Know Your Numbers
Updated: Nov 18
An Introduction to the Different Carbon Accounting Methods in the ETS
While accounting isn’t a hot topic for most regular people, it’s a big deal for landholders who want the option of harvesting their forest while earning carbon credits.
Update: From 2023 onwards, new forests that are entered into the ETS must register under either Averaging or Permanent accounting. Unfortunately, because of MPI processing times, applications submitted in late 2022 will not be eligible for Stock Change accounting as they are unlikely to be accepted before 2023.
Spoiler alert: If you’re interested in restoring native forest permanently on your land, you don’t need to worry about Stock Change going away. It won’t make any difference to your carbon credits.
In this post we’ll introduce the different carbon accounting models used in the ETS and go through their pros and cons.
Introduction to carbon accounting models
When you register a forest under the ETS, your chosen carbon accounting model informs how your carbon credits (NZU’s) are calculated.
Let’s start with basic principles. As trees grow they remove carbon from the atmosphere and this carbon gets stored in the woody biomass of the forest. Once registered in the ETS, changes in the carbon stock of your forest are monitored and credits are awarded accordingly. The carbon accounting model determines how many carbon credits you receive or need to surrender, which can make a substantial difference to your carbon income.
There are three accounting models used in the ETS:
Stock Change, the original method of carbon accounting in the ETS, will no longer be available to forests registered from 2023 onwards. However, forests already registered under Stock Change will be allowed to remain under that system after 2023, or those registered in 2019 or later can switch to another accounting system.
Now let’s review the three accounting models and their pros and cons.
What is Stock Change Accounting?
Under Stock Change, your credits directly reflect changes in the carbon stock of your forest.
As long as you don’t cut the trees down, you continue to receive carbon credits until your forest reaches a steady state of growth. If the carbon remains stored in the forest permanently, you keep the credits. Simple.
But what happens if you want to harvest? If you cut your trees down, the carbon stock of your forest will drop instantly, so you will be required to surrender an equivalent number of credits – up to the amount you earned since registering. If you had already sold those carbon credits you would need to get hold of some more, by using credits from another area of your land or buying replacement credits on the market. Once you plant more trees, the cycle starts again and you continue to earn credits as the carbon stock of your forest increases.
About the carbon plateau
To complicate matters, harvesting leaves behind residual carbon in the form of woody biomass (i.e. roots and tree stumps), so your carbon stock doesn’t go down to zero immediately after clearance. It takes around ten years for this biomass to decay so the carbon stock would continue to decrease during this period. However most people choose to replant soon after harvesting, so the growth of the new trees offsets these old decaying roots. This causes your carbon stock to plateau for about ten years after clearance, before going up sharply. For forests registered when they are very young, there is a certain amount of ‘safe-carbon’ that will not have to be surrendered after harvesting, however this only occurs in very select circumstances.
Here’s a simplified chart showing how credits are awarded for a typical production forest:
This distinctive ‘saw-tooth’ style chart is why Stock Change is sometimes referred to as Saw-Tooth Accounting.
Pros of Stock Change:
Harvesting is permitted.
Second and third rotation forests are eligible for carbon credits, provided they meet the other ETS criteria. Some owners choose to harvest their existing forest, then replant with a view to leaving the next rotation in the ground to earn carbon credits.
Flexibility. If you don’t know whether to harvest or not, you don’t have to decide immediately. If your forest is already registered, you can sit back and weigh up your options by comparing the price of carbon credits and the price of logs. Stock Change keeps your options open.
Cons of Stock Change:
If you choose to harvest the trees, you must be prepared to surrender the carbon credits you have already earned.
Stock change can be hard to get your head around. It might seem like unnecessary admin.
Some say carbon credits shouldn’t incentivise exotic forestry plantations at all and should focus exclusively on incentivising permanent native forest.
What is Averaging Accounting?
Under Averaging, forests earn credits as their carbon stock increases, but only up to a point.
The New Zealand Government introduced this model to make it simpler for people to earn carbon credits from production forestry. Under Averaging, the landholder receives an average carbon stock for their forest based on multiple cycles of planting and harvesting. As long as you keep replanting within a reasonable time period, and grow the trees to a normal rotation length, you’re entitled to keep harvesting and won’t have to surrender any credits.
Landholders can register exotic and indigenous forests under Averaging accounting. For indigenous forests, Averaging accounting gives landowners flexibility before they have to decide whether they’d like to register their forest as permanent.
Here's a simplified chart showing a typical production forest under Averaging:
The average ages used in the ETS:
What do these average ages mean? These are the ages that each forest type will earn credits up to on its first rotation. For example, if you planted and registered first rotation radiata pine under Averaging, you would earn credits until the trees were 16 years old.
Pros of Averaging
Harvesting is permitted, allowing owners to earn credits as well as forestry income.
Averaging can feel less risky than Stock Change because you don’t incur carbon credit liability when you harvest.
Incentivises people to plant new forest, rather than providing additional income to owners of second or third rotation plantation forests.
You can transition from Averaging to Permanent accounting if you decide that harvesting is not for you, and would rather earn carbon credits instead.
Cons of Averaging
Only first rotation forests which are younger than the average age will be eligible for credits under Averaging.
If your forest is in the second or third rotation, it won’t earn any credits at all. This gives little incentive to register the forest.
Owners of mature forest who decide to transition from Averaging to Permanent accounting after the average age has been reached will be able to claim carbon credits going forward but will miss out on claiming units back to the average age.
What is Permanent Accounting?
If you register a forest as Permanent Forest, you commit to leaving it in the ground for at least fifty years.
When the permanent forest category goes live in 2023, native forest will be eligible for this accounting method but as of July 2022, the decision to allow exotic forest is under review by the government. MPI has confirmed permanent forestry will be available to all eligible post-1989 forest land from 1 January 2023 - exotic or native.
Carbon credits are awarded as the carbon stock of your forest increases, until the forest reaches a steady state (as defined by ETS policy). It’s very similar to the original Stock Change model, with the main difference being that you’re not permitted to harvest.
Here's a simplified chart showing the basic principle of Permanent Accounting:
Pros of Permanent Accounting
Simpler model to understand.
Second rotation forest and older forests are eligible, provided they meet the other ETS criteria.
Incentivises long-term carbon sequestration.
Cons of Permanent Accounting
The commitment can feel restrictive as it affords less flexibility to current and future landholders.
Potentially harsh penalties if the forest is accidentally or deliberately harvested or if an adverse event happens and re-establishment does not occur.
Compared with native forest, exotic species are less supportive of native wildlife and generally less resilient to adverse events such as high winds and forest. Many ask: Do we really want exotic trees there ‘permanently’?
Stock change accounting allows first and second rotation forests maximum flexibility, while earning as many credits as any permanent forest.
Averaging accounting allows harvesting to occur but stops issuing credits once the forest reaches a certain age. Additionally, there are no credits issued to second or subsequent rotations.
Forests registered under Permanent accounting cannot be harvested for 50 years.
Options for Registering Your Forest Now
At CarbonCrop, about 80% of the forest we register is native regeneration, but many farmers have some exotic trees on their property too, and wish to take advantage of the extra carbon income. For forests registered from 2023 onwards, Stock Change will be replaced by Averaging and Permanent accounting.
For exotic forests that are below the average age and intended for harvesting, then averaging can be a great option. However, Averaging does not award credits to forests that are over their average age. For these forests, you will have to decide between locking up the black for 50 years under permanent or foregoing carbon revenue altogether.
For Indigenous forests, one option to consider is to register blocks that are below the average age and on their first rotation under Averaging. The rationale is that Averaging offers greater flexibility for participants to clear their forest or exit the ETS if they decide it's not for them. As the forest approaches its average age, it can be transitioned to permanent (if there is no more clearing planned) so that it can continue to earn units beyond its average age.
As always, if you are interested in carbon credits for your land get in touch with us to confirm eligibility for ETS carbon credits via our free assessment. The minimum area of forest we can register is one hectare.
If your forest is eligible and you choose to proceed, CarbonCrop can register your forest as an authorised representative.
Start with our free carbon assessment
CarbonCrop offers a free land assessment to landholders within New Zealand. We analyse whether your forest is eligible for the ETS and calculate how much your credits could be worth if registered. It’s a remote service, so we don’t even need to visit your land.
If you'd like to discuss your options with one of our carbon analysts, the first step is to confirm eligibility. If your forest is eligible and you choose to proceed, CarbonCrop can register your forest as an authorised representative.
Blog post updated 18th November 2022