This means when trees are harvested, foresters must pay to the Crown a significant amount of the New Zealand Units (NZUs) they have earned from a forest's growth, even if the forest will be re-planted.
Under averaging accounting, there is no longer a need to surrender NZUs upon harvesting.
Participants instead receive NZUs as their forest grows, up to a determined average level of long term carbon storage, and will not face any liabilities on harvest if they replant.
"By taking a long-term view of the amount of carbon in a production forest, averaging means forest owners will be able to trade more carbon at lower risk, and not have to worry about finding units to repay when they harvest," Forestry Minister Shane Jones said.
"It's essential the ETS provides the right incentives for forestry over the long term so we can deliver on our One Billion Trees programme as well as our commitment to taking action on climate change and supporting the transition to a low emissions future."
Jones said the forestry sector had spoken of the need to make the ETS simpler, while increasing the incentives to plant trees.
"Simpler accounting for the carbon stored in trees will make a positive difference for anyone considering investing in forestry."
The decision was timed to allow forest owners to go ahead with planting, knowing they could choose the new system, he said.
"We expect to make further decisions soon on the details of averaging accounting, and whether forests already in the ETS can transition to averaging."
Climate Change Minister James Shaw said Cabinet had also agreed to several operational changes to streamline the ETS process for forest owners.
"We will improve the emissions rulings process where applicants can get an assessment of their land prior to investment and enable the use of a mapping instrument to make applications even easier," he said.
"These proposals work together: the improved emissions ruling process will be in place once the legislation changes, while we develop the mapping instrument over the longer term.
"These changes to the ETS are part of a number of overlapping policy levers that aim to strike the right balance between production and protection."
Other changes announced today included strengthening the compliance process for transmissions of interest when a forest changes hands; ensuring a six-year stand-down period for grant-funded forests works as intended; and aligning the ETS Mandatory Emissions Return Periods with the Paris Agreement timing.
The Government has already announced putting a cap on the ETS, which would limit the number of units that can be traded, along with keeping the fixed price option at $25 per tonne of emissions and bringing permanent forest into the scheme.
Parliamentary Commissioner for the Environment Simon Upton yesterday called for a new system that split biological emissions and forestry sinks into one trading scheme, and carbon dioxide into another, arguing that relying on forest offsets was a short-term fix to a long-term problem.
Shaw however poured cold water on the idea, arguing that the reforms the Government already had on the table were "the best range of policies available at this time".
In the wake of Upton's report, the forestry sector called on the Government to give clarity.
"If the government decided to follow this and limit offsets to agriculture, then this would have a dramatic negative impact on the value of carbon units, reduce planting rates and perpetuating the seesaw policy that forestry has been experiencing for too long," Farm Forestry Association president Neil Cullen said.
