The ETS is shaping up a bit differently this year following late 2024 announcements. In this month's CarbonCurious session, Nick Butcher, co-founder dove into the latest ETS updates, including price trends we saw in 2024, the LUC restrictions announcement, and what they could mean for afforestation and carbon credit registration.
Watch the video for more information, or read the transcript below.
Nick Butcher: All right, we've got 20 people already and we've got a lot to get through, so I'm just going to rip straight into it. Thanks for joining everybody. Happy New Year. We're well into it now, obviously, but it still feels somewhat new. And it's bringing a lot of ETS changes either already happened or in the wings, so that's mostly what we're talking about today.
The title of today's webinar was The shareholder one about a week and a half ago, but it's got to be the question that some people looking at doing further afforestation asking themselves, like, what do all of these land use changes mean for me? Sorry, land use classification restrictions mean for me?
Am I feeling lucky? So that's a big part of today's summary. As usual, this webinar is recorded. It's going to be shared on our website after the session. Your microphone's muted. If you've got a Q& A question to ask, then there's a Q& A function built into Zoom. And if we don't answer your question live, we'll try and post an answer with the transcript on our blog later.
I'm Nick Butcher, I'm co-founder and CEO of Carbon Crop, and, and especially important for today's one, do not trade on this information or act on this information in isolation. It's not a forecast or a prediction. We don't have any special hidden insights around future regulations, or trends, or similar, or secondary market prices.
So, take all of this with a grain of salt and act with care. Speaking of prices, first up, secondary market price trends, I guess it's more historic looking trends, but we've pulled this from emsTradepoint with their permission. And it's an overview of the price movements since roughly this time last year.
The green curve is their semi proprietary quarterly weighted price index. And the blue curve is a summary of their daily volume weighted average prices. So you can see that starting from last year, the story is one of a slump. And then a gradual recovery up to a slightly lower level, bringing us to today.
Much of this we've talked about in the past, but just a quick recap of sort of key events driving these price movements. Back in March of 2024, the auction failed to clear at the 64 price threshold, which was interpreted by the market as pretty bearish around future market confidence, unit demand, and price movements and the price crashed immediately and then continued to fall at one point down into the low 40s, I think.
May have even gone lower than that, I'm not sure. That stayed roughly the case with subsequent auctions failing to clear, even partially clear, through until, in fact I think the September auction didn't clear either. But it recovered somewhat in around, I think this was, sometime in August. Just at the time of the carbon forestry conference, when the government gave some updated guidance on, I think in particular, it was the future unit supply constraints through the auction mechanism.
So there were various proposals here being consulted on around how to reduce the unit stockpile and how to help New Zealand meet its future emissions mitigation goals. The general perspective was that. A large volume of units unbacked by removals, which auction units generally are, would be actively detrimental to those goals, and when the government acted on that view, the market interpreted this as sort of generally supportive of future development.
ETS price growth and I think in many respects like the general seriousness about ETS and taking the ETS seriously as a climate change mitigation mechanism and recognising that a high unit price was necessary to achieve the targeted emissions reductions. As a result, or related, in December, the final auction of last year did clear.
Not fully, but partially, which was a welcome change from previous in the year. That was at $64. And if we look at the price today, it's around about $63 to $64. The next auction is in March again, and in that auction, there is a floor price of $68, meaning that no units will be sold through the auction mechanism for less than that.
There's also only 1.5 million units available at that base price. There are some more available through the cost containment reserve, but they're up in sort of the mid $100 level, which I don't think anybody currently expects the market to hit at all. Interestingly from the secondary market prices, the market is currently basically pricing in auction failure.
But there's also a number of supply and demand pressures that are driving the short term secondary market price. So, I think the March auction will certainly be interpreted as a signal one way or the other by the market. In the interim, my guess is as good as yours regarding where the price is moving.
I will say, though, that in the first quarter of the year is when forestry participants are eligible to receive their units. And we certainly have seen a pattern in the past of forestry participants. Who are prioritising cash flow, selling units, we presume, at whatever the current market price is.
Fortunately it's a competitive market, there's lots of traders looking to optimise their future returns. That helps support the price, but, yeah, I hesitate to say that. If you don't desperately need the money, you could wait through the year and see if there's a better supply demand balance later in the year.
That is very much speculation. And I would say that the fact that this, to the extent that this chart suggests that's a good idea, it's largely due to other factors. Sort of a regulatory signals rather than just pure supply demand, but I, I don't even offer that as advice, but there is certainly a reality of lots of people who need money, get the units in January, and then start to sell the units, which creates, pressure on the price downwards due to sell side surplus. Other recent events, so as I mentioned, auction cleared in late December. Certainly a lot of people will be watching to see what happens in mid March, the next auction. Also, roughly at the end of the year, the ETS review of the annual charges was announced with a revision of the price from I think $30.25 per hectare per year for registered forest down to $14.90 per hectare per year for registered forest. There's some exemptions there and some pro rata allocations depending on date of registration. The request for these fees is either being sent in the coming days, I think, or has already been sent to some customers.
For CarbonCrop customers, we'll help support you with how to download the invoice and pay it. But again, this is going to be money that has to come out of your pockets if you're an ETS registered participant, and you may want to gain, realise some value from your carbon units to help pay that bill, which will create selling pressure.
Also, welcomed, there was a confirmation that FMA obligations for forests that were registered, but had an exemption, well actually no, I'll just say forests which were registered at the end of the last MIRP, that is to say prior to the end of 2022 If they hadn't yet completed an FMA cycle they were obligated to complete an FMA set of measurements and get participants specific tables for this MIRP that we're currently in, finishing at the end of this year.
That is no longer the case. Anybody who is registered at the end of 2022 is able, if they choose to, to use the same tables at the end of 2022 for their 2023 to 2025 map upshot for a number of our customers was that they don't have to do if I made measurements in the current cycle, which they were happy about you will still have to do them in the following cycle.
Well, actually, regardless, if you're captured by the FMA rules. Speaking of MERPs, we are now in the final year of the 2023 to 2025 MIRP. The biggest thing to consider here, from my perspective, is that this is the last year in which you can complete registration for your eligible forest if you want to receive recognition for your carbon removals over the 2023 to 2025 period.
If you're not registered by the end of the year, under the current rules, then you're then you will lose the rights to carbon sequestration that occurred over that period, and you can't get them by registering next year. There was also, in a very busy December, a request for information published in connection with Crown land afforestation.
I'm not going to go into the details of that today, we will probably do a follow up session on this, but basically the Crown is signalling interest in afforestation of Crown owned land. In particular, as part of public private partnerships under various models and what they've essentially indicated is they want proposals from the private sector on models that might be of interest.
Then finally the big topic for today. Farmland exotic forest conversion limits like this policy slash pending regulation has been phrased in various different ways, but it's basically a restriction, future restriction on the circumstances in which forest will be eligible for registration and the ETS beyond those that already exist today, such as pre 90 post 89 forest land status, et cetera.
So that's what we're going to spend most of the session talking about because it has very big implications for future afforestation economics. And it's complicated and there's a lot of uncertainty. So if you came here today, hoping to have all of the answers at the end of the session, you won't, because there are a lot of things that we still don't have the answers to.
And it's basically pending further clarification. And the ultimate clarification will be the approved legislation. later this year. Like prior to that, there's always going to be an element of uncertainty. The two different titles that was given by the Beehive announcement and then the regular ministry, the primary industries announcement was from the Beehive.
The tagline was protecting New Zealand food production and ETS credibility and MPI was limits to converting farmland to exotic forestry registered in the ETS. So one of these I think signals the intent. The other signals the mechanism, like it is definitely going to limit conversion of farmland to exotic forestry registered in the ETS to some degree, and the goal of the policy is to predict, protect productive food land and help support ETS credibility by largely limiting to some degree the anticipated future exotic afforestation, which was sort of at least forecast as a possibility and maybe a threat to unit prices.
Everything that I'm gonna say today is our interpretation and opinion. If you're in a position where you have a decision that's sort of gonna be affected by the stuff, please reference the official data. Don't take what I say as gospel and don't take anything else that you read around the place as gospel because we have seen.
Widespread errors from multiple sources and the framing of this policy, including both the certainty around specifics and some of the technical specifics themselves. So definitely take care. Okay, so starting with the restrictions. These are relatively simple and the devil is really in the exemptions, but this is copied directly from the wording on the website.
Sorry, in the announcements. So there is, or rather there will be, a moratorium, which is to say a ban on registration of exotics on LUC 1 to 5 actively farmed land. The quotes there are mine. It was just actively farmed land. Part of the question here is, what is actively farmed? What is not actively farmed?
Is that actually relevant? Is it captured by something else? We don't know, and I'll get to our working assumption later on. There is also a ban on ETS registration of exotics on LUC six farmland unless you have access to the limited allocation of 15,000 hectares per year. This here is a paraphrasing of the original wording, and I think is a better way to think about it.
They say there's like a registration limit of 15,000 hectares because the circumstances under which you can access that limit are currently unclear. I would suggest treating this as a ban. Unless you know how you're going to access, for you, the 15,000 hectares or a share thereof. And these rules are expected to come into, or at least indicated as, they're going to be coming into force in October of 2025.
So, it's not a long term distant thing. The exemptions. Native and indigenous species are exempt, in general. So, you, this won't change your ability to register those. There is a little bit of a question of how a native forest cover may or may not change the land classifications. So, there could be a weird flow-on effect.
But, our understanding is that. So what this means is that if you go to MPI with an application for registration of an area of indigenous forest, they will not be checking your application against these criteria because it's not captured by them. LUC land is also exempt, meaning that if you go to MPI and your forest that you're looking to register is on LUC land, then you're exempt.
You, they won't reject it on the basis that it's exotic. Up to 15, 000 hectares per year on LUC6 land. How that's allocated, we're not clear. Up to 25 percent of LUC1 6 land, which is like, very helpful that they included this, but there's a lot of questions over 25 percent of what. And I'll get to this later.
Forest land already registered in the ETS is exempt. Our understanding of this is basically that you're not going to get kicked out of your existing registration because of this rule. And it'll be interesting to see how this is applied with regard to sort of post. August, sorry, post October 2025 registrations that then may later be subject to some change of like exemption status a key one, which there have been a lot of questions around is the transitional exemption for those in the process of afforestation with evidence prior to 4th of December 2024.
So to give the various Parties on the government side involved in this credit, they have gone to quite some lengths in the announcement to emphasise that they are not looking to penalise or disadvantage existing investments. I think the challenge is that, exactly how you avoid doing that and to what extent is really tricky.
And there's still quite a few open questions on what stage of investment becomes captured by the transitional exemption or not. There's also an exemption for Crown land, to the extent that it may be made available for afforestation. Currently, Crown land can't be registered in the ETS for the most part anyway with the possible exception of lease mechanisms or similar.
It will be subject to different rules and there's some details around this in the RFI for the Crown land afforestation. And then finally, of my list, specific categories of Maori owned land are fully exempt. So if you're trying to figure out whether you can plant forest or not and register in the ETS, this is a little bit what your planning scheme is going to look like and we're going to try and break some of that down and make the sort of the criteria a little bit more applicable.
So what to expect if you're captured by a restriction and not covered by an exemption. This is an assumption on our part. But we don't think that there is going to be any active mechanism by which you find this out in advance. We would expect that you submit your application to register as usual, and then the fraction which is ineligible based on a restriction will be rejected due to that restriction.
In the same way that if you currently submit land that's ultimately assessed as being pre 90 forest, it's excluded from the accepted area. These restrictions on ETS registration, not on planting. There are different restrictions on planting, which means that it's entirely possible that you can plant a forest and then subsequently find out that you're unable to register it, which is going to do extremely bad things for your investment case in all probabilities.
So please check first. How to check? There's so many questions. And one of the key ones we're getting is like, what is an LUC? There's a lot of devil in this detail. There's not just a top level LUC. There's also a bunch of subcategories and LUC types. The indication is that the legislation won't differentiate it on the basis of those.
They've just said LUC with the top level number. And for a rough breakdown of what that maps to, I've taken this from the Landcare Research site. LUC1 is sort of the really good cropland. LUC8 is the very steep slopes and rocky mountains and such like. And, and generally it's accepted that, I'd say it's almost a definition.
LUC1 through 4 is arable cropland. Like you could grow crops there and farm them for the most part. LUC4, that's a bit, might be getting a bit tricky for certain types of harvesting, but for the most part this is arable cropping land. LUC1 through 7. As all considered suitable for grazing, but there's obviously different levels of that.
Like, by the time it's LUC7, you know, that's some of that is a real challenge to actually walk over in a stable way. And if you, if you had stock in a paddock, many of them will be staying off that land just because it's too steep for them to be happy. But technically, you could, how much of each is across the country is a really interesting question.
We're going to dig into this in some more detail for future updates, but New Zealand is roughly 27 million hectares. And of that area, considering all land, not just privately owned land, roughly 75%. Is in the other categories when I made up where I got the data from LUC adding up all the individual LUCs.
I had a million hectares less than the total area of New Zealand, but this could be lakes or something. I haven't bothered to check, but in a nutshell, 75 percent of the country is LUC 6, And almost 50 percent of the country is just 8. However, that's going to be disproportionately captured by national parks and reserves and other land because the productive farmland tends to be the sort of LUC 7 and below.
And anything below LUC 6 is captured by this. So there is a lot of land that is affected. And if you consider only private land, even more of the land will be affected by this policy. Like, I would say, my guess would be 75 percent of private land probably is affected by this policy. It might be as low as 50, but I'd be surprised if it was that low.
Obviously there's a bit of a crazy rainbow here. I'm not very good at doing elegant colour spectrums. But the good thing is that as far as this policy is concerned, a lot of them condense together. Like, LUC 1 to 5 is a very, Like, widely diverse land use grouping, but it's all treated the same for this policy.
LUC6 is distinct, and LUC7 and 8 is also bundled together. So there's actually only really three bands that you need to worry about and unless you're eligible for this exemption, you really only need to worry about two. Are you LUC6 and below, or LUC7 and above? At a, sort of, the area of a particular part of your farm.
And I've also flipped my colour coding around here, because the way it works is actually LUC78 is the stuff that you don't need to worry about too much. Like if you're planting on that land, you might have other issues, but you don't need to be concerned for registration. LUC1 to 5 and 6 are the ones of concern.
And really, I would say that unless you're very confident that you have this exemption, just lump 6 in with 1 to 5. If you're planting on LUC1 to 6, this is something that you need to be actively thinking about. So that's LUCs generally. What's your LUC? This is our random demo property. You can see it's a pretty widely varied patch of land.
There's not a lot of truly flats on it, but there's some stuff that you could obviously happily graze and there's some stuff that's in forestry and there's some stuff here that's pretty steep and erosion prone and is likely falling into the gullies. But this entire property only has two land use categories, sorry, three land use categories on it, a very small area of LUC3 down in the bottom.
Right. Most of it's either LUC4 or 6, and LUC4 or 6 and 3, as we just identified in the chart earlier. They're basically all the same thing as far as this policy is concerned. So at the regional level, which is a very broad brush, the treatment for this entire property is identical. The indication is that there will be the option for a farm level LUC assessment.
These are already a well established thing, they're used for all sorts of farm use plans. You will, as we understand it from the announcement, have the option. to use this for your farm's assessment of eligibility or exemption or not rather than another thing. But I would say that you're unlikely to get to pick or choose within a given farm.
You probably have to pick one and then run by that and it might be that for some reason you happen to have a whole lot of LUC7 that on closer inspection might be LUC6 or below and you might choose not to opt for the farm level assessment given that. So first question, am I planting exotic?
Because if you're not, you perhaps don't need to worry so much. If you need to ask the question, the answer's probably yes. Our assumption is that these species definitions and categories are the same as for elsewhere in the ETS. All exotic species are going to be covered, so if, for a given CAA, you're using the pine table, the Douglas fir table, the softwood, Exotic softwoods table or the exotic hardwoods table, all are equally affected.
It's only if you were going to be in the indigenous category that you would be exempt. Are you planting on 8 land? Very good question. Check against the map. We can certainly help with this. Note that, as I mentioned before, you might not be able to pick or choose in the future, which means that asking for an assessment under one category may well lock you in to that LUC map resolution in the future.
This is currently unknown, we're just guessing. Is your land exempt, Maryland? There's three specifically cited general categories that are going to have an exemption. So Māori land held under Te Ture Whenua Māori Act 1993, land on which the status was changed to general land under the Māori Affairs Amendment Act 1967, or land pursuant to a treaty settlement.
This is something that you probably already know if you're in that category or not. If not, then we can potentially check with the Māori Land Register and help you out. But I would say you probably already know if, if you're wondering if you are then you're probably not. Exempt Maori land, would be my guess.
Okay, the next pathway through this, this puzzle. Can I get 15,000 hectares per year, well, can I get a part of that allocation? As of today, no, you cannot. It doesn't exist yet. There's no mechanism for allocation. You're not, there's not some registration that you're failing to apply for. It just hasn't been set up yet.
The indication in the announcement is that these rights will be allocated to register on a first and first served allocation system. We are encouraging and supportive of something that allows the allocation to occur ahead of planting, because obviously it's very difficult for any individual to take the risk of planting on the hope that they get a future allocation if the registration is the sort of linchpin of their whole business case.
The mechanisms and the timing of those mechanisms. We don't know anything other than what's in the announcement. I would just say that planting this year and relying on this as the mechanism for registration is very much a risk because you don't know how the allocation is going to occur and you don't know whether you're going to get a share of it.
You're relying on, yeah, you're basically relying on whatever it ends up being, you getting an entitlement and I would say that that's by no means guaranteed because it's, it's going to be a popular thing. Like we expect that a lot of people will want these allocations. The next one, will I have a transitional exemption?
So, this is. Very much. I think the multi million dollar anxiety inducing question for many people who have undertaken or are about to undertake forestry activities in 2025. There was a, again, credit to the officials, they are actively signaling that they are not looking to yank the rug out From underneath and like massively disadvantaged people who are already making investments, but you should be very careful about the assumptions you make of exactly where you fall on the sort of spectrum of already making investments.
These two specific comments were in the announcements transitional measures for landholders currently in the process of a forest station who can demonstrate an intent to a forest prior to 4th December 2024 implication here is that you don't necessarily actually have to have trees in the ground.
But you do have to be able to demonstrate an intent that predates this announcement and that you're currently in the process of afforestation. MPI, transitional exemptions for those who were in the process of afforestation before this announcement and can provide evidence of this dated before 4th December 2024.
And helpfully they give a couple of examples, such as a land purchase agreement or a seedling order. So if you planted prior to December 2024, emphasis here on planted. The investment is made. We think, but we don't know that you'll be exempt on the basis of the transitional category. But forest in the ground, like literally the trees are, there is pretty compelling evidence of both intent and investment.
But you would want to make sure that you have that evidence captured because five years from now, it might be difficult to tell whether you planted it in 2024 or 2025. We are wondering whether we're going to see the emergence of what's essentially a pre 2025 forest. As a new category that's going to be a whole nother level of complication because that also implies post sorry, 2025 implies post 2024.
But when we sort of work through in our heads, some of the puzzles that emerge with the implementation of this legislation, that's something that we think would. would make sense and would help with some clarifications and at the very least it's going to be a lot easier to work that out than pre 90 and post 89 because at least we don't have to go quite so far back into the past and the data is a lot better.
If you're planting after December 4th 2024, which probably means that you're planting that you haven't planted yet because the last month and a half isn't really prime planting season. You need evidence for your transitional exemption. It has to demonstrate an intent to a forest and we've got a couple of examples.
But there's obviously a lot of open questions in here. We basically expect that the strength of evidence of intent and investment is going to fall on some spectrum. Where things are positioned and what cutoff is going to be isn't clear. But at the top end, our assumption is that if your trees are literally planted prior to the 4th of December 2024, That's very strong evidence of a very strong intent and a definite investment, so we'd hope that it would be captured by the transitional exemption.
At the other end of the spectrum, if you mentioned the possibility to some stranger in a pub that you were maybe thinking of planting some trees at some point in the future and he was wearing a green swandry and we can totally like try and find him and he'll vouch for it, it's quite clearly not going to cut it.
Also up at the top end, based on the content of the MPI announcement, if you actually ordered the seedlings prior to that date, or you purchased the land prior to that date and you had a business plan titled forest or bust that's going to be pretty strong evidence. I think there's an open question of if you purchased the land prior to that date, but there's a strong basis for assuming you purchased it as a farming operation, It could be that the sort of evaluation of that evidence is quite different.
And I would say that at the other end of the spectrum, if you've got a seedling order, and your seedling order is dated after the 4th of December 2024, and that's the only evidence that you have, It's sort of the opposite of this one here and I would expect that to be reviewed pretty dimly. All of this stuff in the middle do not take the positioning as any indication of our view on the perceived strength of that evidence.
It's just an example of some things which are in this grey area. So if your farm was advertised as a carbon forestry investment prospect prior to 4th of the 12th 2024, like you're looking to realise the value of that farm for forestry, you've indicated an intent. Does that count? Does your 2021 farm plan that indicates your areas intended for planting as part of your overall farm management practices count?
Does your due diligence that you had underway for a land purchase in September of 2024 which was predicated on a forestry investment case count? Does your pre December 2024 financed staged afforestation plan that indicates an area for planting but the planting isn't actually proposed to occur until 2027 because you're planting in blocks based on your available cash flow, does that count?
These certainly all in our view could count under certain circumstances, but I think the implementation of this, there's going to be a desire to not allow it to just be a generic, anything goes, because then the policy will fail to have its intended effect. So there's going to be a cutoff. We are hoping to see some more guidance ahead of legislation of where that cutoff might be, because it has obvious implications for afforestation, not only this year, but also next year.
Because even though next year we post legislation, nurseries and planting crews and other actors within the ecosystem, they kind of need to know before October what their likely opportunity is going to be and where the demand is going to be. So it's something where guidance would help a lot.
That's really all we have to say on this; we can't give guidance beyond what's being announced in the official policy. We certainly hope to at least see clarification that literally having the forest in the ground on the 4th of December is evidence of an intent and an investment, but other than that we don't know anything more than in the official announcements.
Right, so, is my land converted from farmland? This is a phrase from a couple of the bits of guidance. We're not really sure how to interpret this. Our expectation is that in practice, it's probably going to be a combination of the land use classifications. And the pre 25 forest land status. So, if your land was LUC 6 on the 4th of December, and it's not forest it's probably farmland.
Because that's what the LUC definitions are, is that it's suitable for farming. There may be some future exemption for scrub, we don't know. But our working assumption would be not. For forest land that's already in the ETS MPI's comment was that there are no limits on ETS registrations on forest land already registered in the ETS.
We're interpreting this as the existing registrations are grandfathered in, which is great, like you're not going to suddenly have your registration evicted from the ETS because it's on LUC5 land and it's exotics. We're hoping for clarification here around the implications for pre 25 forest generally not necessarily registered.
Versus unregistered forest being there being a distinction if if you don't do this it's easy to come up with scenarios where there could be perverse barriers to deregistration of forest because it's like you know that it's registered now but you can't deregister it and get it back in even though it was already existing forest.
This also has potentially positive implications for farm subdivision This will come a bit later around the 25 percent rules, etc. But if you got a farm, if you got some forest registered under the 25 percent rule and that created an obstacle to further subdivision of the farm entity, then it could be a barrier to people registering because they're worried about the encumbrances that they place on their land.
This here is really just speculation on our part, but it's good to see that there is consideration to this point being given in the design of the legislation. So this basically brings us to the 25%. Our expectation is that setting aside existing forest that's already in the ground at the end of 2024 and existing forestry investments that are already underway, which is sure to be the small minority of all future forest investments and the 15, which is quite a lot in terms of total planting, but it's it's unclear how it will become available.
Our view is that for the average farmer, especially small scale farmers looking to do just partial retirement of parts of their farm to create a carbon forest or just a general forest with carbon as a revenue stream, the 25 percent number is what they're going to be looking at. And this is one where there's a lot of questions around how it will be calculated.
So 25 percent of what? You've got your LUC 8 and 7, and then your LUC 1, 6, which as we talked about before, we can basically lump all of those together. One possible interpretation is that the 25 percent will be of all of your LUC 1 to 6 land. Regardless of whether it's forested or unforested, registered or unregistered, just you've got this allocation and you can then spread that around how you like.
Existing forest is already there and there's a question of how that's treated. If, if the 25 percent was of your unforested LUC1-6 land then that could actually be a relatively smaller fraction of your total land because some of it's already forested and may or may not be registered. If it was 25 percent of all of your LUC1 6 land and you were able to.
Distribute that only over your unforested land, because you've already got an exemption for pre 2025 forest for your forested stuff, that's going to be quite a different total entitlement to a forest. And if you start considering what's registered and unregistered within the forested land, if, if registered stuff is exempt, but there's no automatic entitlement to register forest, even if it was pre 2025 perhaps your 25 percent is calculated against the combination of your unforested land and your unregistered land, but you might then want to allocate all of that 25 percent across your existing unregistered forest, which would mean that you might not have any left at all for your unforested areas.
But I've been through this pretty quickly. We don't, I'd say all of these are possible. Some of them are certainly preferable in our view, and I'll get to that a little bit later after we talk about farm splits. But in the absence of finalisation of the legislation and some certainty, it'd be a pretty bold gamble to plant your farm in one of these categories, unless you were Yeah, I would say if I was, if we were given guidance on if somebody wanted to take the chance, I would probably say, make sure that your planting would be, if you're looking to take advantage of this 25 percent exemption, make sure that for all reasonable interpretations of the 25 percent exemption that you can think of, your planting will fall within that.
Then I'd say you're reasonably safe. If there's any other thing that you're looking at doing where you're like, Oh, well, I really hope that they do it like X, you could easily be out by 50 to a hundred percent of your land, which would be obviously again, very bad for your business case.
There's another term in the guidance of 25 percent of the LUC 1-6 land on a farm, which raises the question, what is a farm? There are a lot of things it could be. Is it just a title? Noting that many farms, especially many larger farms, comprise multiple titles. Is it a collection of titles within the same owner, like exactly the same owner on the title?
Is it a collection of titles with a related owner where it's like perhaps within some common holding company but there's separate subsidiaries? Is this considering the status pre or post 4th of December 2024? What happens if the titles are close together or far apart? How does this change when the ownership of the titles change?
The groupings in particular are something where we have a fairly strong view. We do not want to see a situation in particular where smaller farming entities that only exist in one location are materially disadvantaged in terms of their flexibility under this policy and their ability to realise the value of their land, as opposed to large group entities that may have activities across very large areas.
And as an example of how that could work, like, here we've got, let's say, a local group. Let's say that a local group is a cluster of titles in Northland, and local group 2 is a cluster of titles in Southland. And each of them have some LUC land, and some LUC 1 to 6 land. And they, for this example, let's assume that they're all under a single corporate entity with the owner.
The way we would like to see this work is that, Title Group 1 has its own entitlement of 25%, and Title Group 2 has its own entitlement of 25%. And they can allocate those how they want across their local title group, but what they can't do is this. Where Title Group 1, all under the common owner, gets all of the 25 percent from both farms.
And the reason that we don't like that idea is that under a separate scenario where these are completely separate ownership. The, the owner of Local Group 1, they can't sort of use this optimisation to suddenly afforest half of their LUC1 6 land, which means that if Forestry had the highest NPV for that land they're going to be heavily incentivised to sell their land to a major corporate landowner, rather than to continue to farm it themselves.
And this seems like Actively contrary to the intent of the policy. So we think it's important to allow for this. I would say that the incentives to do so for major corporate developers will be quite strong commercially, which means that they'll probably figure out a way to, if there's not a specific barrier to doing so.
This could also be taken to the extreme if you don't do anything about it, where it's actually. This policy is almost no obstruction to whole farm conversion at all, because there's no guarantee that it's just one title group. It could be that there's several title groups all under the same ownership, all with their 25%, or it could be that there's one very large title group, and you're looking to sort of, enable the afforestation of, by, by bundling your 25 percents together of quite a small one.
Now you're just back to the same situation of whole farm conversions happening but through a different mechanism. This is clearly contrary to the intent of the policy. Remembering that there is not a shortage of LUC 1-6 land. If you just took 25 percent at face value, I can't remember the numbers that we had earlier, but it's, it's sort of in the multiple millions of hectares.
far beyond what's anticipated for afforestation, especially through the restrictions of this policy. And if you're not careful, all of that could come, at least in theory, through whole farm conversions, which is the whole goal to prevent. So our hope and I would say that it is signalled, is that, so this is from the Beehive announcement.
The intent is to allow up to 25 percent of a 6 land to be planted in forestry for the ETS, ensuring farmers retain flexibility and choice. So we would like to see an implementation that given the goal is prevention of whole farm conversions to exotic forestry, achieves that while preserving flexibility and choice for farmers to a reasonable degree.
Our view is that a way to do that. At a high level is to treat farm groups independently. Like, if you own a farm at the top of the North Island and the bottom of the South Island, those should not be considered the same farm for the purposes of this 25 percent grant and allocation. Otherwise you'll have all sorts of problems.
We would like to see these limits applied only to new forests. That is to say post 2024 forest. Pre 25 forest should be exempt. And we would like to see the calculation based on the whole farm area regardless of whether it's forested or unforested, otherwise you can easily get a situation where a landholder who's already forested a significant fraction of their LUC 1 to 6 in, in line with good forestry practices, they may have no flexibility at all with the remainder because they might have already used up all of their 25%.
Which doesn't give them independence. Finally, most of what I've just shared here is speculation. All that we have concretely to go on is the same thing that any of you do, which is the announcements from the regulator and from the government. And a lot of this is going to remain speculative, subject to further clarification from the authorities until the legislation is actually passed.
We are encouraging to the regulator guidance on directional kind of, and intent. They're certainly helpful to support near term decisions. But even they can only give a certain amount of clarity on the subject, ahead of the legislation being finalised. And it might not be enough to necessarily enable your particular forestry activities because it might not meet your threshold of sort of confidence or certainty.
So I'm going to stop there and really quickly look at the questions, although I might come back, you know, I'll finish this up briefly, like, that was a, a good brief, I've been talking for 40 minutes. There's a lot to absorb there, I know we are, to the extent possible, building into our system, the tooling to help support the farm level analysis that would be able to guide these decisions.
We'll be sharing more about that before the end of Q1. But it's only going to be able to give you guidance to the extent that the legislation allows us to give guidance. Like, if there's something which is simply an unknown, we'll be able to say, well, if you, if you interpreted the likely legislation in form A, then you'd be able to plant this much.
But if it's form B, then it'll be this other number, which might not meet your threshold for confidence. Back to basics though if you're already registered in ETS and especially if we're actually managing your registration, then something on your mind is like the how do you get your units for your registered forest and actually reap the benefits of all of this work that you've done.
So, we made a number of changes in 2024 to streamline this. We, if we haven't already been in touch with you, we are certainly in the process of it to ask about your forest changes, if any, and see if you actually want to file a provisional emissions return this year. Reminder, it's not compulsory to file this year, it will be next year because that's the end of NERP.
You can only file these returns, or we can only file it for you from January to June. We will follow a task, if you're doing it with us, you'll be following a task through the Carbon Prop Platform to sort of give various approvals to us and clarify any changes that have occurred before, it goes to MPI.
Once we submit it to MPI, they're doing a fantastic job with turnaround times here, we're usually seeing the units arrive within a few days. And once you have your units you can sell them or hang on to them. We have had a couple of questions around emsTradePoint and their status given their sort of various messages to the market last year.
Their guidance is they are still running as normal, they are still actively onboarding new customers. If you'd like to sell, you can certainly sign up with emsTradePoint and sell through them, or if you're already signed up, transfer your units to them and sell through them. And certainly there are other providers as well.
We also regularly use Jarden which you can look at. We have been making really good progress here. We've submitted, I think, something like, might be 75 percent almost of returns now that we've submitted. And basically if you haven't heard from us please get in touch. If we're not currently processing your return, it's likely because we are waiting on information for you at this stage.
So get in touch if you think there's been something missed. All right, into the questions. We do have some questions already, and I'll start with those because those who actually turn up. Good on you so question number one on the RFI for afforestation of crown owned land. Do you know if crown owned land generally can actually be registered under the ETS?
My understanding is that in general it specifically can't be. I think there is an exemption for a forestry right, for land being registered, forest land being registered by a non crown party through a forestry right mechanism. In the RFI they specifically mention that their preference is for the partnerships to not be dependent on ETS registration.
Or on NZU's obviously any partner is going to want some sort of recognition. But there are other forms that could take. So yeah, the general statement is no, it can't be. There are various possible exemptions to that that already exist and further ones that may.
Another great question here. In your opinion, will space planted poplars for slope stability be restricted? It looks like it will be, but I wanted to check specifically for this. I think this is an extremely interesting one, because this is a category of exotic afforestation on farms, which is entirely consistent with land use preferences. It's like local government, landholder, regional government, national government.
It would be restricted in the sense that there's no explicit exemption for it. Aside from if you're planting poplars on a slope for stability purposes. It may well be that that slope is considered LUC7 land, in which case you're exempt. Here there's a big difference between the region level LUC classifications and the farm level LUC classifications.
But yeah, I would say that for them to be exempt. It would have to be through either the 25 percent mechanism where obviously you're using up an entitlement, but it may be an entirely suitable use of that entitlement from your perspective. Or otherwise it will be through a, probably a farm level LEC mapping, which says that those erosion prone areas.
Do I think forestry leases will be subject to the same restrictions? I hesitate to say I'm certain, but I'm basically certain that they will be subject to the same restrictions. I would expect that the 25 percent calculation will be at the farm level, not at the lease level. So could be wrong there, but that'll be an interesting one to navigate for lease allocations and carbon rights associated with leases.
So I mentioned that the policy approach may have the reverse effect of seeing more whole scale conversions. I. I didn't mean to say more than we have been seeing in the past. My point was rather that if the policy were to allow the aggregation of entitlements within a single corporate entity across a very large area, then there's the risk that it's not an obstacle to wholesale conversions by certain stakeholders.
And I think that would be problematic. And finally one, have you considered how MPI might treat forested land that is also grazed, i. e. silver pasture with low stocking rates, but still ETS eligible? I imagine that this would, certainly if there is some farmland, non farmland distinction made in the future, I think it will be considered farmland.
So it's certainly captured from that regard. In every other respect, I think it will be exactly the same as any other part of land based on its LUC classification. So if, let's say for example, that. You had a farm consisting of LUC4 land, and nothing else, and as of today it's just been grazed in sheep, and in early 2026 you thought, I could probably plant some of that in exotic forest and register it in the ETS.
I do not think you would be able to register more than 25 percent of it. I could be wrong there, but I, I, it is a bit of a shame in some respects because it's sort of interesting. Silver pasture doesn't necessarily lead to a loss of farmland. But I think that actually making the distinction there robustly under the current mechanisms will be sufficiently hard that there won't be an exemption for it.
But it's an interesting idea for exploration in the future, given the benefits for sort of alternative fodder. And shading for livestock and mixed productivity because you get a timber resource as well as a pastoral resource like an interesting one to get into and then a related question about the effect on possible agroforestry options such as pasture under 30 percent of cover.
I think it will have no effect because pasture under 30 percent cover is not currently eligible for registration in the ETS anyway, but were it sort of pasture under 35 percent cover per my previous answer, I think. And again, this is all my opinion. I think we have to wait and see, but some of these questions sort of are good questions for future potential evolutions of this policy, because I think there is some stuff that could be captured that, where the afforestation is actually in everybody's best interest and it's not the sort of Competition of forestry versus farming.
All right, and on to the pre answered questions. So, first one, which I've hopefully covered. LUC, what's the new criteria? What are the new rules and regulations? I've said about as much as I can about that for now, but hopefully it's been helpful. Similar one following. What impact do you think the LUC limits will have on exotic plantings within farm systems?
I think it'll be, for some farms, potentially quite significant. Like it, it will be a restriction for future afforestation if you intended to go beyond these limits as to how someone assesses 25% of their farm and knows their LUC classifications. I have touched on that already. And a pre present question here.
How can, sorry, impression, how can this be changed if the scale is off? That will be the case for some farms for sure. Remembering though that you only really care about the scale of LUC 7 to 8, LUC 6, and LUC 5 to 1. And, the errors there are going to be less frequent than sort of within individual categories.
But you can get a farm scale LUC assessment. My strong advice though is don't run out and get one. Until you know what the qualifying criteria is going to be for those assessments, because it could be that you spend money with the wrong provider and that you still don't have an eligible assessment and that you need to go and do it again later on how many carbon credits were issued in 2024 land?
I left this question in because I think that's a great question. I have no idea of the answer. We know what the answer is within our portfolio and it's significant. But I don't know what the answer is at a national level. What changes to the ETS relevant to people with plans to register native and farm forests should we expect to see in 2025?
For native forests I don't expect there to be any major changes other than those that we've sort of referenced out around like future price evolution. The general position seems still to be don't discourage native afforestation where people choose to do that because there's not currently an issue with native afforestation driving massive land use change on productive farms, really.
For farm forests though, like the definition here, very much includes exotic forests, and I would expect this policy to result in significant changes, at least until people know where they stand and can make an investment in a land use change with confidence. Would a food forest under the Centropic system, which is to say mixed species, some fruiting, mostly exotics, qualify for inclusion in the ETS?
Fruit trees are generally excluded from the ETS. The exact qualifying criteria would likely be dependent on the species mix and the species fraction and how those species are classified. But for certain models, I would say that it likely is qualified. You just have to check the species mix in advance and make sure that you weren't planting something that would be captured by another as an orchard.
Long term view on locking up regenerating native bush for carbon credits. What is the long term view was the question. I can only give my long term view, which is that I think that where the land is well suited for regeneration, that's an excellent idea, and we should be actively encouraging it.
Certainly, it's what we are spending a lot of time working to help enable, and I would say that the general policy direction seems to also be encouraging of it, where appropriate and where it's economically competitive. There's one here that was: what is the proven science that farm pasture does not sequester carbon, or what is the science behind excluding it when we all know that plants rely on CO2?
So, I wouldn't say that there is any proven science that farm pasture does not sequester carbon, quite the opposite, like it's, it's widely accepted that it does sequester carbon to some degree. The ‘where’ it's excluded explicitly, it's excluded from the ETS in New Zealand. It is included in the ETS or in various carbon inventory mechanisms in other countries.
The challenge is two things really. One is that it's difficult to measure. It's difficult to prove and it's difficult to guarantee that it actually stays sequestered because you can get quite high rates of carbon sequestration during pasture growth and soil carbon sequestration during damp years, but it can all be lost very quickly if there's a drought.
So the durability is one of the key obstacles. Where's the price going for indigenous forest? I don't have any concrete predictions on the future prices for indigenous forest carbon units, only to say that I don't anticipate in the short term there being a significant bifurcation of the market into different categories.
But, you know, I could be wrong there. That could change. There's nothing that's been announced that we're aware of that would drive that change. I'm looking at harvesting my pine trees. How much do I need to pay back to the ETS? It is extremely situationally dependent on your registration scheme, the date of registration, the age of the forest, the history of the forest.
If you're at this point, you absolutely need to check before you harvest it. If you're registered with us, you can come and talk to us. The liabilities can be enormous to the point that they could be prohibitive to harvesting. So, very much check first. What is my crystal ball telling me? I've basically shared as much as I reasonably can about what it's telling me.
It's encouraging that many of these changes I think are the current coalition government signaling ongoing commitment to the ETS and forestry within the ETS. We're gratified to see that indigenous forestry continues to be given additional flexibility and it's, we're really hopeful for some of the ongoing programs around recognition of the ETS ongoing sequestration and pre 90 forest. So that's, that's what we're more hopeful for, but I'd say that's further away. All right, if you made it that far, thank you very much for your time and for joining. There's obviously still a lot of open questions here. And I realize that it can be a little bit of an uncertain time, especially for those looking at doing further exotic afforestation.
But we will be keeping up to date with all of this and keeping you up to date over the course of this year. And as I mentioned, there is some tooling that will be available fairly soon to at least explore scenarios. Cheers, everybody. Enjoy the rest of your days.
Komentarze