hundreds of dollars.

So the question is, do I think that the government or perhaps many governments have come up with their own acceptable cost of carbon targets? IE that the cost that the average voter will tolerate. And if so, if there are a number that I think has been landed upon for end of use, I don't know. This certainly was a very concrete consideration back in, I think it was either late 2022 or 2023.

I've lost track of time, I [00:45:00] think. Yeah, I honestly can't remember. It, it was near the end of the last labor government, but they. Decided to not change the, I can't remember if it was the auction reserve price or some similar thing and essentially were saying that they were very concerned about the cost of living and the contribution of the carbon price to the cost of living.

And therefore were making policy decisions to make sure that the carbon price wasn't too high 'cause it could drive cost of living health. Credit to Lawyers for Climate Action, I think is the name of the group who challenged this in court and won and said that that wasn't the reasonable basis on which to make that decision.

And also credit to Shaw, who at the time said that as a member of cabinet, he had to go along with the decision but did not support it. I, I think that certainly it's a factor that's considered whether $60 a ton is a price at which it's a material cost. I'm not sure I quickly calculated this earlier.

Just for reference. $60 a ton of carbon is 5% on the price of petrol at $2 50 a liter. [00:46:00] So it's not like it's a massive burden. We charge, I think, significantly more tax on petrol than that for other purposes, like a lot more. Which is kind of a shame to me because if you consider how much decarbonization might be possible, both through forestry including potentially native forestry and other methods, if the carbon price was $120.

It'll probably be an enormous amount, including helping drive people to move to lower emitting transport options that use less petrol. And even $120 would only cost us 10% on the current petrol price, and it goes up and down by that much anyway. So I, I think that it may well be that people are trying to manage the price.

I don't think that that would be an especially good idea at the current levels. I think it's, it's low enough that it shouldn't be a massive burden. Is there a minimum area of native bush required in order to apply for carbon credits? Again, nice to have an easy one following. A tricky one. Yes, one hectare.

That's the technical minimum area. I would say. There is also a minimum economic area and it is generally more than one hectare, but that's [00:47:00] very much a consideration for you in terms of how much value is there for it to you, how much of a price do you put on the obligations that come with it or not?

You'd need to analyze it. And sort of related to that, how do we involve small holders in small sequestration activities over long periods? I won't read this all out in detail, but in a nutshell, it is actually very difficult. Especially at very small scales. The returns are commensurately very small.

And so I, I will say that the, let's ignore the very small scale part. Things like land ownership change. And, and sort of legacy, et cetera, are handled by the ETS as it stands today. So if you subdivide land, you still have to deal with these obligations. They don't just go away and there are mechanisms in place to deal with them, but they do cost money and for small projects especially, they could easily overwhelm the entire lifetime value of the project.

Yeah, I, I think the biggest cha so ways around this though collective registrations, we have a couple of customers who are [00:48:00] actually sort of resident associations who have a common ownership of sort of a, a local significant area of amenity planting and who are sort of doing ecological restorations of that area.

It is a lot easier in multiple respects if you can sort of aggregate the activity together under, sort of a shared holding company or something that everybody's got a stake in which will also be easier for arranging things like pest control and costs, et cetera. Sorry, I accidentally skipped past a couple there.

So we had a number of questions around sort of possible effects of the sort of USAs pulling out of the Paris agreement or commitments to the Paris agreement. I've, I've largely covered these earlier. I should have bundled that question in here as well. My views on the market price, as I said, we, we always do get a question like this.

I don't know, is the only real answer I can give. I have certainly had my own privately held opinions in the past, which I've been wrong about, and I won't speculate on what's likely to change. And finally, I think, no, not finally, we. We do currently only look at sequestration and emissions from

[00:49:00] forestry.

We don't deal with emissions from your livestock or your agriculture. We've had a lot of discussions around agricultural emissions, and the main challenge there for us as a company is that. Directly estimating your agricultural emissions, like properly estimating it requires a lot of knowledge around your stocking and your fertiliser use and a whole bunch of other factors like that.

And for us to get that level of detail, it would really mean building out the full farm management platform, which is just not where we consider if it's best spent, there are others working pretty hard on this, and we'd rather collaborate with them. And then finally, where are we at with voluntary carbon?

And what's the current trading state for voluntary carbon markets? So desktop analysis, it can still provide an indication. Ours is certainly. Past audit grade. The main issue remains just the demand for and liquidity of those units in the global voluntary carbon markets. And this is very much a global issue.

I haven't really seen any updates on market volumes since the US elections and the recent discussions, but I

[00:50:00] can't imagine that they've helped even less so any possible recession like this is pretty much discretionary spend. It's likely to be a category that gets hit. Okay. There was since we've got a moment at the end, do we have an estimate of the administrative costs over the lifetime of the stand, EEG fees, returns, et cetera?

Yes, we do. We can provide those for a specific scenario on request. Just get in touch with us. All right. That was a marathon. Thank you very much for your time and your interest. I hope that was helpful. And yeah, if you do have any further questions just follow up with us and we'll take a look at them.

Thanks a lot.