NZETS Questions from Forest Owners

After meetings in South Waikato a rural Bank Manager wrote to us with a few questions on the NZETS and forestry:

Q.  Owners with more than 100ha must use the field measurement approach (FMA). I’ve heard this method often calculates more carbon units/ha than the published default look-up tables? I have friends with about 95ha. Their question is how strictly do MAF(Ministry of Agriculture and Forestry) adhere to the requirement that any forest(s) totalling less than 100ha cannot use the field measurement approach?

A. The rule is quite clear – you must have more than the 100ha. MAF also decide the total area when you apply. If you are a ‘participant’ then the associated persons rules apply, that is if you are a beneficiary say of a trust with 10ha and own 95ha then in theory the total is 105ha and you must apply the FMA. Given this is specialist legal stuff we recommend you seek independent legal advice on this point. One final issue is the FMA may in some cases provide LESS credits than the old look up tables, the risks are significant to those already selling credits. We cover this in recent carbon monitors. The potential for increased NZU from the FMA is just that, and given the PSP (permanent sample plots) are MAF selected I would be cautious.

Q. For a forest owner sells some or all of their carbon units, are the sale funds taxable? If so, when they harvest their forest and have to buy units back again, is the cost of these units tax deductible?

A. Post 1989 forest owners are liable for income tax on their NZU or AAU unit sales and similarly can deduct the costs of purchasing units for surrender at harvest or to cover some other loss like fire. There is no GST. Income and expenditure are assessable in the year they occur. Again this is a specialist area and specialist advice should be sought. Units are outside of the trading stock regime, that is they are not taxable when created, but only when sold. Again the definition of ‘sold’ is wide and transfers of any kind can create a tax liability if not handled correctly.

Q. A farm has say 20ha of forest on it. If the farmer sells all or part of the carbon units earned, then sells the farm, how does the prospective purchaser verify if the forest is (a) part of the ETS and (b) how many units may have been sold? A purchaser needs to know this to compare farms they may be considering to purchase.

A. (a) When registering for the ETS the property title is updated noting the ETS registration. Buyers are alerted to the registration but not the status; that is whether credits have been issued or sold.

A. (b) The NZEUR is a register with all transactions logged. The name on the EUR has to be the same as the name on the title. A buyer should be able to search the NZEUR to find the transactions i.e. the credits issued, surrendered and sold thereby giving them an ability to quantify liability or for that matter assets. This facility is NOT available in the current EUR. Apparently MAF will issue a statement as to any outstanding liability but this of course is not sufficient to establish both the asset and liability position of a given forest block. EITG has made enquiries as to how MAF and the EUR propose to handle the sale of land.

The liability is attached to the land (albeit some parties attempting to lease carbon credits via a forestry right say they have legal advice to the contrary) and also is ahead of any mortgage security. Buyers therefore need to be wary of what happens to deposits on unconditional date as mortgagors often don’t like to pass title without full discharge of mortgage. An issue relating to carbon credits could cause withholding of proceeds of a sale to meet this liability for instance. Again this is a technical area requiring specialist legal advice.

Q. Most forests are insured against fire. How does one get that cover extended to the loss of the carbon units that would be lost if the forest burned down. I have asked my insurance company (NZI) who have advised they will not cover carbon units?

A. There are new schemes including www.nzcarboninsurance.co.nz that provide ways to potentially address this risk. Large insurers are not currently offering carbon insurance as I understand it.

Please note: these questions and answers are indicative only and are prepared as examples and should not be relied upon as professional advice. You are advised to seek your own professional advice from the appropriate specialists. EITG terms are at http://www.eitg.co.nz/index.php?option=com_content&view=article&id=87&Itemid=114

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4 Responses to NZETS Questions from Forest Owners

  1. Geoff Manks says:

    NZI’s position of declining to insure carbon credits leaves me questioning if they do infact fully understand the subject matter they are actually insuring?! This issue has been raised with NZI on several occasions and they have consistent in their stance of refusing to entertain carbon credits in their policy. However the problem is they have clients who have traded NZU’s earn’t from their forests! So how will they treat a loss where their client has a surrender liability from traded credits? Has there been any misrepresentation under the policy by including a carbon value in the sum insured? Does the settlement clause suit the carbon activity? Is the sum insured even close to the real needs of the forest owner?
    In short, insurance of forests which have a carbon activity included has specific needs and needs expert advice. Blindly expecting a timber insurer or timber policy to do the job will fall short and potentially be completely inadequate, leaving carbon foresters unnecessarily exposed to a financial loss.

  2. eitg says:

    Geoff raises an interesting point. Forest carbon insurance is also cumulative, once you sell the credit you must in effect insure it until the risk is crystallised or you harvest and are required to surrender the credit.

  3. Geoff Manks says:

    Correct……the surrender liability is cumulative which emphasises the point that timber policies are not suitable for those trading carbon from their forests. The estimated gate price of timber in the future may be miles away from the surrender liability which will climb each year. Any if the cap comes off and the credit value spikes, think of the impact of that! Great for cash-flow, but also means a spike in the surrender exposure. All manageable of-course, but get good advice!

  4. eitg says:

    Look at more recent posts 1/9/2011 to clarify that the associated persons rules do not apply to the FMA

    Moreover one can hold 99ha in the PFSI and 99ha in the NZETS and be exempt from the FMA – or not able to access its benefits!

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