Recently TBK capital sent out a document entitled Carbon Credit Leasing Offer. The essential elements of the offer were summarised in their email as follows:
- Our client is seeking a limited area of established forests for long term lease.
- Rental of $200-$250 per hectare per annum (plus GST) paid annually in advance.*
- To qualify, forests must be first rotation radiata planted after 1989.
- Our client takes a registered lease of the owner’s forest and takes on all carbon credit liability.
- The owner retains ownership and possession of land, tree crop, and cutting rights.
- Our client is a New Zealand owned and operated company that is in the business of Carbon Farming. They own, lease and plant forests for carbon credits.
- They supply bulk carbon credits direct to large energy companies and oil companies who need carbon credits to meet their legal obligations.
- They currently have 10,000 hectares of forestry under management.
- They have recently completed the largest sale of carbon credits in New Zealand history.
- Their team includes experts in carbon credits, forestry, finance and insurance.
In essence their client appears to want to take a registered forestry right that specifies the NZU issued from the forest growth accrues to them for an annual fee per ha.
EITG was asked to look at this and we made the following observations:
- The price of NZU on Carbon Match late January was around $7
- At a lease price of $200 per ha (they claim the GST as an input) that is around $10 per credit on 20 credits per ha or $6.66 on 30 credits per ha
- The international market, where there is no practical restriction on credits entering the NZETS is around Euro 3.81 or $6.14 (@0.62 exchange rate)
- Whilst the international market prices remain at this level NZU according to commentators are expected to remain at low levels
- Non binding advice on the issue of who is liable for surrendering the credits from MFe in a telephone conversation around July last year was
- Whilst Mfe say the liability would be chased through the lessee and the Directors of the Lessee in the event that company failed
i. The liability could still ultimately attach to the land
- There is no legal precedent that Mfe were aware of in this area
Questions that leap to mind are
- Who is behind this offer?
- What is their financial status?
- What does the insurance provide, and is the Lessor an interested party in the policy?
- What obligations does the Lessor have in the event of loss during the no harvest period?
- What legal advice do they have that the Lessor is not ultimately liable?
- Is any legal advice addressed to the Lessor?
- What is the actual situation with liability if the lessee fails? Or cannot honour its obligation to surrender sufficient credits?
- What about the obligation for field measurement in 2012?
It’s a simple scheme on the face of it. In a falling market probably not that profitable. At $20 per NZU it was of course highly profitable provided they had resolved the issue of the cost of credits at harvest and their attendant liability. At $7 per NZU we wonder if the same applies?