Key Points of Presentation to Finance & Expenditure Select Committee

10.00 am

Wednesday 14 May 2008

Flexible Land Use Alliance Representatives

• Ross Green, Spokesman

• Professor Lewis Evans, Chair of Economics, Victoria University

• Hayden Wilson, Kensington Swan

• Graham Brown, Rank Group

• Murray Parrish, Carter Holt Harvey

• Kimberly Crewther, Fonterra

• David Rhodes, New Zealand Forest Owners’ Association

Background

• The ability to use land flexibly to meet changing market and climatic conditions is one of the hallmarks of the agricultural backbone of the New Zealand economy.

• The Government’s announcements in September 2007 of its intention to impose massive retrospective liabilities on those who harvest their pre-1990 forests and convert to sheep, beef, dairy, tourism, horticulture, grapes or any other use destroyed as much as $3-4 billion of land value.

• For example:

- Wairakei Pastoral has lost more than $75 million with its best land falling in value from $13,000 per hectare to $2,900.

- Carter Holt Harvey will suffer a loss of $100 million to $200 million from its forestry investments, which is comparable to the potential economic value loss across all of its energy-intensive industrial businesses, demonstrating the relatively disproportionate and punitive impost on pre-1990 forest owners.

- The Federation of Maori Authorities estimated $2 billion will be wiped off Maori balance sheets, more than twice the value being returned to Maori in historic treaty settlements.

• The Flexible Land Use took a responsible and conservative approach to addressing these issues, taking private soundings towards the end of last year from officials and from the Opposition, and from various consultants

• The alliance was advised that Parliament was committed to an ETS including forestry from 1 January 2008.

• Therefore, the alliance developed a “second preference” of a Forestry Offset Scheme, as part of a more substantial compensation package.

Forestry Offset Scheme

• The current proposal allows a pre-1990 forest owner to harvest and replant the exact same land, without liability.

• Under a Forestry Offset Scheme, this principle would be extended so that the same forest owner, upon harvest, would be able to replant an equivalent forest on another piece of more-suitable land, without liability.

• Shifted forest subject to the Emissions Trading Scheme.

• Owner required to register as a participant in the Scheme.

• NZUs derived from that forest would not flow to the landowner.

• Atmosphere benefits in exactly the same way whether the trees are planted on existing forestry land or new forestry land.

• Scheme would encourage forests to be replanted on land most suitable for forestry, including the hundreds of thousands of hectares of eroding hill country land that is not in forestry but should be.

• Economically, a Forestry Offset Scheme would maintain, in a controlled way, the all-important principle of land use flexibility that is vital for New Zealand’s survival as a first-world economy.

Positive Response from Political Parties

• Nick Smith, National: Flexible Land Use Alliance has put up a “pretty good case”, “offsetting has merit”, and National would be pursuing the idea through the Select Committee process (see http://www.nzherald.co.nz/feature/story.cfm?c_id=26&objectid=10495190)

• Jeanette Fitzsimons, Greens: ``It’s sensible to allow flexibility in land use provided the forest is planted somewhere’’ (see http://www.tv3.co.nz/News/Story/tabid/209/articleID/47673/cat/41/Default.aspx). ``We should “plant more forests, but on marginal and eroded land that is not suitable for farming. It is acceptable for the Government to cover the cash flow effects so long as the fiscal effect over the life of the forest is neutral’’ (see http://www.greens.org.nz/searchdocs/PR11692.html).

• Maori Party: strong support in letter from Hon. TarianaTuria.

• Peter Dunne, United Future: “the Forestry Offset Scheme put forward by the [Flexible Land Use] Alliance will be fairer to landowners” and “has the capacity to reignite investor confidence and increase the amount of forested land in New Zealand” (see http://www.scoop.co.nz/stories/PA0802/S00465.htm).

• Doug Woolerton, New Zealand First: “It makes sense to allow land better suited to farming to be used as such, and offset carbon liabilities by replanting forests in a more appropriate location” (see http://www.nzfirst.org.nz/content/display_item.php?t=0&i=2685).

• Rodney Hide, ACT: “Forests planted before 1990 should be removed from the ETS or, at the very least, [there should be] a full compensation package of land owners including the common sense idea of a Forestry Offset Scheme” (see http://www.act.org.nz/act_welcomes_forestry_offset_scheme).

• Jim Anderton, Labour/Progressive Government: “We are happy to relook at the [offsetting] issue, have the proposal evaluated and discuss it with stakeholders” (see http://www.beehive.govt.nz/release/deforestation+policy+not+simple+it+appears).

• Mr Anderton has advised that if a majority of the Select Committee supports the idea then he will be guided by the Committee.

Fiscal Issues

• A Forestry Offsetting Scheme has cash flow implications for the Crown, but there are no long-term fiscal implications because the Crown earns the credits on the replanted forests.

Concerns About Quality Of Official Advice

• The Flexible Land Use Alliance has real concerns about the quality of advice the Government has received from officials, and about the quality of advice the Select Committee is now receiving.

• The advice is coming from the same government departments that have been spectacularly wrong on every prediction they have made about climate change policy.

• Officials have said the forestry offsetting proposal is not consistent with the precise wording of the Kyoto Protocol.

• Some have nonsensically implied that there is an absolute requirement for the forestry industry, alone among New Zealand industries, to have penalties imposed upon it us in order to identically reflect obvious mistakes in what New Zealand signed up to under the Kyoto Protocol.

• In fact, there is no obligation for New Zealand to impose domestic rules that perfectly reflect every detail the Kyoto Protocol, which is an international agreement among governments, otherwise agriculture would be forced into the scheme from 1 January and the Government could not have made the other major changes it announced last week.

• Some officials have admitted Kyoto’s current rules are bad for the forestry industry, New Zealand and the world but claimed they must be imposed on the forestry industry so that those same officials will apparently have a stronger negotiating position in arguing for offsetting in CP2. The Flexible Land Use Alliance believes that position is utterly absurd.

• The alliance believes the data on deforestation which officials are relying on is wrong and is inconsistent with work by Dr Bruce Manley of the University of Canterbury who MAF recently commissioned to carry out a deforestation intentions survey.

• The Flexible Land Use Alliance believes, based on knowledge its members’ own businesses, that deforestation intentions, even were pre-1990 forests completely excluded from the ETS, are much lower than officials have advised Ministers.

• Ministers and the Select Committee are also likely to get poor advice on afforestation intentions under current proposals, with officials claiming these intentions are positive when in fact they are not.

• The alliance is aware of an official government document that claims that its estimates of land value loses of $3-4 billion implies that deforestation intentions in the long-term are much higher than it maintains, suggesting officials do not understand the value of an option to a land owner, even if that land owner has no intention of taking up that option.

• The Flexible Land Use Alliance does not trust officials to be fair and impartial, believing they are operating defensively and with closed minds, and in some cases are engaging in what is better described as political lobbying rather than policy analysis.

• When confronted with the devastating effect of their policies on pre-1990 forest owners, some officials have pushed the line that this is acceptable because it would impact on only higher net worth individuals.

• Officials have also failed to seriously consider alternative proposals despite commitments to do so.

• Professor Evans advises that officials have not even carried out a proper cost/benefit analysis of the ETS and pre-1990 forestry – one which would compare net real resource costs with net welfare gains, to arrive at net economic benefit and instead have analysed only costs and benefits under Kyoto rules.

Importance of Forestry in Tackling Climate Change

• Forestry is the only industry in New Zealand capable of actually sequestering carbon.

• It is ridiculous therefore that forestry is the one industry being persecuted by this legislation in the immediate term and that official advice continues to be so poor.

• There is a fixation on the Crown’s short-term cash-flow position at the expense of the longer-term economic and environmental wellbeing of New Zealand.

• Forest owners regard this as punitive and inequitable and agree with Jeanette Fitzsimons that “the forestry sector is being left to compensate for everyone else.

• This is permanently destroying confidence to plant.

Economic Analysis of Forestry Offset Scheme (Prof Lewis Evans)

• Kyoto accounting for forestry creates liabilities for New Zealand that are distinct, even separate, from New Zealand’s actual net carbon position. This liability is being placed almost entirely on pre-1990 forest owners.

• The treatment of privately-owned pre-1990 forest removes rights of tree and land use that were formerly part of the foresters' ownership rights and the Government’s compensation package does not compensate for the extent of the taking.

• This truncation of ownership rights of pre-1990 foresters has the effect of undermining investment incentives and reducing the value of existing long-lived investments, thereby harming dynamic efficiency. This rights effect should be assessed in any cost-benefit analysis of the ETS.

• Under a Forestry Offset Scheme, forest owners are seeking to buy back rights that were formerly theirs. It is a mechanism to mitigate, to a limited extent, the adverse effects on dynamic efficiency of allocating the liability to forest owners and truncating their rights. It is a compromise proposal that shares the liability between forest owners and Government, while enhancing dynamic efficiency. It would be part and parcel of the Government’s compensation for its significant takings.

• Dynamic efficiency is enhanced under the offset scheme in two ways:

1. The scheme enables some land use flexibility. It allows land use to change to reflect the fact that different land will often have significantly different value in alternative uses;

2. It returns some ownership rights to forest owners, a tangible recognition of the taking and some reassurance for all potential forest owners that the Government places some weight on ownership rights.

• The Forestry Offset Scheme will increase the demand for planting new forests on non-forested land. The amount of substitution from alternative uses to forestry will depend on the different values of alternative land use that will be revealed over time.

• The draft amendments to the legislation mean that:

1. The land which is planted under offset is subject to the pre-1990 ETS rules; and

2. The carbon credits earned from sequestration from the offset forest will be retained by the Government.

• For any hectare switched the Government will lose its Kyoto carbon asset, but gain carbon sequestration on the offset-planted land and revenue from the sale of offset rights.

• If a Forestry Offset Scheme is to be capped, our recommendation is that a new instrument called Forestry Offset Permits be allocated in an auction in which the Government gets the revenue.

• Under the auction, there could be approaches such as the setting of the reserve price which can address issues such as screening out spurious bids and ensuring something is paid for the permits, and the setting of a cap on offset permits that limits the Government's liability.

Legal Analysis (see handout)

• Option One is an uncapped offset scheme and is the simplest.

• Involves inserting a definition of “alternative forest land” in clause 6(2) of the Bill.

• Alternative forest land would be land planted with forest species (as defined in the Bill) in substitution for pre-1990 forest land.

• A new section 164 (contained in clause 43 of the Bill) would also be amended to provide that pre-1990 forest land is not deforested if an equivalent area of alternative forest land is planted.

• This option could also be simply amended to provide for CO2 equivalence if that was preferred.

• Amendments would have the effect of replacing pre-1990 forest land with an equivalent amount of alternative land.

• The alternative land would be part of the Emissions Trading Scheme but the landowner would not be entitled to receive NZUs in respect of that land.

• Option Two is for an offset scheme capped at 4,000 hectares per annum, with the rights being distributed through an auction system.

• Legally, it is slightly more complex.

• Forestry Offset Permits would be created.

• Section 164 would be amended to include an identical definition of alternative forest land as in option 1.

• New sections 165, 166 and 167 would provide for the issuing of forestry offset permits, their content and their allocation.

• This would allow a limited amount of pre-1990 forest land to be converted to alternative uses, with an equivalent amount of land being planted in substitution.

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