29 July 2021

All sectors of New Zealand's economy, apart from agriculture, pay for their emissions through the Emissions Trading Scheme (ETS).

As New Zealand’s answer to climate change policy, the ETS was introduced to assist New Zealand to meet its international obligations under the Paris Agreement and to help meet its 2050 target and emissions budget by placing a price on the emissions of greenhouse gases.

However, the forestry sector is unique as it is currently the only sector that gets credit for the removal of emissions from the atmosphere. This is due to a process called carbon sequestration where trees store carbon and reduce greenhouse gases in the atmosphere. As trees grow and absorb carbon dioxide, companies can earn New Zealand Units (NZUs) or carbon credits.

How NZUs apply to forestry

Under the ETS, there is a distinction between ‘pre-1990 forest land’ and ‘post-1989 forest land’.

If you have ‘pre-1990 forest land’, you are mandatorily in the scheme and would have been granted units historically. These are forfeited upon harvest and no further NZUs are earnt on this forest land as it grows.

If you have ‘post-1989 forest land’, you will need to join the ETS to be eligible for units. These will be earnt as trees grow and will need to be paid back if your carbon stocks decrease, you deforest, or you remove land from the ETS.

When you register ‘post-1989 forest land’ in the ETS, you earn units for additional carbon storage from the date of registration. The number of units a forest earns depends on several factors:

• The age when the forest was first registered.

• The species of the forest.

• The forest management regime.

• The carbon accounting method.

• The size of the forest.

Accounting for NZUs

The methods used to account for carbon are either the Stock Change Accounting or Averaging Accounting methods.

With Stock Change Accounting, you earn units as your forest grows and stores carbon and you pay back units if your carbon stock decreases (such as when the forest is harvested).

Averaging Accounting focuses on long-term carbon storage over several rotations of growth and harvest. Under averaging, you usually don’t have to repay units after you harvest, so long as you replant your forest.

This means that, while you earn fewer units under Averaging Accounting compared to Stock Change Accounting, you will earn more low risk units that you are less likely to need to repay.

The appropriate accounting method you should use will be determined by when you register with the ETS.

• If you registered your forest as ‘post-1989 forest land’ before 2019, you must continue to use Stock Change Accounting.

• If you register between 2019 and 2022, you can use Stock Change Accounting until 2023 and then decide whether to move to Averaging Accounting or stay on Stock Change Accounting.

• If you register your forest as ‘post-1989 forest land’ in the ETS after 1 January 2023, you will have to use Averaging Accounting.

There are income tax considerations for NZUs, particularly when you buy or sell them, and these will depend on the circumstances of the purchase or sale. As a complex and emerging area, we recommend you seek advice from a specialist in the ETS field and income tax area. For assistance or more information on this topic, get in touch with the Findex Accounting and Business Advisory team.