Climate Change Mitigation Policy: The Effect of the New Zealand Emissions Trading Scheme on New Radiata Pine Forest Plantations in New Zealand

Climate change is one of the toughest challenges facing the world today. Putting a price on carbonemissions is an important step towards climate change mitigation. A cap and trade system is one ofthe ways to create a carbon price. The New Zealand Emissions Trading Scheme (NZETS) is theworld’s first economy-wide cap and trade system that covers all sectors and all 6 greenhouse gases.Forestry is a major part of the NZETS, allowing foresters to earn carbon credits for new forestsplanted on and after 1st January 1990 (afforestation and reforestation). At the same time, the NZETSalso makes foresters liable for harvesting new forests planted on and after 1st January 1990, anddeforesting forests existing on and before 31st December 1989. In this paper, we perform aneconomic analysis of how a carbon price will likely affect the returns and forestry managementbehaviour in new forests in New Zealand.Previous works have used the NPV/LEV (fixed harvesting) analysis where the forest is assumed tobe harvested (in future) at the estimated optimal rotation age regardless of timber prices at that time.Other works have employed the Real Options approaches (flexible harvesting) where sophisticatedmodels such as Partial Differential Equations and simulations analyse the effects of bringingforward the harvest decision if timber prices are favourable, and deferring the harvest decision iftimber prices are unfavourable. Often, these methods tend to have higher data requirements, employdifferent assumptions and are much more complex to estimate. Because of these differences, it maybe difficult to compare the results of NPV/LEV analysis with Real Options.Our work here applies the binomial tree method, which is a relatively simple method that cangenerate both LEV (fixed harvesting) and Real Options (flexible harvesting) results on a commonmodel with the same data requirements and assumptions. This allows for better comparability offorestry management behaviour and effects of carbon price. The forestry valuations are analysedunder a stochastic timber price and a constant carbon price. This paper concludes with someimplications on policy in New Zealand.