New Zealand is currently reconsidering how its forestry sector can contribute to meeting its long-term climate change targets, and what this means for its emissions trading scheme (NZ ETS). A recent paper from researchers at Motu Economic and Public Policy Research and the Environmental Defense Fund sheds light on New Zealand’s innovative treatment of forestry in the NZ ETS, its impacts so far, and questions about where to go from here.
To help inform future policy choices in New Zealand and other countries, the research team examined patterns of behavior in New Zealand’s forestry sector under emissions pricing. While the NZ ETS has mobilised new forest planting and cut deforestation, the outcomes have not always supported policymakers’ intentions. Further policy changes will be needed to help New Zealand meet its climate targets through 2050 and beyond.
What is the New Zealand Emissions Trading Scheme?
To achieve a low-emissions economy, New Zealand has both international and domestic emissions reduction targets:
- Under the 2015 Paris Agreement, New Zealand’s net emissions (including forestry) must be reduced 50% below 2005 gross emissions (excluding forestry) by 2030. This can be met through domestic emissions reductions and forestry removals (sequestration) as well as purchasing offshore mitigation.
- In domestic legislation, New Zealand’s emissions of methane from agriculture and waste must be reduced at least 10% below 2017 levels by 2030 and 24-47% by 2050. For all other greenhouse gases, the target is net zero by 2050 and beyond. Five-yearly emissions budgets, set 15 years in advance, create stepping-stones to the 2050 target and must be met primarily through domestic action.
New Zealand’s unique economy, however, creates challenges in reaching these ambitious commitments. In 2021, over 50% of gross emissions came from agriculture. Powered by over 80% renewable electricity, New Zealand’s biggest energy emitters were from transport and industry. At the same time, New Zealand’s growing forests created net emissions removals from land sector, which offset 21% of its gross emissions. From 2008 to 2020, New Zealand relied heavily on domestic forestry and offshore mitigation to meet its international targets and gross emissions remained relatively flat.
Since 2008, the NZ ETS has served as the government’s main climate change policy tool. By linking a regulatory limit on total emissions to an emissions price in the market, the NZ ETS incentivises companies, consumers and investors to reduce their climate impact. The NZ ETS remains the only system in the world designed to cover all sectors and greenhouse gases, although pricing has been deferred for agriculture.
What lessons can other countries learn from the NZ ETS’ inclusion of forestry? Our study revealed the following findings:
Emissions pricing has driven change in New Zealand’s forestry sector
Between 2008 to 2022, New Zealand’s ETS has proven the feasibility of including forestry in an ETS at a sectoral level.
A successful cross-sector carbon market has been established in New Zealand and a significant proportion of post-1989 afforestation (new forest planting and growth) has been registered in the NZ ETS (60% as of September 2022). With broad coverage and clear liability provisions for landowners, the system has overcome key challenges to project-based forest crediting: accounting for leakage (where emissions are simply displaced, instead of actually reduced—such as deforestation moving from a protected plot of land to an unprotected plot) and permanence (where credited sequestration is reversed, such as when a protected forest sheds its stored carbon due to forest fires or illegal logging).
The research found emissions pricing influences forestry outcomes. Deforestation has generally declined with increasing emissions prices and increased when emissions prices dropped. Similarly, rising emissions prices have incentivised afforestation. This effect has been most pronounced following NZ ETS reforms in 2020. As emissions prices rose from NZ$12.7 to NZ$23.9 between 2016 and 2020, levels of net annual afforestation leaped from 2,692 hectares to 40,145 hectares (see the figure; note prices are in 2006 NZ$).
Figure: Annual area of net afforestation of post-1989 forest land and deforestation of pre-1990 forest land in New Zealand. The NZU price is shown by the black line beginning once the NZ ETS was implemented. NZU data are from Jarden and afforestation data from the New Zealand Ministry for the Environment. Refer to the paper for references.
In sum, the NZ ETS has clearly boosted forestry’s contribution toward New Zealand’s climate change targets over 2008–2020 and set the stage for further afforestation to accelerate under current policy settings.
Policy uncertainty, price, and the system’s shortcomings have dampened its impact
Despite this effect, over the first decade of operation, many factors likely limited the effectiveness of the NZ ETS in changing forestry outcomes. And recently the scheme has driven forestry removals but the focus on forests may have weakened the effect on gross emissions reductions in other sectors.
According to landowner surveys, extended periods of policy uncertainty impacted afforestation and deforestation decisions. This included reviews of the NZ ETS (in 2009 and 2011) along with international negotiations on post-2012 forestry rules. Moreover, weak emissions price signals (particularly over 2011–2016), along with an expectation that emissions prices would not recover, may have discouraged some landowners from investing in new forests. The NZ ETS had an unlimited linkage to the international Kyoto market from 2008 to mid-2015 and this markedly depressed emissions prices. For example, millions of seedlings established while emissions prices were high were mulched in 2014, when it became uneconomic to plant them after emissions prices fell due to linkage. When prices began to rise after the ETS was delinked from the international market it took several years for investors to begin to plant trees in response. And a hard price ceiling in place from 2010 through 2018 continued to constrain emissions prices after delinking occurred.
Through 2020, the NZ ETS resulted in increased afforestation but not costly emissions reductions in other sectors. Over 2008 to 2020, national gross emissions (excluding land use, land-use change and forestry) declined only 2.6%; however, this was during a period of growth in population, income and dairy production. In part, the past failure to invest in significant emissions reductions in other sectors enough to much more than offset those growth pressures is likely to be due to the same forces – weak price incentives and policy uncertainty – that affected forest investments. The option to rely heavily on forestry to help meet emissions reduction targets has also likely reduced political pressure to act in other sectors.
Forestry investment involves long time horizons, so market confidence and policy stability are crucial for harnessing the sector’s mitigation potential. Relying on blunt emissions price signals alone will not necessarily deliver desirable mitigation outcomes across all sectors.
EDF’s Chief Economist Suzi Kerr and Sandra Cortes Acosta planting trees.
Trees planted by EDF Chief Economist Suzi Kerr, three years later.
Emissions pricing for forestry has not always supported broader environmental outcomes
NZ ETS incentives have favoured exotic over indigenous forest species, because of significant difference in mitigation costs driven by planting costs and growth rates, and driven land-use changes that impact landowners and communities in both positive and negative ways. Many Māori, New Zealand’s indigenous people, have strong interests in the system because of their large land holdings, their involvement in forestry businesses and their commitment to kaitiakitanga (guardianship).
As of September 2022, 89% of the forest registered in the NZ ETS was exotic. Although all forests provide co-benefits, indigenous and mixed-species forests can support higher levels of biodiversity and may offer improved resilience to pests, natural disasters, and climate change impacts. Many stakeholders have raised concerns about the environmental, economic and cultural implications of extensive exotic afforestation, both plantation and permanent, while others emphasise that exotics produce faster climate benefits and can help supply the bioeconomy. Some see the potential for exotic forests to transition to indigenous over time.
In February 2023, Cyclone Gabrielle sent forestry slash and other woody debris across northern communities on the North Island, contributing to further devastation that prompted a ministerial inquiry. The panel reported that “forestry has lost its social licence because of its activities.” Its recommendations included restrictions on land use and forestry practices in the region as well as NZ ETS reforms.
Further reforms are needed to both the NZ ETS and other policies to shape forestry’s contribution to climate change mitigation and broader environmental outcomes.
Conclusion
The NZ ETS will not remain fit for purpose in coming decades. Under current cap and price settings, high levels of afforestation will depress emissions prices, slowing decarbonisation in non-forestry sectors unless they are also regulated in other ways. As key sectors like stationary energy and transport approach zero emissions, the demand for forestry credits in the ETS will diminish. However, forestry removals will still be required in the long term to offset unavoidable emissions outside the ETS. New Zealand’s Climate Change Commission called for changes to the treatment of forestry in the NZ ETS in its 2023 draft advice report on New Zealand’s second emissions reduction plan. In June 2023, the government initiated a policy review of the NZ ETS to consider both relative incentives for emissions reductions and forestry removals and policy settings for permanent forestry,
In Aotearoa New Zealand, emissions pricing has proven to be a powerful tool in driving afforestation and discouraging deforestation at a national scale. Enabling the NZ ETS to deliver an environmentally desirable and socially acceptable balance between gross versus net emissions reductions, plantation versus permanent forests, and exotic versus indigenous species in the longer term will require further reforms to the NZ ETS as well as land-use policy and regulation.
Catherine Leining contributed to this post in her capacity as a Policy Fellow at Motu Economic and Public Policy Research and not as a New Zealand Climate Change Commissioner.