Marty Verry
The Commerce Commission wants to encourage more competition in the market for structural timber through large-scale investment in new processing. That, though, requires the Government to start treating wood processors fairly and equitably with foresters when it comes to carbon.
International carbon accounting rules allow countries to calculate carbon from forests/wood in two parts.
The first part is the tree growing stage. The second part is the long-term carbon storage stage after the tree is converted into wood products. This stage is known as “harvested wood products” accounting.
The harvested wood products component makes up around one-third of the total forest-based carbon accounting credits New Zealand claims in its Kyoto and Paris Accord reporting. The tree-growing stage is the other two-thirds.
The two are treated completely differently by the Government.
Since the introduction of the ETS in 2008, tree growing has earned NZUs for foresters to then sell. Forest establishment has been transformed as a result.
New Zealand was experiencing deforestation prior to the ETS but after its introduction, planting rates began doubling every year. MPI research predicted afforestation rates to increase tenfold as the carbon price reached NZ$50, and that is what has happened.
The Government has fuelled this further with various afforestation grant schemes, including a large portion of the NZ$3 billion Provincial Growth Fund that subsidised the 1 Billion Trees program.
Now, contrast the treatment of foresters with that of wood processors, who generate the harvested wood products’ carbon value. Not a dollar of value has ever been distributed to wood processors.
Despite many wood processors investing heavily in the expectation that eventually they will be treated consistently and earn NZUs, the Government has to-date pocketed all the accounting value of harvested wood products. Effectively, they have been nationalised.
In 2019, Minister for Climate Change James Shaw and Minister for Forestry Shane Jones instructed officials from MPI and the Ministry for the Environment to work up a system of distributing harvested wood product credit to the wood processors that earn them. The officials did not do as asked and the project was put in the too-hard basket.
Understandably, wood processors are becoming irate at being treated inconsistently. Production rates of wood products have flatlined for years, there is little new processing investment, and we have run short on timber for the last two years, causing significant price increases as a result.
Based on Scion research for MPI, the annual value of harvested wood products is NZ$225m, of which an estimated NZ$100m is created by domestic wood processing, as opposed to offshore processing of our logs.
That NZ$100m annually, if distributed to the wood processors that earn it, has the potential to completely transform the industry and has significant spin-off benefits for the country.
Firstly, the additional margin will allow wood processors to invest in value-added processing and economies of scale, targeting new products for commercial structures locally as well as fresh international markets for all wood products.
The officials reporting to the ministers in 2019 recognised that our wood processors faced an unlevel playing field internationally, where competitors are often subsidised or benefit from a range of cost and tax advantages.
They correctly concluded that harvested wood product value was a way of levelling the playing field without breaching trade agreements or WTO rules. Without the additional carbon revenue stream, investment targeting new international markets is often too risky.
Secondly, greater processing capacity obviously brings more competition locally, which will also result in lower timber prices, construction costs, inflation and therefore interest rates.
Next, in 2024 as the planned Building for Climate Change regulation kicks in, a range of mass timber products will be required to reduce the very high emissions caused by construction.
This “embodied carbon” within high-emission materials such as steel and concrete accounts for 10% of the country’s emissions and needs to be addressed urgently.
In fact, the Building for Climate Change programme could be at risk of failing without significant investment by wood processors. With investment projects taking three years to commission, time is very much of the essence.
Next, the forest industry wants to see the value of harvested wood products attributed to wood processors also.
Sixty percent of New Zealand logs are exported and 80% of those are sold to China. So, one in every two logs goes to China. This is a precarious reliance on one market that can be fickle, as Australian foresters found out two years ago when the Chinese banned their logs.
Further, Māori are heavily invested in forests and forestland, so this lack of diversification is a risk to one of their major asset classes.
Māori also make up a large portion of the workforce in the processing sector, so any investment triggered by sharing harvested wood product value will create well-paying employment opportunities in regions such as the central North Island and Northland.
Next, as pointed out in the latest Climate Commission’s latest report, the Government will need to secure access to offshore mitigation to meet its commitments. This means the Government expects to pay foreigners to sequester carbon. It seems incredible that it would do that instead of supporting local processors to generate more harvested wood product carbon value.
Lastly, farmers concerned about large-scale forestry conversions will also benefit from increased investment in wood processing.
Research has shown New Zealand processors manufacture longer-lived products than Asian processors of our logs. By processing more locally, we therefore generate more carbon value per hectare of forest and need fewer hectares of land to meet our Kyoto commitments. Fewer farms will need to be converted to exotic forestry, meaning happy farmers.
We have a perverse situation currently whereby the value of harvested wood products is taken by the Government at the same time as NZUs are given free to manufacturers of high-carbon emitting competing building materials such as steel and concrete.
The rationale is that these other manufacturers are exposed to international competitors that don’t face carbon pricing, so need compensation in the form of free NZUs that they can sell on the ETS.
This extra revenue stream allows them to lower the price of steel and concrete products locally, which in turn reduces the price and/or demand for wood products that have to compete at those lower prices. Carbon negative wood is effectively subsidising polluting competitors.
Sharing this carbon value with wood processors could trigger up to NZ$2 billion of new processing investment. At Red Stag alone we have NZ$225m of projects awaiting fair distribution of harvested wood product value.
Wood processors are now wary of investing ahead of such a scheme being developed in case officials grandfather the pre-existing processing capacity levels at each site.
To date, the Government’s plan has been to use a fund allocated in this year’s Budget to encourage investment. The plan is that the Government invests this fund in the form of debt or equity into new wood-processing plants.
It would be fair to say the industry is not exactly doing backflips at having its harvested wood product value nationalised by the Government and then loaned back to it or having to hand over equity in order to benefit. Not when foresters get theirs with no strings attached.
That plan also does not compensate those that have invested in additional capacity in recent years in the expectation that eventually wood processors would be treated fairly and consistently with their forestry friends.
Until that happens, the sector will not transform, all the above benefits will not be achieved, and the wood-processing sector will become increasingly irate at the Government pocketing the carbon value it creates for New Zealand.
This opinion piece was first published by Stuff NZ.
Marty Verry is the chief executive of Red Stag group, which operates New Zealand’s largest sawmill and holds investments in forestry, cross laminated timber, glulam and property development.
