The Permanent Forest Sink Initiative - Institute of Foresters of Australia

The Permanent Forest Sink Initiative
PAPER PRESENTED TO THE AUSTRALIA AND NEW ZEALAND INSTITUTE OF
FORESTRY CONFERENCE, JUNE 2007.
Author: Robert Miller 1
Abstract
The Permanent Forest Sink Initiative (PFSI) is a New Zealand Government initiative which will allow
landowners and investors to invest in new or recently established forests for the purposes of carbon
sequestration. Landowners who establish forests under the PFSI will be able to earn tradable carbon
credits which are recognised under the Kyoto Protocol for at least the first commitment period from
2008-2012. International recognition and rules associated with carbon sinks post-2012 are still
subject to future negotiations.
PFSI landowners will have to meet all costs associated with generating carbon credits and agree to
‘replace’ any carbon credits should there be a decrease in the carbon stored in the forest. These rights
and obligations will be formalised in a contract between landowners and the Crown. These contracts
will be registered against land titles and will bind future landowners.
In addition to earning Kyoto-compliant carbon credits, PFSI forests may also be harvested for timber.
Harvesting can occur on a continuous canopy basis.
The legislation, regulations and operational procedures enabling the PFSI are expected to be in place
in 2007.
What is the Permanent Forest Sink Initiative (PFSI)?
The PFSI is a government initiative that promotes the establishment of permanent forests on
previously un-forested land. The initiative enables landowners to generate income through “carbon
forestry” – removing carbon dioxide from the atmosphere and storing it in new forests. PFSI land
owners will be able to claim Kyoto-compliant carbon credits for increases in the amount of carbon
stored in their forest.
The PFSI will be administered by the Indigenous Forestry Unit (IFU) of the Ministry of Agriculture
and Forestry (MAF). More information about the PFSI is available on MAF’s website
(www.maf.govt.nz/forestry/pfsi/).
The PFSI is likely to be favoured in marginal lands in New Zealand’s hill country where farming is
less profitable or where roading infrastructure does not exist to support traditional commercial
forestry.
Why the PFSI?
The PFSI provides an opportunity for landowners and investors to invest in forests grown for carbon
and to sell carbon credits. The initiative is expected to be broadly neutral to the Government in, its net
position. The PFSI does however potentially generate a number of important co- benefits:
The scheme encourages new afforestation – particularly in areas which have been traditionally
marginal for commercial forestry
It provides farmers with additional income generating land use options
It provides farmers with options for offsetting green house gas emissions from livestock and other
farming activities
It provides Government with a further source of credits to purchase to help meet its Kyoto target
1 Manager, Indigenous Forestry Unit, Ministry of Agriculture and Forestry, robert.miller@maf.govt.nz

It provides an additional mechanism for central and local government to promote sustainable land
management - managing erosion and water quality
PSFI improves the financial viability of establishing indigenous forests and other slow growing
species
A range of species/forest types are encouraged; leading to greater biodiversity
Legislation and Implementation
Part 3B of the Forests Act 1949 provides for the implementation of the PFSI. The legislation is
available from www.legislation.co.nz. This enabling legislation for the PFSI was passed in late 2006.
The detailed operational requirements for the PFSI will be contained in two forms:
Regulations;
A covenant agreement between the landowner and the Government.
The scheme is expected to become operational before the end of 2007 once operational procedures are
in place and regulations are approved. The Ministry of Agriculture and Forestry is currently
consulting on: regulations, costs recovery and a draft forest sink covenant. Therefore, some of the
details may still be subject to change.
Regulations for the PFSI are currently under development. These will provide for:
eligibility requirements;
empower the government to enter into covenants;
allowable harvesting levels;
carbon accounting requirements;
transfer of carbon credits to and from landowners;
record keeping requirements; and
government cost recovery.
The PFSI covenant is an agreement between the government and the landowner which is registered
against the land title in perpetuity. The covenant defines the forest area, sets out the obligations of both
parties and includes a management plan.
The legislation, regulations and operational procedures enabling the PFSI are expected to be in place
in 2007.
Relationship to the Kyoto Protocol
New Zealand has ratified the Kyoto Protocol. New Zealand will account for forests under Article 3.3
but has elected not to account for any Article 3.4 activities. Under Article 3.3 New Zealand must
assess, over the first commitment period (2008-12), the change in carbon stocks in new forests
established since 1990.
The New Zealand Government has opted to retain all Kyoto forest sink credits and liabilities for Kyoto
forests (those established since 1990) apart from forests established under the PFSI. Holders of PFSI
covenants will be entitled to receive Kyoto compliant carbon credits in proportion to the increase in
carbon stocks in the PFSI forests over the first Commitment Period. In addition, PFSI participants will
be liable for any reduction in carbon stocks.
The PFSI operates under the Kyoto emissions trading regime. It is not a “project” under the Joint
Implementation (JI) mechanism.
If the Kyoto Protocol no longer allows emission units to be generated from the forest, then all
harvesting restrictions will be removed – though, to the extent that CO2 emission liabilities remain in
respect of units already claimed; these liabilities will need to be met by landowners if the carbon stock
declines.
Eligibility

To be eligible for this initiative the land must not have been covered in forest as at 31 December 1989
and the forest must be "direct human induced ... through planting, seeding and/or the human-induced
promotion of natural seed sources.” A forest is defined according to the definition New Zealand has
adopted for accounting under the Kyoto Protocol.
A “Forest” is a minimum area of land of 1.0 hectare with tree crown cover (or equivalent
stocking level) of more than 30 per cent with trees with the potential to reach a minimum
height of 5 metres at maturity in situ. A forest may consist either of closed forest formations
where trees of various storeys and undergrowth cover a high proportion of the ground or
open forest. Young natural stands and all plantations which have yet to reach a crown density
of 30 per cent or tree height of 5 metres are included under forest, as are areas normally
forming part of the forest area which are temporarily unstocked as a result of human
intervention such as harvesting or natural causes but which are expected to revert to forest.”
In addition, Kyoto-compliant land containing exotic forest is eligible to enter PFSI only if the forest
was established after 17 October 2002 (the date the PFSI was first announced). All Kyoto-compliant
land containing indigenous forest is eligible to enter the PFSI.
Applicants must provide evidence that the land is eligible. This will normally be aerial photography
taken at or close to 1990 that clearly shows the land use at that date.
Species
There are no restrictions in the species that qualify for the PFSI provided that they meet the above
Kyoto definition of being able to grow to 5m or taller at maturity in situ and meet the eligibility
criteria discussed above. The species chosen will depend on the growing site and the objectives of the
investor or landowner. A factor to consider in the selection of species is not just the site – species
interaction or the rate of biomass accumulation but also its fitness for management under a continuous
cover management regime which is a requirement of the PFSI at least for the first 99 years (see
below).
Shade tolerant species which can persist under their own canopy or the canopy of other species are
essential for this form of management to ensure that carbon stocks continue to increase in the long
term. In the New Zealand environment shade tolerant species of interest include indigenous species
such as silver beech (Nothofagus menziesii) and tawa (Beilschmiedia tawa), many of the exotic
cypresses, redwood (Sequoia sempervirens) and Western Red Cedar (Thuja plicata). Douglas fir
(Pseudotsuga menziesii) fits into the medium shade tolerant category which may not easily lend itself
to continuous cover management with small coup sizes (Maclaren et al). Seral vegetation such as
kanuka and manuka and exotic gorse can play a significant role in the early development of forests;
often making up the major part of the carbon pool.
Establishment of indigenous forests is making a resurgence in New Zealand. This may happen in the
PFSI either by direct planting or seeding or by actively promoting natural regeneration through a
change in land use out of farming into forestry. For those interested in maximizing returns from
carbon sequestration in a shorter time period then fast growing species will be the species of choice.
These include Eucalytpus species, Pinus radiata, Douglas fir, cypresses such as Cupressus
macrocarpa and C lusitanica, coastal redwood and poplar species. Most tend to be light demanding
pioneer species however and management plans will need to address the succession into climax
vegetation with the risk of significant carbon loss.
Carbon sequestration rates in New Zealand forests typical range from 2-5 tonnes of CO2 equivalent
per year mean annual increment for slower growing mixed podocarp/hardwood forests to 25-35 tonnes
per ha for fast growing species like radiata pine.

Figure 1. Indicative Carbon Sequestration Rates 2
Tonnes C02/ha
1600
1400
1200
1000
800
600
400
200
0
1 4 7 101316192225283134374043464952
Age ( years)
Manuka (Leptospermum) Totara ( Podocarpus)
Mixed podocarp/hardwood Pinus radiata
Douglas fir
Allowable harvesting levels
Harvesting of the forest is permitted on a continuous cover basis. Under continuous canopy forestry,
participants will be allowed to harvest up to 20 percent of the forest’s basal area per hectare (applied to
any given hectare). The forest must then recover to the pre-harvest basal area before trees can be
harvested again. This restriction will be removed from a forest after the forest has been part of the
PFSI for 99 years.
Figure 2.
Tonnes CO2/ha
1000
900
800
700
600
500
400
300
200
100
0
Continuous Cover Management
1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52 55 58
Age (yrs)
Participants who breach the harvesting restrictions will be required to ‘replace’ carbon credits for the
CO2 released, plus make a penalty payment. The penalty payment will be additional carbon credits
calculated on the basis of an annual compounding rate of 10 percent applied to each year’s carbon
credits received, commencing from the earliest year in which the units were generated. Penalties are
only payable for breaches of allowable harvesting limits and NOT for CO2 emitted for other reasons
such as fire, disease or wind throw.
2 Note that the “dips” in the curves for Pinus radiata and Douglas fir assume an early thinning is carried out for stand improvement

Carbon Accounting System for PFSI
MAF are currently developing a carbon sequestration accounting methodology for the PFSI. While
New Zealand is already establishing systems for accounting for carbon stock changes in forests at a
national level under the LULUCF principles of the Kyoto Protocol these operate at a coarser level than
the stand level monitoring required for the PFSI.
The following principles guide the development of the PFSI carbon accounting system:
(a) A system in which participants have some flexibility within defined limits but get “rewarded”
for providing more precise estimates;
(b) Has an acceptable likelihood that Government is not giving out more carbon credits than what
it claims under the Kyoto Protocol for PFSI forests as a whole;
(c) Aims to be reasonably site specific, so that factors such as management decisions aimed at
increasing carbon sequestration rates (such as stocking rates, species, and tending decisions)
and site productivity are recognised;
(d) Estimates carbon emissions and removals in accordance with good forestry practice;
(e) Balances accuracy with cost effective data acquisition and input requirements;
(f) Accounts for carbon in all 5 carbon pools 3 but with flexibility to exclude carbon pools which
are of marginal benefit to measure if this delivers a positive net cost benefit to the covenant
holder; provided that it takes into account pools which are or become a source;
(g) Accounts for carbon stock changes for any species or forest type established under the PFSI;
(h) Will provide conservative carbon sequestration estimates where only coarse information
exists, including in respect of information for specific carbon pools;
(i) Uses the best available information and can be updated, developed and refined overtime as
new research acquires more information;
(j) Produces a report showing all the data inputs, assumptions, and an estimate of the uncertainty
of the calculation and the final carbon stock at a specific time;
(k) Can be made available for stakeholder or public use through a web-based user interface;
MAF is investigating 2 options for assessing carbon stock changes:
(a) measurement through a system of permanent or temporary plots established randomly
(b) modelling - using estimated parameters such as stocking/canopy cover and average height
applied to growth models.
Measurements will be more costly but would be expected to generate a more reliable estimate of
carbon (depending on sampling error) and therefore potentially a higher level of carbon credits
allocated than a modelled approach.
Use of Certifiers
Participants will be required to arrange their own assessment of carbon stock changes in accordance
with the PFSI carbon accounting methodology. This will need to be signed off by an approved certifier
registered with MAF. Certifiers would have to maintain independence and impartiality from
participants.
MAF would audit a proportion of the work undertaken by these certifiers.
MAF has proposed that certifiers must be New Zealand Institute of Forestry (NZIF) registered forestry
consultants 4 or have appropriate competencies. This should:
• provide an additional level of confidence in the mechanism;
• assist in reducing the time MAF spends ensuring the quality of certifiers;
• provide a means of dispute resolution which is impartial and fair
• provide a code of ethics for certifiers.
Transfer of carbon credits
3 Above ground live biomass, below-ground live biomass, deadwood, litter, and soil organic matter
4 Further information regarding NZIF and NZIF registered consultants can be found at www.nzif.org.nz.

A participant will be transferred carbon credits on the basis of a report certified by a registered
certifier and approved by MAF which assesses the change in carbon sequestered in the forest over the
first commitment period (and potential future commitment periods). This report will need to use the
carbon sequestration accounting methodology or methodologies specified in the regulations.
Holders of PFSI covenants will be entitled to receive Kyoto compliant carbon credits in proportion to
the increase in carbon stocks in the PFSI forests over the first commitment period. In addition, PFSI
participants will be liable for reductions in carbon stocks.
PFSI forests generate removal units 5 (also known as RMUs or sink credits) for the Crown under the
Kyoto Protocol. Under the PFSI these removal units are devolved to landowners with forest sink
covenants. MAF proposes that if the landowner wishes to receive Assigned Amount Units (AAUs),
the Crown may, if circumstances permit, transfer AAUs instead.
Units will be transferred to the landowner’s nominated account in the New Zealand Emission Unit
Register (NZEUR).
Participants will not be prevented from forward selling units.
Markets for PFSI Credits
The PFSI issues Kyoto compliant carbon credits. Potential markets for these credits might include:
(a) Kyoto markets – through international emissions trading
(b) Regional or domestic emission trading schemes
(c) Voluntary or so called “ grey “ market trading
Kyoto markets
Developed countries that have ratified the Kyoto Protocol must hold sufficient carbon credits to cover
their emissions. To meet emission obligations countries may purchase units internationally such as
AAUs and/or RMUs and/or credits from the flexibility mechanisms (the Clean Development
Mechanism (CDM) and the Joint Implementation (JI)).
A number of countries are expected to be buyers of credits in the first commitment period of the Kyoto
Protocol. For example, the projected net position for New Zealand is a deficit of 41.2 million tonnes
of carbon dioxide equivalent (Mt CO2-e) over the first commitment period (MfE, 2006). Countries
with emissions obligations may be interested in purchasing PFSI sink credits.
CDM (and to a lesser extent JI credits) are already a significant part of the Kyoto market. The volume
of CDM credits traded in 2006 was over 500 million tonnes CO2 at an average price of €6-7 per tonne
(Point Carbon). So far very few of these project credits are forestry sink credits; most CERs are
created from emissions reduction projects in China and India.
Regional Schemes
Regional emissions trading schemes operate either inside or outside the Kyoto Protocol. The best
known and largest regional market which is linked to Kyoto is the EU emissions trading scheme (EU
ETS). In 2006 the EU ETS traded approximately 1 billion tonnes of EU allowances valued at €18
billion (Point Carbon). Recent transactions of EU allowances were €17.48 for December 2008
contracts and €19.68 for December 2012 contracts (CCX Market Report). Neither sink credits nor
AAUs are currently recognised in the EU ETS. Therefore these trading prices may not provide an
appropriate indication of price for credits generated under the PFSI.
Other regional schemes include the New South Wales greenhouse gas abatement scheme (GGAS) and
two regional cap and trade schemes emerging in the USA – the Western Regional Climate Initiative
and the Regional Green House Gas Initiative (REGGI). Also the New Zealand Government has
recently announced a timeline for consideration of a domestic emissions trading scheme (Government
Press Release).
5 Under the Kyoto Protocol forest sink credits are called Removal Units.

The NSW scheme sets a mandatory cap on power suppliers and accepts forest sink offsets (abatement
certificates) – provided that the forests are grown in NSW. Forest sink credits from outside NSW may
be accepted provided these are from approved schemes. It remains to be seen whether Kyoto units will
be accepted in the future. Around 1.3 million abatement certificates have so far been created ( GGAS).
In 2006 the average spot price was reported to be $A13 per tonne (Point Carbon, 2007).
The Western Regional Climate Initiative is a collective carbon market trading programme involving 5
western states lead by California. REGGI is an agreement among 9 New England states. A key feature
of both schemes is the development of regional cap and trade for electric utilities. The Western
scheme is planned to impose caps from 2012 while REGGI will commence from 2014. REGGI will
accept international offsets for up to 10% of emissions i.e. there should be a market for Kyoto credits.
Voluntary Markets
Unlike the markets above the voluntary markets do not rely on regulated caps to generate demand.
Demand is voluntary and typically comes from individuals or firms seeking to reduce their carbon
footprint and market themselves as climate friendly or carbon neutral.
Reliability of credits is a key concern for purchasers; in particular the permanency of forestry sinks
which are an important source of credits in the voluntary markets. For this reason prices in the
voluntary markets are often lower than for the regulated markets which tend to have stronger rules
governing the creation of carbon credits. Total trades in the voluntary markets world wide were
estimated to be 10-20 million tonnes in 2006. This is expected to double in 2007 (Point Carbon).
The Chicago carbon exchange (CCX) trades in forestry offsets from afforestation, forest enrichment,
forest conservation and urban tree planting projects. Total trades in forestry offsets to May 2006
exceeded 9 million tonnes. Prices in March 2007 were around $US 4 per tonne (CCX).
The New Zealand stock exchange (NZX) announced it was setting up a carbon exchange called TZ1
which will be operational in early 2008 (NZX Press Release). A number of companies have a stake in
the venture including Air New Zealand and Fonterra. TZ1 will trade in both Kyoto credits and
voluntary credits, spot markets and future trades.
Landcare Research operates New Zealand’s longest running voluntary carbon sinks offset programme
through its EBEX 21 programme. This scheme offers credits for sequestration in indigenous forest
reversion under permanent protection. While volumes are still small, prices have been increasing with
demand. EBEX credits are currently trading at $NZ 17-20 per unit. Landcare operates EBEX 21 in
conjunction with its Carbon Zero programme which offers participants the opportunity to become
carbon neutral through the purchase of EBEX carbon offsets.
References
Chicago Climate Change( CCX) Forestry Carbon Emission Offsets
http://www.chicagoclimatex.com/environment/offsets/offset_project_types.html
CCX Market Report:
http://www.chicagoclimatex.com/news/publications/carbonMarket.html
Government Press Release http://www.beehive.govt.nz/ViewDocument.aspx?DocumentID=29222
Maclaren et al (2006): “Continuous-cover forestry with Douglas-fir”. NZ Douglas fir Cooperative
Report no.51 prepared for Ministry of Agriculture and Forestry
MfE, 2006, net position report
http://www.mfe.govt.nz/publications/climate/projected-balance-emissions-jun06/html/page8.htm

Ministry of Agriculture and Forestry, (March 2007): Permanent Forest Sink Initiative; A consultation
document on the proposed regulations, cost recovery methods and forest sink covenant
http://www.maf.govt.nz/forestry/pfsi/index.htm
NSW Greenhouse Gas Reduction Scheme (GGAS)
http://www.greenhousegas.nsw.gov.au/
NZX Press Release
http://www.nzx.com/aboutus/news/press/cmwg_07may
Paul et al (2007) : “Species Suitable for PFSI”. Ensis report prepared for Ministry of Agriculture and
Forestry, April 2007.
Point Carbon (2007): “Carbon 2007 – A new climate for carbon trading” Roine,K. and Hasselknippe
(eds.) 62 pages