Brian Fallow: Sinking feeling in the forest

The first fruits of the Government's review of its climate change policies have appeared. Ripe, luscious and tempting? Well, no ...

The permanent forest sink plan is a good idea neutered by poor policy design.

Most of the landowners whose behaviour it seeks to change are likely to regard it as too hard, too risky and generally not worth it.

It is a shame, because the concept is attractive. It aims to encourage the reforestation of marginal, erosion-prone land that with the benefit of hindsight should never have been denuded of its natural vegetation.

Just as clearing bush to establish grazing land released carbon dioxide, contributing to global warming, reversing that change in land use removes CO2 from the atmosphere.

The environmental benefits of doing that are recognised by the Kyoto Protocol which sets up a system of forest sink credits, which countries can use to offset their liabilities under the climate change treaty for emissions of greenhouse gases.

But they apply only to forests established since 1990 on land not previously forested.

The net increase in commercial plantations of pine dwindled to nothing last year, so the Government has a clear incentive to encourage permanent afforestation, although it is probably too late to have much effect on the growing fiscal liability for Kyoto's first commitment period, 2008 to 2012.

The Government also stresses other, more local environmental benefits, such as reduced erosion - meaning less silt in river waters and a reduced risk of flooding downstream - improved biodiversity and restoring the habitats of native birds.

But instead of simply offering to pay landowners in good old New Zealand dollars for environmental services rendered, the Government is inviting them to enter the arcane and forbidding world of the international carbon market.

That is liable to prove a barrier to the early uptake of the scheme.

"Owners who meet the requirements will receive tradeable, Kyoto Protocol compliant emission units which they will be free to sell to whomever they wish," the Government says.

"The amount of units received will be equal to the increased carbon dioxide stored in the forest for the period between 2008 and 2012."

The requirements to be met are that the land was not forested in 1990, and that if it is to be a forest of exotic trees such as Douglas fir rather than native bush, that it was not established until after October 2002, which was when the scheme was outlined.

The costs of proving that those conditions are met would fall to the landowner.

Establishing the forest does not necessarily mean clambering around a hillside planting seedlings.

MAF official Brian Smith says "enhanced" natural regeneration is allowed, which in practice is likely to mean keeping livestock off the land and probably some pest control.

The scheme might also suit commercial forestry, albeit of a different type to the traditional pine forest , which is really a form of agriculture with a 25 to 30-year gap between planting and harvest.

Clear-felling is not allowed, but the scheme's rules allow some harvesting or thinning provided a "continuous canopy" is maintained.

How that is defined is an area of uncertainty, but it might suit the cultivation of long-rotation species such as Douglas fir.

One factor limiting this might be that every sink credit generated creates an equal contingent liability which would crystallise if the carbon stored in the forest decreases.

If that happened, the landowner would have to cover the liability by buying replacement credits equal to the change in the carbon stock.

There is also the risk that the trees might burn down, be blown over or succumb to pests or disease.

Policymakers seem to assume that insurance will be available. If so, it will have a cost; if not, the financial risk to the landowner could be substantial.

All of these obligations would have to be enshrined in a contact between landowner and Government, which would would be attached to the land and would bind any future owner.

Monitoring and enforcement would be required, at a cost to the taxpayer, but that is inevitable if the country is to have an internationally credible forest sink credits system.

Forestry consultant Piers Maclaren points out that it is technically difficult to calculate how much carbon is in a forest made up of a mixture of species and ages.

So estimating how many credits a landowner was entitled to would not be easy.

But the bigger difficulty would be in turning those credits into money.

The Government airily assures us that markets are developing for the trading of emission units, and it is expected that companies or countries with obligations under the Kyoto Protocol might want to buy emissions units. Third-party traders and speculators might also want to buy in.

This is disingenuous. Forest sink credits cannot be traded on the most liquid carbon market, the European emissions trading system .

Because of doubts about the durability of forestry-based measures to reduce climate change, forest sink credits are not hard currency in the Kyoto world.

So the Government is likely to have to pay landowners an equivalent number of assigned amount units, peeled from the national wad, as it did for some wind farms under the "projects to reduce emissions" scheme.

Those at least might find a buyer among governments with Kyoto obligations from time to time, unless the parcels involved were too small for them to be bothered.

But connecting with such buyers would not be straightforward.

It is true that a sort of archipelago of carbon markets looks likely to emerge.

California has just committed to a cap and trade system, and the Australian states and territories recently issued a discussion document on the design of a future carbon market for the electricity and industrial sectors.

But these markets do not yet exist. Nor does a domestic New Zealand one.

Until they do, talk of "carbon farming" is premature, and landowners are likely to regard the credits as a kind of funny money.

Which raises the obvious question: why not pay the farmers in cash instead?

After all the carbon tax, now scrapped, was to have been set at a rate - $15 a tonne - intended to approximate the international price of carbon.

It made sense, the Government argued, for it to interpose itself between emitters and fluctuating prices on immature carbon markets, bearing the transaction costs and the carbon price risk in both directions.

Surely that is still valid.

The problem appears to be an aversion to the "s" word.

The Government sending farmers a cheque could be portrayed as a subsidy.

And it has become an article of faith, in New Zealand if almost nowhere else, that subsidising farmers is a wicked waste of money.

But, as MAF's Brian Smith insists, the permanent forest sink plan is not a subsidy: "It is a new business opportunity created by the Kyoto Protocol."

How many see it that way remains to be seen.