Buying land for carbon credits
Updated: Jun 21, 2022
What to consider when buying land to earn carbon credits under New Zealand’s Emissions Trading Scheme (ETS)
Recently we’ve noticed a rise in assessment requests from people considering buying land, who want to know whether a particular property will be a good investment for carbon forestry. While we’re unable to provide land assessments to all these prospective buyers, we wanted to share some introductory information for people in this situation.
In this post we'll cover:
Whether you’re at the beginning of your research process or have already identified a property, we hope it will be helpful.
If you already own land, we can analyse your current carbon eligibility remotely via our free Land Assessment. If you're a prospective buyer, why not send this link to the current landowner?
It takes about 3 minutes to request an assessment.
What are carbon credits?
Let’s start with the big picture. In Aotearoa, when people talk about carbon credits they’re generally talking about NZU (New Zealand Units), the currency unit of the New Zealand Emissions Trading Scheme (ETS).
To earn credits, you first have to register a qualifying area of forest under the ETS. Most people authorise a third party like CarbonCrop to register the land on their behalf.
Each year you can claim credits for the additional carbon that your forest has sequestered. You receive one NZU for every tonne of carbon. To put this into context, one hectare of ten-year-old forest might earn anything from 8-24 NZU per year, depending on the tree species. If sold at $65 per NZU, this would equate to around $520-$1560 per year.
It works the other way too: If you cut your trees or want to deregister the land you would need to surrender an equivalent number of carbon credits - i.e. giving back the credits you had previously earned. In this situation, you might have to buy credits if you had already sold them. (Note that the rules can differ for plantation forestry, depending on which method of carbon accounting you are subscribed to.)
Your credits sit in a special holding account, a bit like a bank account, until you decide to sell them. You can sell credits on the open market or through aggregators. Since you can only sell each carbon credit once, it’s important to think carefully about your timing and priorities.
What are the requirements for eligible forest land?
To qualify for carbon credits, your forest must meet a number of requirements. As a rule, there are two big themes.
1. It currently meets the definition of forest land (or will do when planted)
To be considered forest land today, your forest must meet several criteria, including:
Minimum area of one hectare
Average width of 30+ meters
Potential to reach 5 meters in height
Potential to reach 30% canopy cover
Eligible native or exotic tree species
2. It was not already forest land in 1989
In addition to being forest land today, it must be considered ‘Post-1989’ forest land to be eligible for carbon credits. This means it was established after December 31st 1989. Unfortunately, being clear of trees today - or even in 1990 - doesn't necessarily mean that the land was unforested in 1989, according to the ETS criteria.
For a deeper dive into these requirements, we recommend reading our separate posts:
Registration is a process, not a given
Another thing to bear in mind when buying land for carbon credits is that you must prove that your forest meets the ETS requirements. The onus is on the applicant to demonstrate that a particular plot of land qualifies for carbon credits.
Tip: When buying land, remember to ask the current landholder for any relevant documentation such as planting records, clearing records and historical photographs, as this may increase your chances of a successful registration.
At CarbonCrop we combine aerial imagery with remote sensing data and other forms of historical evidence to create a compelling story of vegetation and land use, to give our landholders the best chance of a successful ETS registration. While our initial Land Assessment highlights areas with likely eligibility, once you sign up as a CarbonCrop customer we will conduct substantial additional work to compile evidence and fine-tune the forest boundaries.
Due diligence - some watch-outs
We strongly recommend conducting due diligence on your chosen property. Your lawyer should notify you of these, but here are some watch-outs to bear in mind:
Carbon liability. We’ve come across cases of people who have purchased land without realising that it has an impending carbon liability due to previous clearing. Make sure you find out before you proceed.
ETS status. The Certificate of Title will show whether the land is already registered in the ETS. If areas are already registered, you’ll need to do some paperwork to transfer participation in the scheme.
Consents. Some land also requires resource consent for tree planting. This is something we’ve seen in ‘red zone’ areas around Gisbourne. Some sections of land are also protected for cultural, historical or ecological reasons so cannot be forested. This includes historic pā or burial sites, as well as protected wildlife habitats. Consult your local government and the National Environmental Standards for Plantation Forestry (NES-PF) for more info.
Tree planting schemes. Some grants for tree planting stipulate that the land may not be entered into the ETS for a defined period of time. If the previous landholders secured any funding, find out whether limitations apply. For example, the Afforestation Grant Scheme (AGS) prevents ETS registration for 10 years after tree planting, and the One Billion Trees Fund (1BT) prevents registration of pine trees for the first 6 years after planting. In some cases, new landholders choose to pay back the grant in order to register for carbon credits straight away.
Existing Forest, Native Regeneration or Tree Planting?
When buying land as a carbon investment, you have three pathways to consider: Buy existing forest, buy areas with native regeneration or buy unforested land and plant trees yourself.
Assuming that the land meets the eligibility requirements, here are some pros and cons of each pathway.
If there is existing forest:
You pay no upfront costs for planting or establishment.
You typically get higher initial payouts. Trees generally don’t sequester much carbon in their first few years of growth, so if your forest is already well-established you’ll likely earn bigger payouts from the beginning, however the number of credits may decline sooner.
If registered before the end of 2022 you can claim carbon credits for carbon sequestered from 2018 onwards. These upfront payouts can be worth tens of thousands of dollars per hectare, in some cases.
If the land is regenerating:
You pay no upfront costs for planting or establishment, provided the land is regenerating well and there are seed sources nearby.
You need to ensure that regeneration started after 1990 and that a sufficient density of tree species are present (in order to meet the forest land definition). This can be more difficult to prove if young trees are masked by gorse, blackberry or scrub.
As with all existing forest, if registered before the end of 2022 you can claim carbon credits for any carbon sequestered from 2018 onwards.
If planting trees:
You must budget for planting and establishment costs.
You get to choose the tree species and density of planting.
As credits may take a while to ramp up, you won’t earn many credits for the first few years. There’s no upfront payout for backdated credits.
Additional land management considerations
Stock exclusion may be required to ensure that the forest can grow to 5 metres in height and 30% canopy cover.
Weeds and pests
Find out whether your trees will require additional land management support such as weed control and pest control.
If you want to support regeneration rather than plant trees, proximity of a good seed source - i.e. nearby native forest - will be critical to ensure a thriving indigenous forest. It will also increase your chances of a successful ETS registration.
Intentions to harvest
In general the ETS incentivises landholders to keep trees in the ground, however there’s also an option to register trees for harvesting too. If this is part of your plan, look out for road access and proximity to mills and ports.
Choosing between tree species
We often get asked which tree species earn the most carbon credits and which trees we would recommend. If you're planting forest as a carbon investment, understanding the carbon sequestration rates of different species is an important dimension, yet there are many other factors to weigh up too.
To do this justice we’ve dedicated another post to the topic of tree species, which covers:
Site suitability, soil and climate
Implications for wildlife and biodiversity
Impact on rural communities
Carbon sequestration rates for different species
What could a 10 hectare plot earn?
Read the post: Which tree species earn the most carbon credits?
How many hectares to buy?
Budget is probably the major determinant for most people. However you may also be wondering what's the minimum area that can be registered for carbon credits. The good news is that you only need one hectare of eligible forest to claim credits under the ETS. At Carboncrop we work with landholders of all sizes, from lifestyle plots to hill stations with hundreds of hectares.
Did you know that not only do more hectares equate to more credits, but the number of hectares influences the way that credits are calculated?
If registering under 100 hectares of forest, the ETS instead uses region-specific tables for pine forest and a national table for each of the other species to estimate average sequestration rates. This means some fast growing forests might receive fewer carbon credits than merited, whilst slower growing forests might receive more. For these smaller blocks, carbon can be calculated remotely, so we can process your emissions returns without visiting your land in person.
If registering over 100 hectares of forest you must use the Field Measurement Approach (FMA) to more accurately calculate your carbon sequestration. This involves paying a specialist to directly monitor a series of sample plots across your land, taking into account the precise mix of species, density, speed of growth, canopy cover - and so forth. We take care of FMA if you choose to register through CarbonCrop.
Tip: If your forest area is just over 100ha, some landholders will be better off registering under 100ha. CarbonCrop can model the likely impact of FMA for your particular forest and help you decide how much forest to register.
Understanding the risks of carbon farming
Will carbon credits continue to increase in value?
In 2021 the market price for NZU increased from around $35 in January to over $68 in December.
While many commentators predict that carbon prices will continue to rise, there is no guarantee that this will happen.
Many CarbonCrop customers with existing farms or forestry blocks treat carbon credits as an additional income stream, a way to diversify their portfolio and reduce overall risk. However people who buy land exclusively for carbon income are putting their eggs into one basket. While this gamble may well pay off, you must be prepared for the possibility that carbon credits may neither hold nor increase their value.
Tree loss and adverse events
In a similar vein, you should prepare for the possibility of adverse events.
From 2023 new legislation will protect landholders from liability, so if your trees are lost in a forest fire, for example, you won’t be liable to repay the carbon credits. However you’ll stop earning credits until the forest has regrown to the same stage. This could take a decade or more, in the case of older forests, and if your forest didn’t regenerate naturally you might need to cover the cost of replanting.
Tip: Consider insuring your forest against loss of income, if you are concerned about recovery from adverse events.
Future ETS policy changes
New Zealand’s ETS started allocating carbon credits from 2008 and is one of the longest-running schemes in the world. With climate change so high on today’s agenda, many people feel confident about its longevity.
Yet some uncertainties persist, particularly around how policies will evolve over time.
Will policies favour different species in the future?
Will average carbon sequestration rates change?
What will happen in 50 years’ time? Will the regulator continue to recognise increased carbon sequestration within both native and exotic forests?
While we don't have a crystal ball, we’re committed to keeping our registered landholders informed of changes in policy and helping them stay compliant with future regulations.
Hopefully this introduction has given you a better grasp of the risks and rewards involved in buying land for carbon farming.
If you have feedback or more specific questions, please let us know in the comments below as we’ll aim to answer them in future posts.
Ask the current landholder to request a land assessment
If you’re serious about a particular site, why not ask the current landholder to request our free Carbon Land Assessment? Although we can’t conduct assessments for everyone researching potential properties, we love to help out where we can.
We can’t guarantee ETS registration, as only the regulator can make that call, however we will combine cutting-edge tech with helpful humans to give you our best estimate of your carbon credit potential.
And if you decide to buy the land, we’ll make it easy for you to receive as many carbon credits as possible! Happy days.