Price for a New Zealand unit (NZU, is equivalent to 1 ton of CO2) reached a record $47. But according to Dennis Neilsen, the head of DANA NZ Limited, the price of NZU could soar to $140 within three years. This will inexorably lead to an increase in the price of forestlands. At this height, it will be much more profitable to grow forests than to make lumber out of it.
Lesprom Network: Why is the NZU price going up?
Dennis Neilsen: We had a situation in New Zealand when the Emissions Trading Scheme (ETS) carbon actually became a cap-and-trade scheme without a cap, which meant there was never a cap on emissions. Industries did not have to pay for those emissions. There was a period of some years where they were exempt. Government did not want to upset the industry, did not quite understand what it all meant, so the industry players were 100% exempt. An infinite number of NZUs were available for purchase from the government, at a fixed price of $25 per unit. However, in 2019-2020, the New Zealand government implemented a reform, after which fixed price option has been abolished, leaving only three ways for units to enter the market: government allocations, the generation of carbon credits through sequestration, and quarterly government auctions. Since the reforms came into effect, the carbon price has surged after languishing below $30 a unit for several years. This is a change and the demand for emissions is increasing.
At the same time, the government set a price cap to prevent prices from being too high. If the price goes up $50, the government will put the new NZU into the market so there's plenty of units and we keep the price down. So, we will expect carbon units to soon be $50, but are expected to increase to $70 – then perhaps to $140 in 3-4 years.
Lesprom Network: How would you describe the current situation in the forest carbon offset market?
Dennis Neilsen: Firstly, I will just say this is a new field in most countries, but a growing field with growing interest from investors. Investors may become involved in tree carbon in different ways:
Via an Emissions Trading Scheme (ETS) which has central government backing and legislation to support it
Via an ETS which has some support in some States within countries – for instance California in the United States, but not via a federal government legislation
Via voluntary credits that can be administered by consultants. These are often for forest grown in countries which have no government regulated schemes
Via a ‘passive’ investment – like paying an airline a premium on one’s ticket to offset carbon on that air travel. That is not an investment, but a ‘feel good’ public relations exercise).
However, there is only one country in the world, which has a government law and regulations related to carbon-offset estimates of carbon credits. That is New Zealand. The EU has the largest government regulated ETS trading scheme in the world, but it deliberately bans the use of trees to offset carbon: it is not allowed. Therefore, putting aside New Zealand, the only way to make money off carbon offsets is to invest in voluntary carbon markets around the world.
That has been quite active for many decades, but it does not have the protection of legislation. For instance, a large carbon offset market has emerged in California, but it has no protection of US Federal laws, therefore there is always some risk when you are dealing with voluntary carbon. There is no accountability if things go wrong. For instance, people want to fly in an aircraft and they feel guilty about flying. The airlines offer them a chance to pay an extra $500 to buy offsets, so their carbon use on this plane is offsets and they can feel not guilty. The airline will use a consultant to plant some trees in Uganda or anywhere else. The passenger feels good but what is really going on? Who is verifying if trees in Uganda have actually been planted? Who is watching to see if the trees have died? Likely to be nobody. There is little or no accountability.
Thus, when you ask what countries are most profitable for investing in carbon for forest, I cannot really answer. I think there is a new scheme, which may be legislated in the UK. Until recently, the UK was part of the EU and so part of the EU’s emission trading scheme. Now with Brexit they are on their own and my English partner told me that the price of land for planting trees in Scotland and Wales has suddenly increased from £6,000 per hectare to £12,000 per hectare in the last 12 months. He told me the price has gone up because of high logs' prices, but he also said it is because of carbon credits. I have not been able to talk to him in detail, but maybe the UK has introduced a new system which is legislatively controlled which will allow carbon sequestration and offsets by planting trees. This must be a very new scheme.
Lesprom Network: Some market participants say that trading carbon offsets in the future may be more profitable than selling lumber. Do you agree?
Dennis Neilsen: Not necessarily. I agree that there will become more market opportunities for carbon offsets of trees, including legislation. However, even in New Zealand, where the price of carbon is going up every day, it is not more profitable than selling cutting trees. It can add to the value under our New Zealand legislation because we can claim carbon and not have to pay it back, which is a unique situation. Even then, the combination of trees for harvesting and carbon offsets give a good return. New Zeeland Unit price is now $47. If they will be, say, $100, then your suggestion might be true.
But related to farming, just today I read of an NZ farmer who stated that as the price of carbon increases, farmers like himself would be at least three times better off planting their whole property in trees, sheep and beef farming. He says, given the price of carbon in NZ, which is currently just under $48 a unit on spot price, it could double in the next two to three years, and land values could follow. According to him, that means the carbon income off the hardest piece of hill country on the East Coast could potentially be worth $3,000 a hectare a year.
Lesprom Network: How strong is the competition among forestland owners in the carbon offset market?
Dennis Neilsen: Yes, there is a lot of competition and because of our new legislation from 2020, NZ tree growers can claim carbon credits and not pay them back after harvesting (which has been the case). The price of farmlands is going up – for instance in the last two years, farmland prices have gone from maybe NZ$6000 a hectare to $12,000, and that is being driven by carbon. Two days ago 55,000 NZU were being bid to purchase by different emission companies. There were only 5,000 NZU for sale. There is a lot of competition. People want to buy these NZUs and there will be an increasing amount of competition. This should be good for NZ forest owners, and for new investors who buy or lease land to plant trees.
That is why we are sitting here as far as forest owners and owners of NZU now, not offering to sell because we think that tomorrow the price would be higher. I bought some NZU at $43 on July the 1st, now it is at $47.
Lesprom Network: Are there any restrictions of foreign investors?
Dennis Neilsen: There are certainly many foreign owners coming in, buying up farmland, planting those trees to get NZU. It seems that there are no restrictions. However, there is an issue that you cannot actually take those NZU out of the country. For instance, some aluminum company in Russia has the right to buy some NZU, but it could not transfer them over to put them in Russian accounts and use them to offset as aluminum smelting in Siberia. However, I have just heard that there is a big Singapore banker, who owns trees in New Zealand and so has some NZUs who said recently that Singapore is about forming a company, which will somehow allow that transfer to occur. I do not know the details.
Lesprom Network: What are the current prices for carbon offsets in the US and Canada?
Dennis Neilsen: Recently in California they talked about US $18.60. Now some experts say that by 2025 the price for one CCA (the same as the NZU) will rise to $30, and could be $40 in 2030.
Lesprom Network: Some experts say range in pricing is an issue today, because prices are not transparent. Do you agree?
Dennis Neilsen: It is 100% transparent in New Zealand, but with voluntary markets it's less transparent, because investors are dealing with private consultants, and so on. For example (just hypothetically), in New Zealand our airline might charge $100 for an offset on a flight to Europe. But Singapore Airlines might charge $200 for the same distance flight. It is a grey area, and it is not so transparent.
Lesprom Network: Is growing trees for carbon offsets a long-term and sustainable business?
Dennis Neilsen: People believe that the climate is changing and that we are not reducing our emissions. If this continues, the temperature on Earth will rise and rise, first by 1 degree, then by 2 degrees, and so on. Then the world is going to have to stop us by doing different things. We will not be able to live in a world that will be too hot. Carbon trading is not an infinite thing, it cannot go on forever, but in my opinion it will go on for decades. There will be an increase in demand for carbon trading for decades; it's not a short-term thing. Different tree species have different growth patterns, like in radiata pine in New Zealand and other countries. The maximum annual growth of radiata pine is around 25 years of age, but it keeps growing. So even at 50 years of age, it's still growing – or even at 100 years (where some trees have been measured as growing at 18 cubic meters per hectare per year, which is 7-10 times faster than most Russian trees grow by.). We just visited a stand of trees nearby here this week, where the trees are 100 years old. There is one radiata pine tree in botanical gardens in Wellington. It is 153 years old, -- so we can get decades of carbon offset growth.
In addition, today trees such as Douglas fir have a maximum growth period of 40 years. In some countries, the fast-growing eucalyptus is grown. However, I would be very surprised if in Russia someday carbon offsets would become more profitable than selling cut timber, because trees grow so slowly in Russia. But that will depend on the price of carbon.
Lesprom Network: Have you ever personally lost money growing trees for your carbon offsets?
Dennis Neilsen: No, but you bring up a very good point now. It does not matter, if you believe in climate change, there are wildfires. In 2019, 3 million hectares of forest burned down in Siberia, and I saw a TV clip just today showing more than 180 forests now burning in Siberia. Then we saw super fire devastation in Australia in late 2019. Last year we saw terrible fires in the United States Pacific Northwest. Just last month, we saw 49 degrees Celsius in one small town in Canada. The next day that town caught fire and was destroyed -- it just disappeared. In addition, there were huge temperatures in Oregon, Phoenix, Arizona. Indeed just this week a forest fire is burning almost uncontrolled in Oregon, which covers more than 300,000 acres
That is why investors should be increasingly careful where they choose to own forest for any reason, but especially for carbon credits – if there is a reasonable chance they might burn down. Personally, I would not now buy forests in Oregon or Washington, the risks are too high for me. Maybe some parts of Russia, e.g. North West Russia is still “safe”, and in Finland, Sweden, or the UK. It's just a new experience for people.
Lesprom Network: Many also remember the closure of the Chicago Climate Exchange and the 2010 price crash. Could something similar happen with the carbon offset market and prices?
Dennis Neilsen: At the time, few understood what climate change, carbon sequestration, and what it was all about. Very few people cared about climate change in 2010. Now, governments, forestland owners, and large industrial companies have a much better understanding, and there is much more of a consensus that Climate Change due to human industrial activity (greenhouse gas emissions) is probably for real.
As for the price crash, the people who ran the stock exchange back then did not enjoy a high reputation. The chances of the repeat of Chicago Climate Exchange closed failure is much lower now than it was in 2010 -- so long as high people of high reputation are running these exchanges.
So, that's why I think investors should seek government regulations to support their tree carbon investments. When you give everything to voluntary trade and the government does not look over your shoulder, there can be a whole lot of shady deals going on very quickly – (but I would emphasize not always). Therefore, you need a very high reputation of people running these, with regulations, rules, and penalties for doing bad things.
Lesprom Network: How does the government in New Zealand help forestland owners?
Dennis Neilsen: Decades ago, the government provided subsidy plant trees, but then it stopped. Really, the government has not helped forest owners planting or managing trees at all. However, what the government has done is establishing ETS and all the rules and regulations around it. It has allowed the trading of carbon credits for carbon sequestration in trees. We have to say that is really helping the industry. In addition, some new laws were passed last year to enable what we call a carbon averaging system. The idea is that we can claim the carbon but we do not have to pay it back, when we have trees to keep. It is a very positive new regulation and it suddenly created a big demand for people to plant trees on farmland.
At the same time, the farmers Associations hate it, because it is taking away their farmer members. Both New Zealand and international companies are buying these farms, planting trees and then they either organize timber production, or offset their carbon permanently.
Lesprom Network: How difficult is it for a forestland owner to conclude a contract with a large company that wants to offset its emissions?
Dennis Neilsen: In New Zealand that is not a problem. For instance, I have a friend who is a farmer and he has only 300 hectares of trees. He sold his carbon credits to British Petroleum (BP), a huge oil company. Notably, he did not just sell them; he sold them in advance for 20 years, although he only planted young seedlings. He sold 20 years’ worth of carbon in advance to BP.
He could go through a private broker and sell trees for Microsoft here in New Zealand, it would not be hard, no problem. Although the big companies could buy us, they do not want it. They want to put their money into their business. They are not falling in love with trees themselves, they just have to find some mechanism to offset their emission to avoid paying emissions penalties (taxes).
Lesprom Network: Many large companies used to be wary of carbon offsetting before, but in recent years have decided to pay forest owners. What has suddenly changed in their opinion?
Dennis Neilsen: Nothing much happened before 2015, but then things started to change. The ‘Paris Agreement’ was signed in 2015, and since then more and more governments are developing their own greenhouse gas emission reduction policies. The EU is in the news over this and now even Russia. There is going to be a big international meeting — the 26th UN Climate Change Conference of theParties (COP26) in Glasgowin November, and all this will be at the top of the global news media for a few weeks. There is a need for governments to start legislating for carbon emissions and for governments to take it all more seriously. They will – soon.
The prices in some areas like New Zealand of carbon units are increasing which is more attractive. There were companies, even forest companies, not interested in carbon. Now these companies have changed their opinion, because everyone has seen on the TV fires in Siberia, US, Canada and Australia. They see the desert and world record temperatures broken almost every week this summer. Previously, only academics and some governments believed in climate change, at least they pretended to believe. Now business has begun to believe in this process as well, and is trying to -- or being forced to reduce greenhouse gas emissions.
Lesprom Network: Can you list the main problems that the market may face in the near future?
Dennis Neilsen: There is a risk in the voluntary carbon market, I mean all sorts of risks. If you want some resolution, some solutions you really want to go from a voluntary carbon situation to a government regulated ETS. It is the biggest hurdle, I think. There are regulations and government officials, which are very bureaucratic and sometimes inefficient, but they work for the government, and so they have the power of the government.
The second problem is forest fires, and I do not know how to solve it. Owning a forest becomes more risky. Even in New Zealand, fire insurance is going up, because of insurance losses in other countries in North and South America and Australia. On the one hand, you can improve the security of forest owners; on the other hand, some risks will increase.
Lesprom Network: What advice would you give to people looking to invest in forestland and make money off carbon offsetting?
Dennis Neilsen: My advice is to stick with government legislation, if you want to get involved in carbon credits. Stick with government legislated ETS. That would be my preference. Other than New Zealand and California and a few other US States, these are very few and far between. There needs to be more. Perhaps the Russian government could lead the way in the Northern Hemisphere.