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Long-term exotic forests will now to be allowed in the ETS and carbon price is on the rise again

Rural News / opinion
Long-term exotic forests will now to be allowed in the ETS and carbon price is on the rise again
Forest

There were two big announcements by Government entities in the last week of July affecting forestry rules and carbon pricing. To a large extent, the announcements escaped media scrutiny.  

That lack of scrutiny was because explanations require an understanding of complex issues on which the general media is not knowledgeable. But let me be clear:  the announcements were of huge importance. They encompass mega movements of both climate change and forestry policies with long-term implications.

The first announcement was the release by the Climate Change Commission (CCC) of a report that exceeded 80 pages, providing advice to Government on the auctioning of carbon credits for the period 2023 through to 2027.  

The CCC is now advising considerably lower auction volumes, much higher minimum prices at auction, and much higher maximum prices before the cost containment reserve comes into play. These three proposals all feed into an aim of increasing the price of carbon.  

The second announcement came one day later. It was a letter signed by Ministers James Shaw and Stuart Nash that they were stepping back from their proposal of earlier this year that long term and so-called permanent exotic forests should be excluded from the Emission Trading Scheme (ETS). The letter was sent to those of us who had submitted written responses to the proposals.

With the Ministers now stepping back, these forests will once again become eligible to enter the ETS, as had previously been flagged in legislation due to be operationalised on 1 January 2023.

This announcement by the Ministers represents a big about-face. It was made at least in part as a consequence of very forceful statements from within the Māori community, led by advocacy from forestry expert Te Kapunga Dewes.

I have been saying privately for some months that in a fight between Minister Nash and Te Kapunga Dewes there could only be one winner, and with an election only just over a year away, it would not be Minister Nash. Someone within the Government would have realised that all North Island Māori seats would become unwinnable if that fight continued. And so, the Ministers have had to step back.

However, there were other factors at play. Both I and others who provided submissions to the Ministers on their discussion paper, pointed out that the proposals were a knee-jerk reaction that was going to create more problems than it would solve.  Also, MPI’s own underlying advice was that the implications of the proposals were profound but difficult to quantify.  Essentially, this was a politely worded message, using coded civil-service language, saying ‘beware’.

First, I will explain some implications of the Climate Change Commission (CCC) advice, before returning to the change of heart by the Ministers.

The CCC has expressed three concerns about both the carbon market and the overall Emission Trading Scheme (ETS) being currently out of kilter.

The first concern is that current prices are sufficient to drive large-scale afforestation, i.e., conversion of farmland to forests, at a much greater rate than is considered desirable. However, the prices are insufficient to encourage a reduction in gross emissions, i.e., less use of fossil fuels within the broader community.

Second, the CCC is concerned that although the Government has said it plans to buy some carbon units overseas, it has not explained how it plans to do this.  There is no obvious way as to how the Government will find these credits to purchase.

Third, the CCC is concerned that too many unit holders are holding their units as investments rather than cashing them in.

None of these concerns is surprising. I have raised all of them in forestry articles I have been writing at interest.co.nz over the last year. I will also be talking about them at the Carbon Forestry Conference in Rotorua in the coming week.

Given the current situation, the CCC thinks that the price of carbon needs to rise more quickly, thereby encouraging fossil-fuel users to change their behaviour more quickly and also supposedly encouraging unit holders to cash in their credits earned from forestry.  However, the effect of these carbon price rises on afforestation rates does not seem to have been addressed directly in the report.

The measures that the CCC is suggesting will, if Government accepts the Commission’s advice, certainly raise the price of carbon rather quickly.  Not accepting the advice would have big political implications. But whether or not the CCC proposal will encourage unitholders to cash in their existing units, is another matter. In isolation from any other measures, it certainly has potential to drive even more afforestation.

Taking 2023 as an example, the proposed plan is to limit the four 2023 auctions to a combined total of 16.3 million tonnes compared to the previous plan to auction 18.6 million tonnes. Also, the minimum auction reserve price is proposed to be $60 instead of $32.10. Further, the initial trigger price at which the 2023 cost containment reserve comes into play is recommended to be $171 instead of $78.40, with a further trigger being pulled if the price rises to $214.

To put that in perspective, the 2022 trigger price is $70 and the market price prior to this CCC announcement was $72. The price then jumped to just over $82 within hours of the announcement, but then came back over the next 24 hours to around $80.

Explaining this in different terms, the Government has tried in 2022 to hold the price to $70 but has failed to do so, having pulled the trigger and already expended all of its 2022 cost containment ammunition in the first two auctions, with two more auctions still to go.  The law does not allow any more cost containment carbon to be added to the auctions this year. But the CCC is now saying that no new ammo should be loaded into the 2023 cost containment gun unless the carbon price rises above $171. And then, if that first firing fails to hold the price at that level, then the Government can load more ammo and pull the trigger again if the price reaches $214.

These prices are just for 2023, with the limits rising further thereafter.  The CCC is explicit that these are not target prices, but they are certainly indicative of where the price might head.

All of this advice was developed on the assumption that Ministers Shaw and Nash would proceed with their proposal to exclude long-term exotic forests from the ETS. With that situation now changing, the cats really are loose among the pigeons.

My own opinion is that Ministers Shaw and Nash have done the right thing to step back from their exclusion proposal. Their exclusion policy was a big mistake and they got out of that just in time.  However, there are massive problems ahead as to how to get the ETS on track, both in terms of getting consumers to change their behaviours and also controlling the march of the pine trees across New Zealand.

The fundamental forestry problem is that the economics of carbon farming has made forestry look more attractive than sheep and beef on almost all classes of current sheep and beef land. This eventual outcome should have been apparent to the officials who designed the ETS back in 2008, but apparently it wasn’t. I can only assume the ETS was designed by desk economists who did not understand the interacting nodes of farming, forestry and consumer behaviour.

The question now is what will the Government do next? My assessment is that the only reason the market price of carbon is currently (2 August) only just over $80 is that the financial folk who determine the market price through their buy and sell decisions reckon the Government will have no option but to have another go at changing the rules. Those changes may relate both to the specifics of forestry and also a fundamental rejig of the ETS itself.

I note that Te Kapunga Dewes in his role as Chair of the Māori Forestry Association has communicated within his wide network that he thinks the Government is still not well informed on the relevant forestry science. On that point, based on what I have heard Government Ministers claim to be the forestry science, I agree with him rather strongly. Dewes also thinks the Government may now use regulations and perhaps other legislation to still thwart the wishes of Māori on these forestry matters. 

There is now a lot of work to be done to sort out forestry policy as it affects all landholder groups, not just Māori, and also to give reconsideration to wider aspects of the ETS.  Hold on tight as the ground keeps shifting. It is going to be some ride.


*Keith Woodford was Professor of Farm Management and Agribusiness at Lincoln University for 15 years through to 2015. He is now Principal Consultant at AgriFood Systems Ltd. You can contact him directly here.

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47 Comments

That lack of scrutiny was because explanations require an understanding of complex issues on which the general media is not knowledgeable.

I've looked into forestry/carbon credits a couple of times in recent years for investment, it's definitely fairly complex, with a lot of contingencies, exceptions and rules. I think there's dollars to be had there, but maybe more for experts and go betweens.

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This is a real loss for Biodiversity. Permanent natives would have been so much better for NZ. What happened to Kaitiakitanga? 

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Clearly Dewes & the Maori Forestry Owners group considered hard money to be more important than concepts of Kaitiakitanga . Pine trees are cheaper, grow around 3-4x faster & more easily sown and grown on marginal land.

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The hard reality is that converting pasture to native forests is simply not practical on most of this land.

The exceptions are where there are seed sources and natural regeneration can occur.

The option on most of the marginal country is not natives versus pines.

The option is continue with marginal sheep and beef farming or go carbon farming with pines. Note this is for the marginal country, not the higher quality land.

Subsequent conversion of pines to natives is feasible but it will in most cases still be very expensive - only the Government (and that means taxpayers) could do this.

KeithW

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Disagree, KW.

Natives can be planted anywhere, indeed gorse can be seed-bombed.

And pricking-out native seed, from elsewhere, is time-consuming but easy-as.

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So the current thinking and rules will speed up conversion of farmland to carbon sink forestry?

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This is why we need appropriate regulations to get the right trees in the right place.  The place for long term exotics is on steep marginal land, with most of this is int he back country.
KeithW 

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With pine forest being much quicker to absorb carbon it was a no-brainer to keep this in the system. Good on the Maori. But it would have been PC to kick it out. The Greenies must be pulling their hair out.

Its like in Ak where backyard trees are being cut down for house building. Its PC to build more houses in leafy suburbs. Forget the environment.

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What this article and so far all the others have failed to highlight is the massive redistribution of wealth occurring as land values escalate in lock step with the carbon price - carbon income is extracted from our domestic economy via businesses and ultimately consumers - and is being concentrated in landowners and foresters with eligible forests at an unprecedented rate with no end in sight.

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Whereas, those with trees on their land are currently providing a public service by storing other peoples carbon pollution for free. They may get a minimal cheque after thirty years, if the trees don't blow over, or burn and the value of the tree is more than the cost of cutting it down and transporting it, assuming demand of course. It's about time trees have an actual monetary benefit to those who give up their property to plant them.

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Yes, the advent of carbon trading has led to a considerable increase in the land values of sheep and beef farms. The beneficiaries of that have been the sheep and beef landowners who have then chosen to sell their farms.
KeithW

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Keith  - one aspect of the repayment of carbon credits on clear felling - much/most of the timber is used for housing, furniture etc so why repay all carbon credits when the carbon remains locked up for a period. Part repayment to represent slash etc seems reasonable other wise selling credits at todays price and buying back at a potentially higher price is not sensible?

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The current thinking is that all harvested timber is made into tissue paper or shuttering for concrete in China.

So it is all burnt/decomposed within a year or two.

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Carefull!  Julian Assange is languishing in Belmarsh for pointing that out.  The purpose of an oligarchy is to transfer wealth from the many to the few.  No matter the "crisis" always the same result.

 

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I believe the economic model behind forestry is still based on sinking the carbon and selling the wood in a later stadium. But by saying that the fact is that about 60% of the New Zealand grown timber is shipped to China to be processed mainly as construction wood. (and emitting another 70-90 tons of CO2 everyday by every ship which sails to China). My hypothetical question is then: What would change if you would award the carbon credits to domestic processors who build 100% solid wooden buildings instead of the forest owners? Regarding our export logs, the Chinese should be paying for the CO2 sequestered in those logs.

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"Chinese should be paying for the CO2 sequestered in those logs." In theory they'll have to. If the value of stored carbon in a standing tree is higher than gained by cutting it down and shipping it, then it will probably remain upright?

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Pinus radiata is going to be dirt cheap in 30-40 years time. That should help bring back building costs.

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Wildling pines for the win!!!!!

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10 years work for some https://www.mountcookstation.com/station-life

Unfortunately, over the past 50 years, wilding trees have spread over much of the station. These consist of Pine, Larch and Douglas Fir. The tree spread has been huge and is starting to move across the northwestern Mackenzie Basin.

We are undertaking a huge operation over the next 10 years to try and remove these wildings and to restore the land back into its original state, however as these trees were signed up under the Carbon Credit scheme, it is proving to be an expensive and major task.

At the present time, we are grazing breeding Angus cattle on the station, but once the land has been cleared, we hope to reintroduce merino sheep.

Country Calendar episode https://www.tvnz.co.nz/shows/country-calendar/episodes/s2022-e19

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70 years ago much of the marginal SI High Country was being aero "topdressed" with pine seedlings in a Govt program to control it's high erosion.

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The trees being harvesting in the programme didn't look like wildlings; that was probably a plantation. Most of the station's revenues came from forestry. Destumping and ETS liabilities were costing a small fortune and they were replacing with clover (yet another monoculture) in a pristine lake catchment. Plus the cows in the waterways! What they were doing should have been far more controversial than the regenerative agriculture that the 42 Below founders were doing in the previous episode.

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Yes, Mt Cook Station is an example where the runholder purposely plated pines in an effort to improve the barren windswept land. But oh how they traveled.
KeithW

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My plan has been to plant permanent mixed species exotics and manage them with selective felling, followed by replanting. Planting natives in wet gullies and perhaps try a few species, such as totara, in suitable sites. My South Canterbury property isn't really ideal for natives. Too dry a lot of the time, although some of the amenity plantings are performing OK. The Idea exotics could no longer be in the permanent forest category was really grinding me, however foreign corporates buying farms, planting monocultures and then shutting the gate, needs to be stopped though!

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How are you going getting that type of planting registered? Many suggest its difficult.  

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Maybe, but I planted an area in Lawson cypress, Ovens Cypress and Macrocarpa and another in 3 varieties of Eucalyptus and when I was registering it, the person on the phone didn't seem overly concerned that the species were mixed. 

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Mixed species exotics is better than a monoculture, but I find it funny when people say land isn’t suitable for natives. A few hundred years ago the whole place below the snow line would have been covered in them.

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A lot of the inland dry areas like Canterbury and Hawkes Bay didn’t have large native tree forests pre European times. William Colenso described inland Central Hawkes Bay as a sea of crown fern and commented on the difficulty they had moving through it.

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They were mostly forest pre-Maori. There were some naturally grassy areas but most of the plains had been cleared of forest by burning in around 1300AD before Europeans arrived. 

https://envirohistorynz.com/2010/05/11/what-is-natural-the-tussocklands…

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My property was like most of the South Canterbury downs, Tussock, Cabbage trees, coprosma, Matagouri, Mahoe, etc. Not a big variety of species and not a particularly carbon rich store. Don't get me wrong. I love native plants. I collect seed from plants on the property, grow them and spread them around. I ecosource those not present. Don't forget forest creates its own climate. I imagine its warmer and drier now and without forest cover, seedlings struggle with frost and competing introduced species.

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Sounds like you are doing good, well planned work, well done. My understanding is that whatever species makes up 51%, sets the category.

I am interested in how some natives that are not traditional wood species,will perform for carbon. Akeake and kapuka are 2 I want to experiment with  both grow fast,and are tough, akeake especially.  I will be interested to see how they respond to pruning.

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I posed a question to an investment manager I know asking about the viability of carbon farming and whether it is a good bet currently. He cited concerns around lack of liquidity, very little change in the pruned log price for the past 5 years and how the one investment opportunity on NZSE, the Carbon Fund has had significant volatility in the past year. So not something they would touch.

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I like native planting as much as the next guy. But I don’t get why people want to discriminate between native or exotic when it comes to carbon. If you get paid for the carbon it should come down to carbon sequestration not what you like to look at. The air doesn’t care what sort of tree is using the co2. 

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You are right. From a co2 perspective pines are better in the short term. But the world also has a biodiversity crisis. We are destroying the complex web of life and think we can save ourselves by addressing one issue at a time. We need to restore the whole system. 

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There is also the risk from going down a mono-culture path and that being exposed to any invasive pest that could decimate it.

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Yikes. What I'm reading is that the Ministers' announcement is going to be similar in effect to the price of land in Auckland when intensification became easier - any sections capable of holding multiple townhouses became work $2m overnight.

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This is the beginnings of another bubble, just like bitcoin and the housing market.

Whenever there's a problem to be solved, our immediate reaction is to financialise it and place our faith in the invisible hand of the market to sort things out. Unfortunately the market isn't as interested in solving problems as it is in separating fools from their money.

Carbon credits are tied to the land; once the trees come down you have to pay them back. The way to make money here is by farming credits, selling them at a high price, then waiting for the inevitable collapse at which point you can either sell the land with a much lower "carbon debt" attached, or cut the trees down and pay the credits back at a much lower price than what you sold them for.

This obviously means a lot of land sitting round with unmaintained - and largely worthless - exotic pine once the carbon credit bubble finally bursts; which it will, either because the scheme itself collapses under its own weight, because people lose faith and simply start ignoring it, or because for one reason or another people stop polluting as much. We then have a different type of crisis on our hands, with thousands of hectares of farmland turned to waste (ever see a newly felled forestry block?), and still have to deal with all the issues it caused in the mean time (foreign ownership of land, increased fire risk, proliferation of pine beetles affecting our forestry industry, wilding pines, etc).

The entire concept is a gigantic green washed ponzi scheme, and a terrible idea. This latest move by the government only serves to turbocharge it, at the expense of everyone who doesn't happen to get in and out again time.

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Good piece Keith (again!)

At some point, more people will realise that market mechanisms (e.g. carbon prices, trading schemes) and reactive policy tweaks are not going to miraculously deliver a smooth and fair transition to a low net emission economy. 

 

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It should be a concern that land that produces food is being turned into exotic forests.

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It would only be a concern

If you were overpopulated....

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What a convoluted twisted scheme this ETS and carbon farming has become. First of all the money men make mince meat of what James Shaw and the ignorants in Labour party went along with when the ETS was initially concocted. Now an about face when the Maori get involved where hard cash over rides other claptrap that is espoused about looking after the land, conservation blah blah blah.

At best the sooner its scrapped the better or at least heavily watered down. Plenty of opportunities for consultants to make a killing advising farmers.

 

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Well , no ones suggesting we change our lifestyles significantly to emit less Carbon , so pine trees it is. 

We , as a whole are not getting it . Can't really blame the politicans for that, especially with a election looming. 

I think the way forward is to plant fast exotics for now, and view them as a potential nurse crop for natives. Plus a limited biomass source (prunings , windfall etc ) and a limited timber supply (5 -10% allowed to be milled at maturity , with replacements planted).

the government can use the extra money from a higher carbon price, to fund pest control ,pruning,  and planting of natives in the exotic forest . Conveants or incentives could be required to allow this to happen on a large scale . Iwi would be keen , for ongoing jobs. Research into native mass production techniques , and growth maximisation could also be funded .

I think the 100ha minimum size for measured growth payments should be reduced , or even eliminated , providing the small landholder is prepared to provide the data and auditing to allow measurement of a smaller area . This would incentivise small landholders or farmers to grow smaller blocks , but maximise their potential.

For example a farmer might have an area of say 10% of his farm , in which he uses excess effluent and possibly irrigation to grow the trees faster , with  measuring growth allowing more carbon credits to be claimed on a smaller land area. .  

 

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The conflict most are overlooking but touched on in this article is the rush to convert farmland into trees because there is more money in carbon than sheep and beef at the current price but that the same carbon price is still too low to affect behaviour by emitters and consumers.

Is a possible solution to no longer allow 100% mitigation by emitters by simply buying matching carbon credits. Maybe each unit purchased would need to be matched by an equal reduction in output, this alone would reduce demand by half while still producing the desired outcome.  

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Good summary Keith as we have discussed before.

The Genie is out of the bottle now – CCC says we need deeper cuts to emissions and constrain the amount of forest. Well whos going to be constrained ?
Maori? – as you described electorate wise thats hard and they have a fair point.
Foresters? – well overseas ones are being taken out so thats a start I suppose but everyday Kiwis when others are allowed? – equity and fairness issues.
Farmers? – late to the party but cranking up – do we stop them adding to on farm planting and sequestration ? – HWEN is telling them to get everything they can into the ETS plus its a good earner – I was on a farming call last week and a few farmers suggested exotics should be banned – well you should have seen the other farmers response who are in the ETS – they know where their bread is now buttered.

Also we have the emergence of the voluntary carbon market – a mess in NZ at the moment but if sorted out overseas demand makes the NZ ETS look like a kindy kids party. Who needs the ETS then?

I can see no matter what happens this train is rolling and its almost impossible to control as the demand for offsets and cuts grows. Which group above wants to be constrained? which political party can afford to annoy some or all of these groups?

Alongside this we have biomass demand growing at an unprecedented rate and likely to get even bigger.

I also know of 2 massive overseas companies wanting to set up mega wood processing plants as the effect of climate change on other forest supply and the Russia/Ukraine war seriously impact international wood flows for the foreseeable future.

Add all that together and it is going to be an interesting ride.

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To help you with your thinking I copied the alinea from the Executive Summary of the latest Forest Industry Transformation Plan (Indufor version):

"As a location for investment New Zealand has the right fundamental characteristics including a
very large readily available, sustainably managed plantation-based fibre resource. But this
attractiveness lacks a comprehensive set of policies and policy instruments that, in combination
with the fundamental characteristics, would allow the country to effectively compete
internationally for investors and investment.

Don't expect anything to happen soon I reckon apart from if you are prepared to invest in solid wood fuel (wood pellets and wood chips) because MBIE is already racing ahead with awarding funds from the GIDI4 fund.

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My comment on investors wanting to come here to process dosnt show the reality when they get here. There is simply not enough wood fibre on scale to run a big plant. In fact in the the next 10 to 15 years the wood harvest will shrink because we stopped planting in the the 2000s and cleared around 300,000 ha of forest (deforestation on a massive scale relative to our size - no one in NZ should complain about amazon rainforest clearance as we hold the gold medal for forest destruction since colonisation).

If biomass demand ramps to the numbers being talked about logs just wont be exported to China in such great numbers. If lumber/LVL etc processors want scale there will need to be a lot more tree planting. 

If we want cleaner water, less soil erosion, more biodiversity etc we will need to plant/regenerate a lot more trees of all types.

What do we want?

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Everything for nothing, and blame the govt when we don't get it.

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Keith, would you have figures on the returns from carbon credits on a block of land ?. Our understanding is forestry companies are languidly picking up sheep and beef properties for just a touch more than other industries are prepared to pay. Little competition even between forestry companies for blocks.

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