Forestry Surge: How a 21% increase in registered forest area is shaping NZ ETS supply
Recent NZ ETS registration data has shown an influx of new forests, what will this mean for supply?
Summary
The Climate Change Commission's (the Commission's) annual advice to the New Zealand Government on auction settings for the New Zealand Emissions Trading Scheme (NZ ETS) is due out within the next week or two. Since the Commission's last advice, the area of forestry registered in the NZ ETS has increased by 21%, and looks to be an important factor that will shape the Commission’s approach to the current surplus of units in the NZ ETS.
To date, the Commission have been fairly clear in their view that the NZ ETS under its current design will produce a mitigation mix heavily skewed towards forestry removals. In the Commission’s view (2024, p. 34) this will necessitate aggressive steps to phase-out other forms of supply such as auctions:
"If the status quo is maintained, dynamics related to forestry units… could create the need for further, more extreme adjustments to NZ ETS unit limit settings that would undermine the scheme's stability and effectiveness."
The Commission's auction settings advice last year that estimated a 68 million surplus of units held in private accounts was based on forestry registration data from late 2022, a dataset that is now more than two years old. This dataset included 560,000 hectares of forest registered in the NZ ETS or in the application queue at that time—sizably less than the 680,000 hectares registered at the end of January 2025 (MPI, 2025).
This 21% increase in registered forest area thus raises several important questions:
How does this updated registration data impact forecast supply from forestry?
What might this tell us about the market's recent price movements, with spot prices falling to $54 in recent weeks, well below the auction floor price of $68?
What implications does this have for the Commission's efforts to reduce surplus units held in private accounts?
This article forecasts unit supply from existing registered forests using an in-house model, forestPy-forecast. This model differs from similar forecast models used by the Commission and government by distinguishing forestry participants based on their size and allowing for varied behaviour over time (see modelling assumptions section at the bottom of this article for more).
How much have recent forestry registrations added to supply?
The area of forestry registered in the NZ ETS has increased fairly sizably in recent years. Since the Commission’s last auction settings advice (using late-2022 data), the area of forest registered increased to 600,000ha by mid-2024, and has risen further again to 680,000ha as of the end of January 2025, with 609 new forestry applications in the last seven months alone (MPI, 2025).
Using registration data at these three timepoints, we can examine supply from forests registered up to each date and quantify how locked-in supply has increased since the late-2022 data used in the Commission's last advice.
Figure 1 below shows that annual supply over the next few years has increased by about 2 million NZUs per year compared to forecasts based on the late-2022 registration data last used by the Commission - a fair increase to ongoing market supply.
These supply forecasts represent just a snapshot in time of course, with forward supply set to increase further as new forests are planted and register in the scheme.
With the Government's restrictions on the total area of forestry able to enter the NZ ETS each year not taking effect until October 2025 (Te Uru Rākau – New Zealand Forest Service, 2025), registrations are likely to continue at a rapid pace in the near-term. This will further increase supply within the next few years, particularly when mandatory emissions returns for the 2023-2025 period are processed in 2026.
Where is the supply coming from?
To better understand the forestry supply dynamics, we can break down projected unit supply by both participant size and the categories in which forests are registered. These breakdowns help illustrate where supply is coming from.
Looking first at participant size, Figure 2 shows how different-sized forestry participants are contributing to overall NZU supply from forests, with larger forestry participants (those with over 1,000ha registered) having made up the bulk of supply in recent years, and are set to remain the largest source of supply in the next few years.
Though New Zealand is currently experiencing a period of relatively high levels of harvest for post-1989 forests due to forests planted during the mid-1990s afforestation boom reaching the typical harvest age for pine forests, large forest operators look to be maintaining fairly stable levels of supply in spite of this. This owes to:
the ability of larger production forest operators to optimise their trading strategy across multiple forest areas established in different years (for more on this behaviour by large forest operators - see my April 2024 article); and
relatively high rates of permanent forests among larger forestry participants, where for example around 66% of forest area registered in the permanent forest category in this emissions return period (2023-2025) has come from large participants with over 1,000ha registered. In contrast large forest operators have made up just 29% of forest area registered under averaging in the same time period.
When examining supply by registration category, Figure 3 below shows a changing structure of supply, with forests registered under averaging quickly ramping up to become the largest form of forestry supply to the market within the next few years.
Estimates of cumulative supply from permanent forests (i.e., forests that see little or no harvest) across both regular stock change accounting and the permanent forest category remain somewhat speculative given limited data available tracking the management intentions of forestry participants.
However, it is likely that forests registered in regular stock change accounting that are managed as permanent forests make-up a sizable portion of ongoing supply when rates consistent with recent surveyed estimates are assumed (Manley, 2023, 2024). Figure 3 above assumes a 17% rate of permanent forests within the regular stock change category, slightly below the central estimate used in the Commission’s (2024) last auction settings advice (20%).
What does this mean for estimates of the current surplus?
The flipside picture of forestry supply are units that are held for future harvest obligations by production forest operators participating on stock change accounting.
The Commission uses estimates of units held for harvest as part of its calculation of the volume of units held in private accounts that it deems as ‘surplus’. Or in other words, units that lack a clear purpose for being held and are likely to form a part of liquid supply. In simple terms the calculation of surplus balance used by the Commission is:
Surplus balance = Stockpile balance - pre90 units held long term - hedging units held by gross emitters - post89 units held for harvest
Recent data published by the EPA has seen the balance of units held in private accounts (aka the stockpile balance) decrease over the last twelve months relative to the equivalent quarter the year prior. This is illustrated in Figure 4 below, which highlights a degree of success on the part of the Commission and government in halting and then reversing increases in stockpile balance observed during the first few years of auctions, with the market's stockpile balance down about 9 to 15 million units in the last 12 months relative to the equivalent quarter the year prior.
In its 2024 auction settings advice, the Commission estimated that surplus units made up about 68 million units (51-84 million range) of this broader stockpile balance of 160.8 million at the end of Q3 2023.
If we were to simply assume that units held for harvest, hedging units, and units held long-term by pre-1990 foresters have remained stable, then the decrease in stockpile balance seen in the last 12 months would seem to be a positive sign that the balance of surplus units is likewise coming down by a healthy amount (e.g., 9-15 million this past year).
However, to properly assess the actual change in surplus since the Commission's last estimate, we need to account for both:
the additional year of surrenders and earnings by foresters, and
the one-off switch in registration category allowed for forests registered from 2019-2022, where about 60,000ha registered in stock change accounting switched to averaging, and a portion more to the permanent forest category.
All else equal, the forests that switched to averaging or the permanent forest category will no longer be expected to hold units for harvest, and so this volume should be lower in our new Jan-2025 snapshot than in the Commission’s late-2022 dataset that came prior to these forests switching categories.
Figure 5 below illustrates the change in units held for harvest when accounting for these effects, with the volume of units held for harvest having decreased by about 9 million to 49.4 million NZUs.
Though this article does not consider the other parts of the stockpile that go into calculating the surplus (hedging units and long-term pre-1990 forest units), if we make the simplifying assumption that these units have remained constant year-on-year, then we can see that a large portion of the 9-15 million unit decrease in stockpile may in fact come from a change in the units held for harvest by post-1989 foresters.
This line of analysis is complicated by the fact that foresters are only required to submit returns at the end of the 2023-2025 mandatory emissions return period (MERP), and some who have harvested recently may have avoided submitting voluntary returns in the past couple of years.
Nevertheless, it is clear that the simplistic notion that a decrease in the stockpile of about 9-15 million units has equated to an equivalent decrease in the surplus volume is incorrect, and progress made in reducing the surplus is likely to be less impressive.
The Commission’s estimates of the surplus in its report due in the next couple of weeks will no doubt vary from that pictured here (and we may see other updates to their methodology that could change things further), but nevertheless were I in their shoes, I would be just as concerned, if not more so than last year about the seemingly slow inroads being made on the surplus and the market’s corresponding weak price conditions.
Discussion
The NZ ETS has seen a 21% increase in registered forest area—from 560,000 to 680,000 hectares since the late-2022 registration data used in the Commission's last auction settings advice. This significant increase in registered forestry is shaping supply dynamics that warrants careful attention by both market participants and policymakers.
The market's recent price weakness—hovering around $54 in recent weeks, well below the auction reserve price of $68—can be readily explained by a surplus volume that still sits well above annual demand in the market (~30 million NZUs) if we are to believe estimates of the surplus last year by the Commission (68 million), Ministry for the Environment (67.3 million), and Ernst & Young (52.4 million) (Ernst & Young New Zealand, 2024).
Though recent reporting by the EPA (2025) indicates a year-on-year reduction in the stockpile of units held in private accounts by about 9-15 million since the Commission, MfE and EY's surplus estimates; when updated forestry registration data is accounted for, it becomes clear that the surplus portion of this stockpile may have decreased far less during this time.
The updated registration data used in this article highlights the significant headwinds facing both the Commission and Government in their efforts to bring the surplus down. The increase in registered forest area is driving higher annual levels of forestry supply, while the level of units credibly held for harvest liabilities has come down given the switch by some stock change forests to averaging and the permanent forest category.
These findings suggest that despite the low volume of units cleared in auctions during 2024 (just 7 million units), and the Commission's aggressive approach to reducing auction volumes, maintaining — or even enhancing this aggressive posture remains necessary.
Indeed, the increasing forestry supply picture indicates that more time will be needed before we see the surplus reduced to a sufficient extent to generate meaningful upward price pressure.
References
Climate Change Commission (2024) Advice on NZ ETS unit limits and price control settings for 2025–2029. Wellington, New Zealand: Climate Change Commission, p. 74. Available at: https://www.climatecommission.govt.nz/our-work/advice-to-government-topic/nz-ets/our-advice-on-the-nz-ets/nzets-advice-2025-29/ (Accessed: 14 March 2024).
Environmental Protection Authority (2025) Privately held units. Available at: https://www.epa.govt.nz/industry-areas/emissions-trading-scheme/market-information/privately-held-units/ (Accessed: 8 April 2025).
Ernst & Young New Zealand (2024) New Zealand Emissions Trading Scheme (ETS) NZU Surplus Advice. Prepared for New Zealand’s Ministry for the Environment, p. 25. Available at: https://environment.govt.nz/assets/publications/climate-change/nzets-nzu-surplus-advice.pdf (Accessed: 8 April 2025).
Manley, B. (2023) Afforestation and Deforestation Intentions Survey 2022. MPI Technical Paper 2023/09. Wellington, New Zealand: New Zealand Government, p. 26. Available at: https://www.mpi.govt.nz/dmsdocument/57130-Afforestation-and-Deforestation-Intentions-Survey-2022 (Accessed: 1 April 2024).
Manley, B. (2024) Afforestation and deforestation intentions survey 2023. MPI Technical Paper 2024/14. Wellington, New Zealand: Ministry for Primary Industries, p. 28. Available at: https://www.mpi.govt.nz/dmsdocument/62313-Afforestation-and-Deforestation-Intentions-Survey-2023 (Accessed: 9 June 2024).
Ministry for Primary Industries (MPI) (2025) News and changes to the ETS. Available at: https://www.mpi.govt.nz/forestry/forestry-in-the-emissions-trading-scheme/news-and-changes-to-the-ets/ (Accessed: 8 April 2025).
Te Uru Rākau – New Zealand Forest Service (2025) Update on proposed changes to limit farm conversions to exotic forestry in the Emissions Trading Scheme (ETS). Wellington, New Zealand: Ministry for Primary Industries, p. 2. Available at: https://www.mpi.govt.nz/dmsdocument/68436-Update-on-proposed-changes-to-limit-farm-conversions-to-exotic-forestry-in-the-Emissions-Trading-Scheme-ETS (Accessed: 8 April 2025).
Modelling assumptions and methods
Forecasts presented in this article use a proprietary in-house NZ ETS forecast model, forestPy-forecast that models forest supply at a ‘representative forest’ level, where forests can be flexibly disaggregated based on variables such as the size and type of participant and type of forest, with differing trading strategies applied to each (including varying behaviour over time).
When run with similar assumptions to the Commission and Government’s NZ ETS forecast models, forestPy-forecast is able to closely replicate supply forecasts produced by these other models.
In this article, core assumptions were:
1,196 representative forest areas - disaggregated by forest species, accounting category and participant size (<100ha registered, 100to499ha registered, 500to1,000ha registered, >1,000ha registered).
Each forecast is run using a range of harvest age assumptions, ranging from 27 to 29 years for pine (central: 28 years), and the rate of permanent forests among forests with exotic forest species (12 to 22%, central: 17%).
January 2025 registration data is estimated using high-level statistics reported on the MPI website (2025), and builds on detailed mid-2024 registration data supplied to me via the OIA.1 Additional forest area registered between these dates is assumed to come from forests planted in the last 4 years that had not registered as of mid-2024.
Larger forestry participants on stock change accounting are assumed to trade a greater proportion of units earned per forest (close to that earned under averaging), while small forestry participants only trade up to the minimum balance seen after first-harvest (‘safe carbon’).
A huge thank you must go to staff at Te Uru Rākau for compiling the dataset for me!