Emissions Trading Scheme – Is it for me?

29 January 2020

There has been a lot of comment in the media recently regarding forestry investment in New Zealand and its ongoing relevance for the country’s environmental obligations and economy.

The Emissions Trading Scheme (ETS) generally forms a large part of that discussion as it is the mechanism by which those with property interests in forestry can derive emissions units or “carbon credits”. The debate regarding forestry will no doubt continue this year given the imminent general election, the law changes proposed to the ETS and ongoing initiatives such as the One Billion Trees Programme.

As a result of this media focus, we are often asked by clients whether they should think about becoming a participant in the ETS, either regarding existing forestry or with new planting. The consensus seems to be it is favourable to be in the ETS if the compliance costs are outweighed by the benefit obtained through the receipt of emissions units. In addition to the forestry itself, the units become another asset for the farmer or other landowner. This may be particularly advantageous for land that is not otherwise suitable for other agricultural purposes. There is also the fact that changes are currently being made to the ETS to make it more user-friendly and to provide participants with greater confidence in the scheme.

The real risks with being in the scheme generally arise when transactions are undertaken with respect to forestry or emissions units themselves, such as harvesting or selling forestry land or selling emissions units. Without the right advice, these transactions can give rise to unexpected taxable income or liabilities to surrender emissions units where none are available. A good example is the story in the media last year where a Kaikoura farmer harvested ETS forest with no appreciation of the resulting cost.

When considering participation in the ETS, a sensible first port of call is a specialised forestry consultant as they have expertise in terms of relevant planting varieties, suitability of land, timing of registration, forestry rotations and expected financial returns. However, in relation to the transactional matters noted above, it is important that advice is also sought from a legal and tax perspective as the tax and other rules relating to emissions units are often not intuitive and can give rise to unexpected outcomes. This is one of those areas where a team of advisors is essential.

If you would like to know more about the ETS and relevant tax or transactional considerations, the Tax advisory team at Findex can tailor an approach based on your business needs.

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