Permanent Forests in New Zealand for Carbon, Timber and Recreation

Permanent Forests for Carbon, Timber and Recreation

The following is a broad outline of the Permanent Forest Sink Initiative (PFSI) and potential of the scheme to positively impact on investment on commercial forestry investment in New Zealand. The article is not intended as a substitute for expert qualified project advice on PFSI or forest investment. As in any significant commercial venture, unless the investor has substantial experience and expertise then expert independent advice by a recognised qualified forestry consultant will be an essential early step before undertaking any specific venture. In New Zealand capable, qualified and very experienced forest consultants are readily accessible. The writer is able to refer potential investors to sources of expert independent project analysis and forest project management.

The Permanent Forest Sink Initiative

For decades in New Zealand, commercial exotic forests (mostly Pinus radiata) have been established with a cycle of tree planting, tending and harvest after about 25 to 30 years, depending on growth and the current timber prices of the day. Recent initiatives by the New Zealand Government as signatory to the Kyoto Protocol include the Permanent Forest Sink Initiative, a scheme designed to encourage investors and private land owners having land suitable for establishing a forest on their property to enter into a covenant for a minimum of 50 years for the purpose of generating a long term income from joint, long term carbon credit and timber  production  or from regenerating native forest, or on land unsuited to commercial timber extraction; from carbon credits on their own. In theory, a well managed PFSI forest may provide a permanent source of income from both carbon credits (AAU’s) and timber for the forest owner and is successors or future owners of the forest.

The Kyoto Accord

The Kyoto Treaty recognises that forests act as a natural pollution sink through their natural sequestion of carbon dioxide which is understood to be a principal cause of global warming.  It offers forest owners and investors planting new forests on eligible land the ability to earn internationally recognised Kyoto Protocol compliant emission units (Assigned Amount Units or AAU’s) for carbon sequestered in permanent forests established after 1 January 1990, or alternately retain their credits as liquid assets, or if so required; use AAU’s to offset their own industrial polluting activities.

Eligibility for PFSI

PFSI is separate to the Emissions Trading Scheme (ETS) which was designed for more conventional 25 to 30 year cycle carbon/timber forests, but in its operating principal is essentially similar, the primary difference being the longevity of the forest and selective, graduated harvest principal (as opposed to clear felling at maturity) leading ultimately to creation of a mixed age forest. Existing forest owners and land owners are eligible to participate in PFSI provided their forest or land intended for a PFSI forest is Kyoto compliant. Kyoto compliant land is land that was not in forestry on 31 December 1989. In the case of an existing forest joining the scheme the tree plantings must have been established after this date.

Assigned Amount Units (AAU’s)

Carbon credits in the form AAU’s are issued to forest owners for carbon naturally sequested by their PFSI registered forests. In the scheme one AAU is the equivalent of one tonne of CO² sequested which may be sold for cash nationally or internationally or alternately held for offsetting a carbon liability. The forest owner is bound by covenant to maintain the forest for at least 50 years. If or when the covenant is terminated the forest owner is then required to account for the AAU’s issued and if necessary re-purchase these at current prices to meet his obligations under the scheme. If the forest canopy is not maintained within the guidelines of the scheme within the period of the covenant for any reason including fire damage the forest owner is liable to repay AAU’s previously issued equivalent to the loss, however this type of loss may be covered by fire insurance. 

MAF definition of forest land

The Ministry of Agriculture and Fisheries (MAF) who administer the scheme define “forest land” as:

“A minimum area of one hectare of land with tree crown cover (or equivalent stocking level) of more than 30 percent, with trees with the potential to reach a minimum height of five metres at maturity in situ. A forest may consist either of closed forest formations where trees of various stories and undergrowth cover a high proportion of the ground or open forest. Young natural stands and all plantations which have yet to reach a crown density of 30 percent or tree height of five metres are included under this definition. So, too, are areas normally forming part of forest that are temporarily un-stocked as a result of human interventions, such as harvesting or natural causes, but which are expected to revert to forest.”

One significant aspect of this definition is that areas of native forest that would naturally regenerate if protected from livestock grazing may comply and so together with commercial timber forests also have potential as revenue earning carbon forests.

The PFSI forest harvest cycle

In a PFSI forest an early cash flow is generated from AAU’s issued and sold by the forest owner. It has been estimated that a well established and managed forest operation should create a positive income stream following the first thinning operation in the fourth year from planting. Subsequent carbon income should pay for ongoing operations and is likely to provide an income over and beyond this, increasing substantially as the forest trees mature and grow.

Depending on log prices and demand for smaller logs production thinning may provide a timber income stream as early as 17 to 18 years from planting. After approximately 25 years a continuous cover harvesting program of individual mature trees or small groups of trees can be implemented. Under continuous cover harvest guidelines a minimum of 80% of the forest of the basal area in each hectare of the forest must be retained. The very best accessible trees or groups of trees are selected for harvest and replanted as sufficient space and light is created by successive harvest operations, in practice, probably following the second harvest cycle. Surrounding trees with smaller stems inevitably benefit by the light created by removal of larger trees, accelerate in growth and eventually in turn are selected for harvest. The major objective in a PFSI forest achieved under this harvest regime is a mixed age forest.

A continuous forest cover

To maintain a continuous forest cover PFSI regulations require that harvesting operations are undertaken to retain a minimum of 80% of the existing pre-harvest basal area on each hectare of forest for the first harvesting operation. For subsequent harvesting; retention of either a minimum of 80% of the existing pre-harvesting basal area on each hectare or 80% of the previous pre-harvesting basal area – which ever is the greatest, is required.

Forest measurement

For the purpose of measurement in a PFSI forest, “basal area” is the measurement used to determine the volume of a tree and m² per hectare. The cross sectional areas of representative trees are measured at breast height (1.4 metres above ground on the uphill side of the tree) to calculate the total m² of trees per hectare.

Strategies for pruning and thinning a PFSI forest

While not affected by PFSI regulations, pruning and thinning policies need to be carefully considered for their long term consequences if income from both timber and carbon credits is the projected outcome. Traditionally, New Zealand forests have been planted at a little over 800 trees per hectare and thinned to waste leaving approximately 400 stems per hectare at about 7 to 8 years. In a typical well managed forest basal branches are pruned in 3 successive operations starting from approximately 4 years old over the next few years (aimed at achieving 1/3 clean stem from ground level and 2/3 of top growth) with the ultimate objective attaining a saleable stem of at least 6 metres to maximise saw log value. In recent years however low price premiums achieved from high grade saw logs as well as the obvious simplicity of management inherent in a no or minimal pruning forest management strategy has discouraged many forest owners from undertaking forest thinning and pruning operations. Relatively satisfactory net returns from cheaply and (in terms of management) easily produced pulp and lower grade saw logs have been seen large areas of un-pruned radiata forest develop throughout New Zealand. A rough formula used by foresters is that a sale price premium of $50.00 per tone for pruned logs is needed to justify pruning operations.  However in a PFSI forest income generated in the form of AAU’s issued and sold will when (or if) the forest covenant is eventually terminated (i.e. at between 50 to 99 years from planting) will need to be accounted for and repaid. The need at termination of covenant to account for AAU’s issued over the life of the forest means that the end value of the forest is going to be of considerable significance to the new generation of forest owners and should encourage maximizing the value of trees and timber within the forest through best management practices.  At current log prices (2010) well pruned logs are likely achieve a premium of $25.00 to $30.00 over un-pruned, however in establishing a new forest an investor is making management decisions for a log market in 25 to 30 years hence. Given favorable long term timber price projections there seems little logic in assuming un-pruned logs will necessarily continue to have a net profit advantage.

Terrain and access for harvest

More importantly, in practical terms it is difficult to project how a PFS forest could be progressively accessed and harvested (as is required to create a mixed age forest) if full and complete thinning and pruning operations had not been completed. It is obvious that to create a practical working PFS timber – carbon forest, very easy and accessible terrain will need to be selected in the first place, i.e. terrain suitable for development of a close network of logging access tracks and access to individual trees and groups of trees within the forest made practical by suitable terrain and aided by a full pruning and thinning regime.

Many large properties suitable for acquisition for forest investment will inevitably have greater or lesser areas of terrain unsuitable in terms of harvesting access for a PFSI forest, but suitable for harvesting by clear felling (and subsequent replanting) as a conventional carbon – timber forest. A property with mixed terrain may be developed with areas of covenanted PFSI forest as well as conventional carbon – timber forest registered under the Emissions Trading Scheme.

Areas with difficult access or terrain considered uneconomic for timber extraction can be planted tree species such as Eucalyptus purely for carbon sequestion and generation of AAU’s rather than for dual production of timber and AAU’s.  Alternately, steeper areas could be planted in slow growing but valuable timber species such as Californian redwood Sequoia sempervirens, or in colder areas Douglas Fir Psudotsuga menziesii which will mature over the period of the forest covenant, following which harvest decisions can be made. Some steeper areas may have potential for naturally regenerating native forest for which AAU’s may also be claimed.

Permanent New Zealand forests as hunting preserves

In New Zealand mixed aged forests and selective harvesting is a relatively new concept, but not in USA and especially not in Western Europe where standing forests have existed and produced timber for many decades. Recreation forms part of the tradition and even income of these forests, in particular hunting. In New Zealand forests inevitably attract red deer and in some localities fallow deer populations. In the many exotic forests located near New Zealand’s large areas of mountain range and native forest there are quite substantial wild deer populations. It is logical to assume that in chosen localities long term mixed aged forests would be an ideal environment for creation of private wild game preserves and that this potential might add significantly to the attraction of this form of forest investment, both for New Zealanders and overseas investors.

The potential for viable carbon and timber forests in New Zealand

As with any primary land based agricultural or horticultural investment anywhere in New Zealand or the world, a primary requirement is land that is physically and climatically well suited to its intended purpose, in this instance commercial forestry. While New Zealand has a large exotic forest industry (relative to its size and economy) spread over the entire country, it is also very true that growth rates as well as timber quality vary significantly, largely through the influence of climate from one Region of New Zealand to another. Variations in tree growth rates directly impact on the economics of log and timber production together with generation of AAU’s. This being the selection of a favourable site for a carbon timber forest is of primary importance. The following extract from lookup tables published by Ministry of Agriculture and Fisheries (MAF) demonstrate regional variations in growth rates reflected in the calculated average accumulated carbon sequested.

Carbon stock per hectare for Pinus radiata by region expressed as tonnes CO2 per Ha

The potential for viable carbon and timber forests in Hawke’s Bay

Carbon stock figures published by MAF demonstrate the favourable relative viability of timber and carbon forests in Hawke’s Bay, particularly in relation to South Island regions. However these figures do not tell the whole story as the figures are averages over a broad region and there are wide climatic variations and consequently significant growth variations within that area. As a broad generalisation, wide areas of Hawke’s Bay south of Napier City and as far as the Wairarapa Region much further south, are affected by a “rain shadow” behind by the central North Island mountain ranges. Here is a typical Mediterranean climate typified by relatively low summer precipitation and overall low rainfall averaging perhaps 650mm to 750mm, conditions not suited to optimum carbon and timber production. Smaller localised areas closer to the mountain ranges areas having higher altitude and a few coastal areas are exceptions.

North of Napier, from the Tutira Plateau in particular and Northern Hawke’s Bay and the Wairoa District in general, enjoy a significantly higher and wider spread of rainfall. Where accessible land with suitable soils and terrain is available at a viable price the potential for commercial carbon timber forestry is excellent. The neighbouring Gisborne District immediately north of Northern Hawke’s Bay enjoys similar growing conditions and is also an important region for commercial forestry.

The figure given for carbon sequested between 14 and 15 years for Hawke’s Bay and Southern North Island forests is 35 tonnes. A recently audited 15 year old well managed forest in the Wairoa District of Northern Hawke’s Bay was calculated to achieve 53 tonnes, a 47% improvement on the average given in the table.

Acknowledgments

The following have been sourced for information on PFSI

The New Zealand Emissions Trading Scheme:  Climate Change New Zealand

Forestry in a New Zealand Emissions Trading Scheme: Ministry of Agriculture and Fisheries

Permanent Forest Sink Initiative:  Ministry of Agriculture and Fisheries     

Forestry for timber and carbon:   7 December 2009, P F Olsen.

Filed under: Forestry, Hawkes Bay