The Dairy Exporter - The ETS Opportunity by nzrlc

THE ETS OPPORTUNITY

Despite polarising views, the Emissions Trading Scheme (ETS) is set to remain a cornerstone of New Zealand’s climate strategy for the foreseeable future.

Words SAM MANDER

all while creating new revenue streams. Carbon farming doesn’t just mean planting pine trees on productive farmland.

WHAT IS IT AND HOW DOES IT WORK?

The ETS is a government initiative regulated by the Ministry for Primary Industries (MPI) to reduce greenhouse gas emissions. It operates as a marketbased mechanism by assigning a monetary value to carbon dioxide emissions through NZUs. Each NZU represents one tonne of carbon dioxide either emitted or sequestered. Unlike emitters who purchase NZUs to offset their emissions, landowners who sequester carbon by growing eligible forests can earn and sell NZUs on market trading platforms. For instance, earning 1000 NZUs in 2024 allows participants to claim and sell them from January 2025, either immediately or by holding them to potentially capitalise on future market gains. At the current price of $63 per NZU, 1000 NZUs could generate $63,000 – similar to trading stocks on a financial market.

ELIGIBLE FOREST LAND

For forest areas to be eligible to enter the ETS they must meet MPI’s ‘forest land definition’:

9 Must be at least 1ha.

9 Have potential to reach an average canopy width of 30m.

9 Have potential to reach a canopy cover of at least 30%.

For farmers, the ETS is not just a potential regulatory mechanism to come – it is a lucrative opportunity, right now. It provides landowners with a pathway to unlock significant revenue streams through carbon-related investments. Some farmers are unknowingly sitting on assets worth hundreds of thousands of dollars in the form of eligible forest land generating offsets via carbon credits or New Zealand Units (NZUs). Although there’s much debate over whether the ETS is fit for purpose, the huge potential for earnings available to farmers within the existing regulatory framework can’t be ignored. It allows farmers to diversify their operations, optimise land use, and contribute to climate goals,

9 Trees that are species that can grow to at least 5m in height.

9 Forest that does not have gaps greater than 15m on canopy edges of perimeter trees or have clear gaps greater than 1ha within forest areas.

9 Met this ‘forest land’ definition after 31 December 1989.

A forest that meets ‘forest land definition’ is labelled ‘Post-1989 forest land’.

Pre-1990 forest land is a forest area that meets ‘forest land definition’ before 1 January 1990. Pre-1990 forest areas are not eligible to be registered into the ETS (figure two).

STANDARD AND PERMANENT ETS FOREST LAND

There are two models available for forest types registering into the scheme – Standard (Averaging) and Permanent.

Standard ETS forest land, formerly known as Averaging, can be applied to any forest, however, is most applicable to rotational forestry (e.g. Pinus radiata plantations that allow flexible timber harvesting). While harvesting requires surrendering NZUs for lost carbon, this can be offset by replanting.

NZUs are earned only in the first rotation, up to the species-specific average age. For Pinus radiata harvested at 28 years that is 16 years old. So NZUs are earned only up to year 16 from planting and in the first rotation only. After harvest, replanting avoids NZU surrender but no additional NZUs are earned in future rotations. This option suits those balancing timber production with carbon credit income.

Permanent ETS forest land is designed for long-term carbon sequestration (usually 50 years) and biodiversity protection. Once registered, these forests must remain standing for at least 50 years, although it does allow for selective harvesting of trees so long as 30% canopy cover is maintained. Permanent forests earn more NZUs over time due to consistent carbon storage, making them appealing for landowners prioritising long-term carbon income and no timber product (e.g. native forests or planted trees where harvesting is not suitable).

FIGURE

MPI’S ‘FOREST LAND DEFINITION’ WHICH CAN BE APPLIED TO ANY FOREST OR VEGETATION TYPE IN NZ

FIGURE THREE. CO2 SEQUESTRATION PROFILES BY FOREST TYPE

CALCULATING NZU EARNINGS

Registered participants earn their NZUs annually based on two methods:

9 The MPI Carbon Look-Up Tables for participants with <100ha registered.

9 Field Measurement Approach (FMA) for participants with >100ha registered.

For most dairy farmers, forest land areas are going to be less than a total of 100ha, therefore the MPI Carbon Look-Up Tables will be used to calculate carbon stocks.

When using the MPI Carbon Look-Up Tables, NZU earnings are fixed annually, on a per hectare basis, based on the age and species of the forest at the time of registration. Registered participants can ‘back claim’ NZUs to the start of a reporting period (currently 2023–2025).

Therefore, if you register in 2025, your forest will start earning NZUs based on its age, starting in 2023. If you miss this window for registration, you will start

earning in the next reporting period (2026–2030).

Pinus radiata is currently the only species that has regional variation. Like much of the ETS, the look-up tables are likely to be in a state of flux going forward as research continues. It’s likely that these tables will be updated in the near future to better accommodate the diverse nature of sequestration across multiple forest species that they do not currently capture.

One major announcement is the consultation released for the exotic hardwoods category, specifically for the changes that may come for space-planted poplar and willow. The proposal is the first of the tables to see an update, and includes creating new carbon tables for these species, with a focus on stocking rates below 220 stems per hectare. This change may or may not take place as of 2026. Changes would have large reductions in NZU

earnings (up to 60%) for low-density planted poplar/willow forests.

CARBON OPPORTUNITIES FOR NEW ZEALAND DAIRY FARMERS

Dairy farmers could potentially enter areas of native regeneration, riparian planting and agroforestry into the ETS, not just plantation forestry blocks.

Dryland corners and inefficient irrigation zones, hill country blocks and laneways could all provide opportunities to enter the scheme and create other farm management wins.

Agroforestry

Agroforestry is the integration of trees into pastures, and is gaining traction as a sustainable farming model that balances productivity and resilience. The approach offers multiple ecosystem services, including carbon sequestration, livestock shade and shelter and improved consumer

perception. Canterbury dairy farms which currently lack shade on a significant scale could benefit on all aspects.

Agroforestry focuses on complementing farming, not diminishing it. Historically, except for poplar and willow species on hill country, agroforestry research in New Zealand focused on woodlot species models, such as interplanted Pinus radiata, Macrocarpa, and Eucalyptus. These trials often showed unacceptable levels of reduced pasture production due to shading from evergreen species, and foresters lost interest as low-density plantings often produced poor-quality timber.

The emergence of NZU earnings has changed the game entirely, shifting the focus from timber production to carbon credits. Forests only require 30% canopy cover to qualify for ETS, a goal achievable with 40 stems per hectare for most species on average.

Poplar is a standout species for agroforestry and is well researched for erosion control on sheep and beef farms. There are limited reasons why it shouldn’t be thought of as of equal value for dairy agroforestry. One study showed that pasture production would only decrease, on average, by 10% at a poplar forest planted for erosion control at 40 stems to the hectare, which is also ETS eligible. Its deciduous nature provides additional sunlight during the winter months rendering more pasture growth.

There is a raft of financial benefits to consider additional to NZU earnings.

One study showed that in hot regions, trees can lower cow body temperature by 0.5–1 degree which resulted in an increase of 1.5–4 litres of milk production, per cow, per day.

Another study showed that providing shade to dairy cows can mitigate heat stress, leading to increased milk production. Specifically, it notes that cows with access to shade produced

TABLE ONE. ECONOMIC ANALYSIS

Summary of the key ETS forest models discussed as Permanent forests. These should be considered as indicative only and as a nationwide average. Capital costs are likely to vary depending on land use. We have used a carbon price sensitivity analysis to show the potential variation in return on investment.

without shade. Research has found cows start using shade when temperatures reach 20°C.

Increased pasture production (especially in hot, dry climates with high evapotranspiration), reduced soil temperatures, improved soil moisture retention, improved biodiversity, improved soil structure, reduced nutrient leaching, and adding highquality fodder from leaves, are all part of the added benefits to agroforestry.

The Exotic Hardwood category currently offers the quickest return for agroforestry. Individual trees can be

Native regeneration

Native regeneration presents an opportunity for farmers with eligible

forest land. While high eligibility exists on sheep and beef systems, there are examples on eligible dairy farms. Areas such as the South Island West Coast, Northland, and the Waikato have good opportunity, where there is a nearby local seed source.

One of the key advantages in native regeneration areas is the nil capital investment required, aside from consultant assessments or management costs, as the forest has naturally established itself.

Typically, these regenerating forests are registered at an average age of 15–20 years, though some may be younger or older. Once registered, the forest enters a 50-year permanent sequestration period, allowing farmers to benefit from sustainable carbon credits without significant upfront expenses.

Key species include:

• Mānuka and Kānuka

• Mixed podocarp

• Native growing within gorse Beech

In all instances, the Permanent ETS forest category will be used.

Riparian

Dairy farmers across New Zealand are actively planting riparian zones along waterways. Where eligibility criteria are met, these areas can be registered in the ETS. Forest land does not need to meet eligibility requirements individually; for instance, a 0.8ha riparian planting or a waterway with an average width of

Proposed changes to look-up tables for space-planted hardwoods including poplar and willow.

• mpi.govt.nz/dmsdocument/58705

Agroforestry and benefits of shade

• massey.ac.nz/~flrc//workshops/12/Manuscripts/McIvor_2012.pdf doi.org/10.1080/00288230809510439

• nzffa.org.nz/farm-forestry-model/resource-centre/tree-grower-articles/february-2009/in-summer-shade-rules-thescience-behind-why-trees-help-maintain-dairy-productivity

less than 30m can be linked to other eligible forest land on the farm to form larger, connected areas. While profits are generally low, carbon income typically offsets planting costs over time. If external funding is secured, these plantings can generate passive income once registered.

In all instances, the Permanent ETS forest category will be used.

Plantation

Less common on dairy farms due to the typically limited areas of non-productive land large enough to support a woodlot stand. However, small woodlots have been successfully established in problematic areas, such as gorse and broom blocks, or in dryland corners on productive farmland.

These areas are retired from farming entirely and can serve as excellent family succession tools. Over 30–50 years, depending on the species, these high-value timber crops generate significant cash at harvest and can be continuously rotated, providing long-term financial outcomes.

Key species examples:

• Pinus radiata

• Redwoods Eucalyptus

• Macrocarpa

• Tōtora

In most cases, the Standard ETS forest category is chosen to allow for timber production. However, many farmers are now favouring the Permanent Forest model due to its quicker, more consistent income and lower establishment and management costs, as it eliminates the need for silviculture.

TREES A WIN–WIN

Plantings

on under-utilised or low-productivity areas can provide income, create value and improve environmental outcomes.

Creating win–win situations for the environment and business profitability through rewards for carbon sequestration is an opportunity well worth looking at, New Zealand Rural Land Management Director Richard Milsom says.

The company oversees 15,000ha of farmland including pastoral, forestry and horticultural properties owned by the NZX-listed New Zealand Rural Land Company and has undertaken a project to assess and analyse carbon sequestration opportunities on several of its farms.

Carbon sequestration on under-utilised or low-productivity areas is opening the way to build value while also protecting and enhancing the environment.

That doesn’t just mean planting those unproductive areas in production forest though.

Agri Intel Director Sam Mander says the New Zealand Rural Land Company’s 535ha dairy and winter grazing property, Waihao Downs, in Waitaki near Ōamaru is one of the properties analysed.

It’s a great example of what can be achieved when we look to optimise a farm business using the ETS, Sam says.

Agroforestry and riparian plantings can be part of the mix on the underutilised areas and, with a longer time horizon of 50 years in the Permanent model, can be self-sustaining when it

“We want to maximise the utility and value of all of our properties and often there are these unutilised or unproductive areas that are perfect for carbon sequestration,” says Richard. “So, the ability to grow trees and sequester carbon and have a positive environmental impact while also having a positive value impact is a perfect nexus for us.”

Sam Mander is a director at Agri Intel.

ABOVE Riparian planting is eligible when planted to forest land definition.

proposed eligible exotic plantation and agroforestry blocks by some strategic planting. It’s the predominant species per hectare within a registered forestry block that forms what are called ‘Carbon Accounting Areas’ or CAAs.

“CAAs are registered as one of the categories available on the MPI Carbon Look-Up Tables so we can blend the native areas of riparian planting into the exotic CAAs making the exotics the predominant species for the combined area. Therefore, the riparian areas are mostly part of exotic forestry CAAs where they are earning more NZUs.

TABLE ONE . POTENTIAL COST AND CASHFLOWS

comes to meeting costs of planting and maintenance, while providing another revenue stream.

The 1500-cow farm includes wintering and support areas for the farm. It has some areas of rolling contour as well as steeper areas.

It has an existing 4.7ha of exotic woodlot that was already eligible for entering into the ETS.

“The next discussion was to find out if there were any areas on the farm that were either non-effective, marginal or non-productive that were also suitable for repurposing the land use into trees that could meet ETS definitions of eligibility,” Sam explains.

Multiple areas were identified that fit the bill.

They are either waterways, swales, wet areas or blocks in gorse, steeper hill areas or areas that have lower grazing potential.

About 10ha is more suited to exotic plantation forestry in Pinus radiata while about 24ha could be planted in exotic hardwoods such as poplar for agroforestry.

The agroforestry areas would be planted at a low density of 40–50

stems per hectare. Those blocks need to have stock excluded for the first two to three years to allow the poplar poles to establish before animals can be reintroduced again.

The native riparian areas are already fenced off so already exclude stock, but in the majority of cases they don’t meet the ‘forest land’ definition as set out by the Ministry for Primary Industries (MPI) for inclusion in the ETS, Sam says.

That’s mainly because they all don’t average 30m wide.

“But under the rules the riparian areas can be linked up with the

“In total a 43ha area was identified, or about 8% of the whole property, that was either non-productive or non-effective and could be optimised through carbon farming as a better land use,” Sam says.

A total of 10ha in Pinus radiata along with 24ha of exotic hardwoods for agroforestry and 9ha of riparian native plantings could all be registered into the scheme.

If registered as a Permanent forest, with a 50-year sequestration period, the three planting types will accrue approximately 35,000 NZUs. If a median carbon price value of $80/NZU is used over this period, total earnings could average $2.8 million after factoring in capital costs of about $217,000. Sam does point out though that the look-up

tables for the Exotic Hardwood category are under review and returns could be subject to change specifically for spaceplanted poplars as in agroforestry.

The costs in the modelling exercise don’t include fencing, loss of grazing during stand-down period, or silviculture. But they do include approximate and indicative costs for the establishment of each forest species, including trees/seedlings, labour, preand post-planting maintenance, weed/ pest control, and consulting fees.

The average annual cashflow is a deficit and close to zero for the first six to seven years because of initial costs and low carbon yields of younger trees, but after this, cashflow grows quickly year-on-year before levelling out.

The average annual net cashflow in the modelled exercise is $24,000 for the 10ha of Pinus radiata and for the 24ha of agroforestry blended with the 9ha of natives, it’s $45,000, indicatively.

“Carbon farming presents an extraordinary opportunity for dairy

farmers to transform marginal or nonproductive land into a thriving part of their operations,” Sam says.

The exercise carried out clearly demonstrates that, he says. That’s because of the returns achieved by repurposing and optimising only 8% of the farm as well as the improved environmental sustainability of those repurposed areas.

The biggest challenge for farmers to do it themselves lies in understanding what areas qualify under MPI’s ‘forest land definition’ and navigating the registration process.

When it comes to planting trees, good advice is crucial, as for many areas around New Zealand, resource management (e.g. obtaining consents) and national policy standards are becoming increasingly difficult to obtain for mostly exotic planting regimes, even for Permanent forestry without harvest events.

Understanding what policy hurdles exist by engaging a consultant or a

* Exotic hardwoods for agroforestry.

Note the MPI look-up tables for Exotic Hardwoods are under review and these figures may change.

council would be step one to developing a forest management plan.

Ensuring a ‘right tree, right place’ approach is also an important strategy to safeguard against potential failures. Richard says combining the carbon sequestration benefits with other environmental benefits such as protecting water quality without compromising on the productivity of the land is definitely a win–win.

He says the company will be making the identified opportunities a reality on the Waitaki farm and others.

Investors are increasingly wanting to see sustainability initiatives in place – including in the environmental, social and governance areas and Richard says that’s always been the company’s focus through its Enduring Land for Life programme.

“That’s the ‘foundational bedrock’ of the company. This carbon sequestration programme fits hand in glove with that – maximising value alongside improving environmental outcomes.”

LEFT Potential planting areas.

ABOVE Lower productivity areas could be planted and create a win–win for profitability and the environment.