The use of market mechanisms to bolster forest carbon:A critical analysis

Faculty of Law, University of Sydney, Australia

Celeste M Black, Senior Lecturer

Forest Carbon

› Role of forestry in reducing levels of atmospheric carbon

The bathtub analogy

› Emissions: deforestation and forest degradation

› Removals: forest carbon – afforestation and reforestation

› Sustainability Institute and Schlumberger Ltd

› Climate Bathtub

2

Introduction

Forest Carbon

Reducing deforestation

› REDD

› Domestic measures: emissions liability upon deforestation

Establishing new forests

› CDM

› Domestic forest offsets

› Voluntary/regulatory markets

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Role of Market Incentives

Forest Carbon

› Natural sequestration of carbon

- Soil Carbon

- Forest Carbon

- Ocean uptake

› Growth of forest: net carbon sink

› Carbon saturation point at forest maturity?

› Monitoring and measurement

› Permanence – natural risks

› Small scale harvesting

4

Forests as a Carbon Sink

Forest Carbon

› Creating a commercially viable alternative to other land use options

› Direct incentives

- Grants programs

- Concessional tax treatment of expenses

› Indirect incentives

- Issuing carbon offsets

› Including both large and small land-holders

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Creating positive incentives for forestry

Forest Carbon: Australia

› Several regimes to encourage forestry at state and federal levels

› Federal level

- Tax concessions

- Generation of units under deferred ETS (the Carbon Pollution Reduction Scheme)

› NSW State level: Generation of units under emissions trading scheme – the NSW Greenhouse Gas Abatement Scheme (GGAS)

› New initiatives: Victorian Carbon Exchange for carbon offsets

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Forest incentives in Australia

Forest Carbon: Australia

› Establishment costs deductible

- Until June 2012, fully deductible in year incurred

- After June 2012, deductible at 7% pa (over 14 yrs, 105 days)

› Must notify relevant authority and satisfy criteria

› Commissioner of Taxation may deny deduction for non-compliance

› Suggestion of annual monitoring?

› Compare favourable tax treatment of forestry managed investment schemes (plantation forestry)

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Federal tax incentives for carbon sink forests

Forest Carbon: Australia

› Indefinite deferral of CPRS

› For reforestation

› Qualification requirements similar to regime for carbon sink forests

› Approach to crediting units

› 5 year reporting cycle

› Treatment of harvested forest stands

› Risk of reversal buffer

› Projects to be revoked and units relinquished if non-compliant

› Liability capped

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Federal incentive: Generation of units under CPRS

Forest Carbon: Australia

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CPRS Discussion Paper: short rotation harvest – unit limit in red

Forest Carbon: Australia

› GGAS covers NSW electricity sector

› For project-based increase in carbon stocks in an eligible forest, generate NSW Greenhouse Abatement Certificates (“NGACs”)

› Accreditation and project registration

› Approach to issuing abatement certificates

- Sequestration pools

- Permanent carbon storage plus rotational harvesting

› 100 year requirement

› Non-compliance produces emissions liability

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Generating NGACs under NSW GGAS

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NSW GGAS sequestration pool management

Forest Carbon: New Zealand

› 3 main regimes to encourage forestry

› National level: generation of units under 2 regimes:

- Permanent Forest Sink Initiative (PFSI)

- NZ Emissions Trading Scheme (NZ ETS)

› Local/Federal level

- Cash grants under Afforestation Grant Scheme (AGS)

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Forestry incentives in New Zealand

Forest Carbon: New Zealand

› Provides for generation of Assigned Amount Units

› For carbon sequestered in a permanent forest on previously unforested land (1989/90 rule)

› 99 year covenant with NZ Government

› Limited harvesting allowed

› Landowners required to return AAUs and pay penalty in the event of non-compliance

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National Incentives: Permanent Forest Sink Initiative

Forest Carbon: New Zealand

› NZ units issues for increases in carbon stock from afforestation and reforestation

› Delineation between pre-1990 and post-1989

- Pre-1990 forests must participate upon deforestation

- Post-1989 forests: voluntary participation

- One-off allocation for pre-1990 forests & limited exemptions

› Approach to issuing NZUs

› Units must be surrendered if carbon stocks decrease

› Measurement

- Look-up tables: forest age and type

- New measurement-based approach (proposed) based on field data

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National Incentives: NZ ETS

Forest Carbon: New Zealand

› Competitive cash grant scheme jointly funded by NZ Govt and regional councils

› Complements PFSI and NZ ETS

› Simpler option to obtain benefits from establishing a new Kyoto-compliant forest

› Grant agreement with Minister for Agriculture

› Term of 10 years

› Crown owns any units generated

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Afforestation Grants Scheme

Forest Carbon: A comparison

› Shortcomings of Australian approach

- Lack of coherence between current measures

- Issues around design of tax concession and monitoring

- NSW GGAS a useful model - pooling

› NZ approach

- More thorough/detailed

- Inclusive of both holders of small parcels of land and larger scale forestry operators

- Inclusion of deforestation

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Comparison of approaches in Australia and NZ