Introduction
4.1
The Australian plantation estate has not experienced any significant expansion for a decade, and yet meeting the projected shortfall in the log supply available to processors will require the establishment of 200,000 to 250,000 hectares of new softwood plantations.
4.2
One of the key difficulties limiting plantation expansion is the cost of initial plantation establishment and the long period until returns can be garnered. This chapter discusses barriers to expansion and how they might be addressed.
4.3
Despite these difficulties, there are also developments in the forestry sector which may create the conditions for growers to invest in new plantations. In particular, the climate benefits of the carbon stored in plantations offer a potential new income stream for growers. Additionally, there are a range of innovative new wood products which could drive greater demand for timber. This chapter considers these issues, as well as the significant scope for greater integration of forestry into existing agricultural businesses.
Review of the Evidence
The Development of the Existing Plantation Estate
4.4
The Australian softwood plantation estate began to take its current form in the 1960s and 1970s when the Commonwealth offered long-term, minimal interest loans to the state and territory governments. The objective of this loans program was the establishment of around 30,000 hectares of softwood plantation per year. This objective was largely achieved with an average of 33,738 hectares established each year between 1975-76 and 1989-90. Since 2006-07, ABARES described the softwood estate as having reached a steady state of around 1 million hectares.
4.5
The hardwood plantation estate began to experience rapid growth in the mid-1990s, following the introduction of the Export Control (Hardwood Wood Chips) Regulations 1996, which removed the need to obtain a license to export woodchips. Growth further increased with the introduction of the Managed Investments Act 1998, which ‘allowed investors to claim immediate tax deductions for investment costs associated with establishing new timber plantations’. Hardwood plantation establishment peaked in 1999-20 when 126,210 hectares were planted, ‘mostly occurring on cleared agricultural land in Western Australia, Victoria and Tasmania’.
4.6
The boom in hardwood plantation establishment ended in 2008-09 when a number of managed investment schemes collapsed and by 2011-12 the establishment of new hardwood plantations had virtually ceased. As outlined in Chapter 1, the extent of hardwood plantations is now declining and ABARES has forecast that it may decrease by 80,000 to 100,000 hectares over the next 10 to 15 years.
Barriers to Plantation Growth
4.7
The Australian Forest Products Association (AFPA) explained that the current Australian plantation estate is still largely a product of government investments made in previous decades, stating:
We’re moving from a time when state governments and the federal government essentially owned forestry in Australia, and that’s why we have the trees we have [they] were planted by federal and state government programs, with low-interest loans out of the federal government.
4.8
In recent years, the ownership structure of the sector has changed, however, as AFPA elaborated:
That world has changed in the last 20 to 30 years to a privately owned world, pretty much, except in WA and in New South Wales; they are the last remaining areas where the state has a big softwood estate. In the new world, the ownership is really in superannuation funds, who do a terrific job of managing the estate we have. But superannuation funds aren’t in the business of planting greenfield sites; they’re in the business of providing annuity returns to their members.
4.9
APFA added that during this period where ownership is transferring from public to private organisations there has been a lack of investment in new plantations, stating:
So, in this period between the old world and the new, we've lost any incentive to plant, except for other things such as carbon payments, which obviously might turn the rate of return up. But, until the rate of return meets [the rate of return an investor or farmer] could get for doing something else, you're not going to do it just because you love the sight of a tree. And that's what's happened in Australia.
Rates of Return
4.10
AKD Softwoods (AKD) highlighted the cash flow difficulties caused by the length of time between planting and harvesting in the plantation industry, stating:
One of the biggest issues is cash flow. Everybody will talk about rate of return and its pretty hard to actually work out a discounted cash flow over 30 years. Most discounted cash flows don’t really work after seven years—once you start putting in discount rates. The way to make it work, as land costs are high, is enabling cash flow at the start.
4.11
Softwood Working Group (SWG) noted that the 7 per cent internal rate of return (IRR) generally required by private investors cannot be achieved by forestry under average conditions. The private sector, therefore ‘is unlikely to make major investments in plantation establishment’. SWG suggested that the major barriers to achieving a higher IRR were the upfront costs (including land, roads, and plant establishment) and the fact that 78 per cent of the revenue is not generated till harvest, approximately 30 years after investment.
4.12
Mr Alan Cummine stated that ‘all other countries with significant timber plantation industries provide some sort of government financial support—either direct funding, or through various incentives for private investment’. New Forests Asset Management (New Forests) made a similar point, suggesting that ‘without some form of [government] incentive there will be no new plantations established’.
4.13
New Forests noted, however, that even incentives may not necessarily create the economic conditions for plantation growth. New Forests explained that typically plantations generate rates of return around 3 to 4 per cent per year, which are insufficient for institutional investors. Even if the concessional loans were available with ‘very generous’ terms New Forests did not expect these would make sufficient difference to lead to rapid plantation establishment.
4.14
Pentarch Forest Products (Pentarch) also highlighted the cost difficulties faced by harvesting contractors, the majority of which are small to medium sized businesses. These contractors are required to purchase ‘advanced technological and high capital cost mechanised equipment, creating a high barrier to entry’. In addition, Pentarch pointed out that those harvesting contractors must have a continuity of work in order to remain competitive and contain costs.
Cost of Land
4.15
HVP Plantations pointed to the cost of land as a significant barrier to plantation establishment, particularly in areas that are ‘within economic haulage distance of existing forestry hubs and processors.’ These costs include stamp duty and for many larger growers Foreign Investment Review Board costs.
4.16
Similarly, SWG nominated land access as the biggest barrier facing the plantation industry. SWG stated ‘private investors are balking at the cost of land, they are balking at the rate of return they can receive.’ SWG reported that they have been undertaking an analysis of land availability and found that it was possible to achieve 30,000 hectares of plantations on this land in New South Wales (NSW) using low quality land not well suited for other agricultural activities.
4.17
SWG reported that, in 2018, the NSW Government had allocated $24 million to purchase land for forestry. SWG estimated this would enable the purchase of approximately 3,000 hectares but noted that little land had been purchased to date. SWG recommended that the NSW Government purchase land opportunistically with an aim of establishing plantations. SWG suggested these plantations could be established by public companies or by private companies using leasing or partnership operations.
4.18
SWG informed the Committee that the total cost of purchasing 30,000 hectares would be $320 million over ten years and stated that this capital outlay could be recouped by ‘lease fees paid by the grower over the period of the first rotation (30 years)’. SWG added that the land would remain in government ownership and become an appreciating asset on the government balance sheet.
4.19
HVP noted that land costs have always been a problem which is ‘the reason that almost all of the existing softwood plantation estate was developed by state governments’. HVP advocated a similar solution to SWG, suggesting a:
…measured program of land purchases by governments, at market prices and in the vicinity of forestry hubs, over a time frame that did not drive up land prices. That land could then be leased to growers at rates consistent with forestry being the highest and best use.
4.20
The Victorian Government recognised the difficulties caused by high land costs and low IRR and stated that ‘further incentives are required to strengthen the economics and competitive environment of new plantation development’. The Victorian Government added that it is investing $110 million in plantation development in Gippsland with the investment structured to leverage additional private investment.
Access to Water
4.21
OneFortyOne (OFO) described water access as ‘the single biggest impediment to the supply chain in the Green Triangle region’ and suggested that current South Australian water allocations could result in ‘a loss of more than 25,000 hectares of plantation in the South Australian portion of the Green Triangle.’ Similarly, New Forests called for the removal of these state water licensing arrangements which it claimed were limiting plantation establishment.
4.22
OFO also questioned the currency of the data used as the basis for water allocations and called for government investments in ‘future research initiatives including additional groundwater monitoring, subregional models, and additional groundwater dependent monitoring’.
4.23
The Department of Primary Industries and Regions South Australia (DPIRSA) explained that commercial plantations in the Green Triangle area must secure water allocations (via trade or purchase) for their groundwater usage. DPIRSA added that the Forest Industry Advisory Council of SA has recommended that the government ‘considers evidence-based proposals from industry to reform water licensing and increase water allocations in the Lower Limestone Coast’.
Freight
4.24
AFPA raised the challenges of hauling timber caused by the regional restrictions on truck usage. AFPA explained that:
This places an unnecessary burden on hauling logs from point a to b and in some cases requires trucks to reduce their loads or [the number of trailers used] to allow for smaller loads to be hauled. The supply deficit of some individual sawmills could be reduced if impediments for transporting logs by more efficient truck configurations were streamlined and made consistent.
4.25
OFO stated that timber industries rely on road freight to move their products to processors and that the ‘safest and most cost-effective way to transport both logs and finished timber is via high productivity vehicles, i.e. A‑double trucks’. OFO added that greater use of A-double trucks would require less truck trips thus reducing interactions with other road users, creating less diesel burn, and less road damage.
4.26
OFO noted the limitations on A-double trucks travelling from SA into western Victoria and highlighted the Green Triangle Region Freight Action Plan Committee which includes representatives from industry, the SA and Victorian Governments, and local councils. OFO reported that the objectives of the action plan included providing pre-approved routes in Victoria for A‑double trucks, reducing the complexity of permit applications, and improving infrastructure. DPIRSA also drew attention to the action plan and stated that collaboration with the Victorian Government can ‘assist with harmonisation between jurisdictions that result in efficiencies for both the domestic and exporting sectors’.
Limited R&D Capability
4.27
AFPA called for a significant increase in Australia’s forestry research and development (R&D) capability. AFPA highlighted the decline in forestry research, stating that in 2008 forestry R&D funding amounted to $104 million and employed 732 research and support staff. By 2019 this had declined to funding of $20 million and employment of 70 staff.
4.28
OFO also drew attention to Australia’s declining research capability, noting that research helps the industry ‘breed resilient tree stock, develop new products, protect assets from fire, and ensure water use is measured correctly’. OFO added that without support for research ‘we are at risk of lagging behind our international competitors’.
4.29
AFPA compared this capability to the forestry research capabilities of Canada and New Zealand, both countries with significant forestry industries. Canada and New Zealand each have national forest research institutes employing large numbers of staff (600 in Canada and 299 in New Zealand). AFPA noted the creation of National Centres for Forest Product Innovation in Mt Gambier and Launceston, each established with $2 million in Commonwealth funding. AFPA called, however, for the creation of a more extensive $100 million forest research centre, which would build a critical mass of researchers and help ‘accelerate commercialisation pathways though extension and technology transfer programs’.
4.30
AFPA also noted that forest products are the only agricultural sector with a cap limiting access to matched R&D funding. AFPA stated that industry research funding had reached this cap every year and so called for the removal of the cap to ‘allow research and development of the sector to be on the same footing as other agricultural industries’.
Plantations and Taxation
Managed Investment Schemes
4.31
The growth of hardwood plantations in the late 1990s and 2000s was primarily driven by private sector companies supported by the Managed Investment Scheme (MIS). During this period approximately 1 million hectares of plantations were established.
4.32
Mr Cummine noted that most of the forestry managed investment scheme companies had closed down between 2009 and 2011 causing widespread losses to businesses in the supply chain. Mr Cummine suggested that there were many contributing causes to the collapse of these businesses.
4.33
In particular Mr Cummine highlighted that, in 2008, a regulatory interpretation by the Tax Commissioner held that forestry MIS projects were not eligible for business tax deductions. This interpretation was later overturned in court, yet the six month period it was in force had a negative effect on the MIS-based businesses. Mr Cummine stated that it ‘damaged market confidence in these companies to the extent that their share prices collapsed’. At the same time the effects of the global financial crisis were being felt and there was a ‘rapid negative shift in attitude of the banks that had hitherto willingly provided finance for the MIS companies and their investors’.
4.34
Rather than being a model that should be abandoned, Mr Cummine suggested that MIS schemes remain ‘the most successful instrument in Australia so far for attracting private investment into large-scale plantation investment’. Mr Cummine, added that tighter regulatory protections for MIS investors are now in place and suggested:
…it should now be possible to restore confidence in forestry MIS as a workable means to once again attract private funding … whether that can eventuate will depend to a large degree on the willingness of management companies, investors and the financial sector to rekindle their trust and commit to creating and offering revised MIS forestry scheme.
4.35
Similarly, Capital Battens believed the MIS had been ‘instrumental in successfully establishing vast tracts of forests in Australia’ and that its shortcomings were easily fixed. Specifically, Capital Battens suggested abolishing upfront funding in favour of the provision of annual fees, and changing the role of the independent forester so it reports to an independent authority such as the Australian Securities and Investments Commission.
4.36
Plantall Forestry Consultants (Plantall) noted that some MIS plantations were poorly managed and planted inappropriate locations such as areas of marginal rainfall and that these plantations have reverted back to agriculture in the last decade. Similarly, the Tasmanian Government noted that the decline in plantations in Tasmania was due to the removal of poorly-performing MIS plantations, stating that recent years had seen:
…consolidation of second rotations around higher performing sites close to markets and non-replanting of uneconomic ex-managed investment scheme plantations … the fact that a significant proportion of the un-replanted plantation area was poorly-performing, suggests a relatively minor impact on yield.
4.37
New Forests stated that many of these plantations were only established due to the ‘size of the market distortion created by the MIS legislation’ and over time these plantations had reverted to more valuable land uses, mostly as pasture.
4.38
DAWE noted that the MIS schemes were successful at expanding plantations and that regulatory changes to the MIS were being implemented just as the global financial crisis hit and many of the companies collapsed. DAWE stated, however, that many MIS plantations were planted in unsuitable locations and that one of the aims of the National Forest Industries Plan was to ensure that future plantations were well located not ‘established as isolated agricultural activities with no easy access to either market or port.’
4.39
Similarly, AFPA acknowledged the success of the MIS in driving plantation growth but stated that ‘the next round of policy that [gets] trees into the ground has to have something to say about where the trees are planted and which trees are planted’.
Other Tax Issues
4.40
Perhaps the most significant taxation issue for the plantation industry is period inequity, which is created by the ‘lumpy returns’ created by the life‑cycle of a plantation. Mr Cummine explained why this is an issue for growers, stating:
…most of the income in the occasional large income events (commercial thinning harvests and final clearfall harvest) are taxed at the forest grower’s highest marginal tax rate, more income tax is likely to be paid on a plantation forestry enterprise than if the same total amount of income had been received and taxed annually – as occurs with most livestock, cropping, and horticultural enterprises.
4.41
Mr Cummine argued furthermore that growers who plan to use plantations as a form of superannuation can be particularly badly affected and face ‘unexpectedly high tax liabilities’. Mr Cummine suggested that these liabilities have discouraged other potential growers establishing plantations.
4.42
The Institute of Foresters of Australia & the Australian Forest Growers (IFA & AFG) offered potential solutions to the tax issues faced by growers, these included:
changes to the Capital Gains Tax asset value thresholds for small business concessions ‘in relation to the private forests, to account for the appreciating nature of the asset’
changes to the rules for self-managed superannuation funds (SMSF) ‘so that plantation forests established and managed to provide retirement income can be transferred into SMSF’
changes to the Farm Management Deposits (FMDs) scheme so deposits can ‘be made on behalf of partnerships and family companies’ and to change the ‘withdrawal threshold in relation to death or retirement from primary production, with a specific extension of three years or more for forestry.’
4.43
Similarly, Mr Steve Thomas argued that ‘the present FMD Scheme provides very limited incentive to landholders willing to grow commercial crops of trees’. Mr Thomas recommended a ‘new and specific scheme to create very powerful incentives to see a commercial tree crop as a component of a retirement package’.
Opportunities for Growth
Secondary Markets
4.44
Mr Cummine suggested that one of the potential ways of overcoming the disincentive created by time between planting and harvesting is to create a ‘secondary market’ where immature plantations may be sold separately to the land they are standing on. In this system, the initial grower would have the responsibility and risk of establishing a plantation for the first 8 to 10 years of its life and then have the option of selling. Mr Cummine added:
The ‘secondary’ or patient investor (e.g. a super fund or other institution) doesn’t want to take the early risk but will invest in a standing plantation that has survived , and can be measured, monitored and valued for decades with intermediate returns and a big harvest return.
4.45
Similarly, IFA & AFG noted that while growers in forestry managed investment schemes could trade immature plantations after four years, this ability did not extend to other growers. IFA & AFG stated that a ‘secondary market in standing forest without tax penalty would help make investment in long-rotation forestry more attractive.’
4.46
IFA & AFG added that the key current impediments occur when a grower wants to split the land from the plantation and sell one of these two assets while keeping the other. IFA & AFG stated that growers in these instances run into a ‘web of tax rules’ and state regulations, which creates a disincentive to anyone planning to tend a plantation for less than a full rotation and also when ‘dividing rural estates and assets within families.’
Farm Forestry
4.47
Farm forestry is a land management system in which trees are grown alongside crops or pastureland. For the purposes of this inquiry, the term relates specifically to the incorporation of small-scale commercial forestry into existing farming practices. AFPA provided examples of farm forestry, stating that it can include ‘timber belts, alleys, contour plantings, and paddock tree plantings on marginal land’.
4.48
IFA & AFG noted that there are at least 3,000 persons currently engaged in farm forestry, while AFPA estimated that farmers have established more than 150,000 hectares of small-scale planted forest across the country.
4.49
AFPA described farm forestry as an ‘essential and growing component of the forest product industry’. Similarly, Capital Battens emphasised its importance, stating that it ‘has to be the answer to Australia’s [plantation] problems’.
4.50
Mr Cummine explained that farm forestry has the potential to overcome the perceptions of some members of the community that plantations ‘take over pastoral landscapes and dislocate farm communities’. Furthermore, Mr Cummine outlined the potential benefits of farm forestry, stating that ‘integrating plantation forestry into farming operations could enable a forestry resource to be grown on existing farmland as a complement to agricultural food and fibre enterprises and without displacing farming landholders and land uses’.
4.51
Mr Cummine also highlighted that farm forestry has one significant benefit over traditional commercial forestry in that it does not require a capital output for land purchase. This cost is either converted to an annual cost when a leasing arrangement is used or eliminated when the forestry operations are run by the farm business.
Wider Benefits for Farmers
4.52
The use of farm forestry practices is associated with a number of environmental and land improvement benefits. The Tasmanian Forest Production Association (TFPA) outlined some benefits, stating ‘trees on farms are used as shelterbelts for stock shade and wind breaks, to prevent and remediate soil erosion, to outcompete weeds, to manage salinity problems and as a secondary source of income’. Furthermore, TFPA asserted that: ‘Where farmers establish trees along waterways there is the added benefit of shading, reduced stock movement, and much improved stream habitat and water quality as a result.’
4.53
Highlighting the potential productivity benefits of farm forestry, AFPA drew attention to a CSRIO study which examined the use of commercial trees as shelterbelts. Analysing a paddock with a shelterbelt to its west and open land to its east, the study found that the western half had 30 per cent more biomass (3.3 tonnes per hectare) than the eastern half, which only had 2.6 tonnes per hectare: ‘The 25 hectare paddock (including 1 hectare of trees) is effectively growing the same quantity of pasture as a 28 hectare unsheltered paddock’. AFPA cautioned that ‘the project is still ongoing’ but anticipated that ‘the benefits of having trees on farms [will be] shown to supply additional benefits previously not widely recognised’.
4.54
Another important opportunity relates to the capacity of small-scale commercial forestry to help farmers reduce carbon emissions. AFPA recommended that Federal and State government policies to support the growth of farm forestry should include policies related to carbon storage and associated co-benefits. Issues related to plantation carbon farming are discussed in more detail later in this chapter.
Overseas models
4.55
Capital Battens observed that farm forestry is ‘a well-established model around the world’. In Scandinavia, the United States, and New Zealand, for example, private enterprises are integral to ensuring industrial wood supply. In the United States, approximately 50 per cent of all forest land is owned by individuals and families. These small producers participate in both domestic and international markets.
4.56
This is also the case in Sweden, where several large cooperatives have been established to process, market, and sell wood products. Notable among these is Norra Skog, which AFPA noted ‘has 17,000 members and collectively produces and sells around 2 million cubic metres of wood each year’. Capital Battens also drew attention to Södra, ‘a company with 52,000 investors’.
4.57
Furthermore, AFPA stated that over 578,000 hectares, or 34 per cent, of plantation forests in New Zealand are ‘owned by private individuals with parcels of land no more than 10,000 hectares. The New Zealand Farm Forestry Association acts as a national network of farm foresters who share information for mutual commercial benefit.’
Challenges for Farm Forestry
4.58
AFPA stated that ‘farm forestry has not realised its full potential’ and inquiry participants identified several key challenges which hinder farm forestry in Australia. These include the tax barriers discussed above and the lack of pricing transparency discussed in Chapter 3. Additional barriers such as a lack of specialist knowledge among farmers, and problems relating to inadequate capacity and poor economies of scale are discussed below.
4.59
AFPA noted that individual farmers often lack forestry expertise and can find it difficult to access technical advice. This was likewise observed by Plantall, who stated: ‘There is a deficit of knowledge in how to capture the value in commercial trees on farms’ including among agricultural advisors who rarely recommend forestry projects to farmers.
4.60
Mr Cummine identified the Master TreeGrower program as an effective means of redressing this problem. Established in 1996 and initially hosted by the University of Melbourne, Mr Cummine described the course as ‘highly practical, hands-on, peer-level, and focused on the farming operations unique to each farmer. This is the core of what must be balanced with the needs of the plantation processors.’
4.61
In conjunction with such programs, Mr Cummine recommended that governments strengthen ‘regional farm forestry extension services to help build the knowledge, practical skills and confidence of farmers and rural contractors to undertake specialised forestry operations.’
4.62
AFPA noted that small enterprises are often hampered by inadequate infrastructure for harvest and haul. IFA & AFG cautioned that farm forests are unlikely to succeed if the infrastructure and access of the plantation location is not considered, stating:
You can’t just park trees on that bit of land at the back of the property up on a steep slope because you don’t use it for anything else. When it comes to actually harvesting those trees, if you haven't got ready access, the costs of putting in road infrastructure and getting in the equipment to harvest those steep slopes takes all the profit out of it.
4.63
The need for secure and stable supplies can also make it difficult for timber processors to rely on small producers to meet demand. As AFPA noted: ‘While a farm forestry operation may produce only small volumes or have intermittent supply, customers require a large volume supplied consistently’. Similarly, Mr Cummine stated that:
An important consideration for many farmers and other private growers contemplating commercial tree planting – and an impediment that has often proven to be the final discouragement – are the difficulties small-scale forest growers face in assembling sufficiently large parcels of harvested wood to meet the needs of accessible processors.
Regional Hubs and Farm Forestry
4.64
As outlined in Chapter 1, the Australian Government has recently established nine Regional Forestry Hubs (hubs). Inquiry participants stressed that the hub model provided ample opportunity to integrate and maximise the capacity of farm forestry.
4.65
Capital Battens, for example, advised that, ‘with timber hubs, you should have predefined areas [where trees grow well and] where government would encourage farmers [to pursue small-scale commercial forestry]’. It anticipated that, with time, ‘cooperatives or entrepreneurs, with that stability, will find those opportunities and [further] develop those hubs’.
4.66
DAWE reported that the Government is currently developing a National Farm Forestry Strategy which will aim to integrate farm forestry into existing commercial supply chains, thus creating greater confidence in guaranteed supply for processors:
The aim of the strategy is to transform farm forestry as a commercial, timber-supplying enterprise by investigating aggregation tools, data needs, mapping and business models and navigating the challenges of changing land use. It will aim to help farmers explore opportunities for expanding farm forestry, creating future wood and fibre supplies, improving links with the forest industries, and increasing economic returns for farmers.
Carbon Farming
4.67
AFPA drew attention to the potential sustainability benefits of plantation forestry noting that the major carbon abatement opportunities from the forest industry are:
the carbon sequestered in growing forests
the carbon stored in durable wood and paper products
the substitution of high emissions materials (e.g. steel, concrete) with wood and other fibre-based products that have low embodied energy
the use of woody biomass for renewable energy (including for renewable heat and biofuels) thereby displacing fossil fuels.
4.68
In 2018, AFPA launched the forest industries climate change plan, entitled ’18 by 2030’, the plan sets the objective for the forest industries to remove 18 million tonnes of carbon dioxide equivalent by 2030, which equates to approximately 23 per cent of the Australian Government’s emissions reduction target.
4.69
Plantall asserted that ‘the economics of growing trees on farms are significantly enhanced now that carbon credits are available to plantations grown longer than 25 years.’ Similarly, DPIRSA stated that ‘potential returns from the carbon market could also increase the uptake of forestry as an option for landholders and investors, while facilitating a raft of co-benefits’.
4.70
Inquiry participants noted that, alongside gains for farmers, increased agroforestry initiatives can assist other businesses in meeting their carbon targets. Plantall argued, for example, that ‘there is a great opportunity for Western Australian gas and mining companies to offset their emissions by growing trees to the benefit of WA farmers, these developments should be landowner driven while using the best technology’.
4.71
AKD highlighted how carbon farming can create the possibility for mutually beneficial leasing arrangements for plantations on farms. The forest owner can lease some of a farmer’s land in the knowledge that the generation of carbon credits will create a steady income while the farm owner has the security of a part of their land earning a stable income.
4.72
Mr John O’Donnell called for the Commonwealth Future Fund to use part of its $165 billion fund to invest in plantations as a carbon abatement measure.
Emissions Reduction Fund
4.73
The Australian Government’s Emissions Reduction Fund (ERF) is a ‘voluntary scheme that aims to provide incentives for a range of organisations and individuals to adopt new practices and technologies to reduce their emissions’. When participants undertake eligible emission reducing activities they receive one Australian Carbon Credit Unit (ACCU) for each tonne of carbon dioxide equivalent gas they have sequestered or reduced.
4.74
The Clean Energy Regulator (CER) advised that in 2017, it completed the method for plantation forestry. This method sets the rules for participation in the ERF and since this time plantation projects have been eligible to participate in the fund. The CER added that it is about to begin a process of engagement with the plantation sector with the objective of updating the method for plantation project participation in the ERF.
4.75
The ERF method for plantation forestry includes the need to meet various conditions ‘designed to help manage the effects of commercial tree plantings on water availability in locations where average annual rainfall exceeds 600 millimetres’. DAWE stated that these conditions, commonly referred to as the ‘water rule’, have consistently been identified by industry as ‘the biggest impediment to plantation expansion’.
4.76
DAWE advised that, in 2020, amendments were made to the water requirements for the ERF’s plantation method which will enable plantation and farm forestry projects to participate in the ERF ‘if located in an area where tree planting is unlikely to materially impact water availability’. These changes are initially being applied in the following five Regional Forestry Hubs:
north east New South Wales
South West Slopes of New South Wales and Victoria
south east South Australian section of the Green Triangle
south west Western Australia
north/north west Tasmania.
4.77
AFPA called for the changes to the water rule to be applied to all the hubs, especially the Victorian side of the Green Triangle. HVP also advocated for the need for these changes to be applied in western Victoria.
4.78
DAWE stated that it had identified the Victorian part of the Green Triangle as being an area ‘that was already under significant pressure of water availability due to climate change and past plantation establishment’. DAWE added that it has been working with the Victorian Government which is currently attempting to identify areas in the Green Triangle where the risk to water resources from plantation expansion was low.
Climate certification and verification of credits
4.79
The Department of Industry, Science, Energy and Resources (DISER) highlighted the role of Climate Active, a government based system offering certification for businesses who are claiming to have become climate neutral. To achieve climate neutral certification, an organisation must use certified carbon credits, this includes ACCUs but also a range of international carbon credits. DISER advised that not all international credits could be used for Climate Active certification, only those that ‘meet similar integrity principles to the ACCU’.
4.80
DISER also reported that while there were ongoing efforts to encourage the use of ACCUs only ‘about six per cent of offset units are ACCUs. The main reason for that … is price, with ACCUs being around $16 a unit, and international units being at a much lower rate—more around the $3, $4 or $5 mark.’ DISER added that the many of the international units were part of the Clean Development Mechanism system, overseen by the United Nations Framework Convention on Climate Change. This is a system with well established standards that has been running for a significant amount of time and so has led to a high level of supply of international credits, which DISER suggested was the primary reasons for the low international prices.
4.81
New Forests suggested that competitiveness of plantation carbon sequestration projects could be improved by raising the auction price and allowing ACCUs to be traded in ‘more lucrative global sequestration markets’ such as the European Union and New Zealand.
4.82
New Forests explained that, at the current prices, carbon credits were perhaps adding 1 to 2 per cent to the rate of return on plantations, lifting it to around 5 per cent per year. New Forests described this rate as ‘still subeconomic’, adding:
…it’s unlikely to generate any sufficient or rapid expansion of the industry, it’s not until you see carbon prices well north of [$20 to $30]—that you will start actually to catalyse plantation establishment at current land prices and with current economics and the capacity to pay from the current processing sector. That’s the limitation, and that’s why you are not seeing plantation establishment occurring, even with the 600-millimetre [water] rule being clarified for the hubs, which is greatly appreciated by industry.
4.83
HVP agreed that the net value of carbon credits needs to increase but noted that this could occur though an increase in the price but also through ‘lower accreditation and management costs for bringing carbon sequestration credits to market’.
Life Cycle Carbon Storage
4.84
In addition, New Forests suggested that carbon sequestration calculations should also include ‘the life cycle carbon stored in wood-based end products, not just in standing forests’ and that the Government should provide incentives for the greater use of wood products in construction given their lower embodied energy.
4.85
HVP agreed with the need to recognise carbon storage in wood products, stating that ‘current accounting treats this issue much more conservatively than evidence indicates is appropriate, in essence carbon sequestration credits are more valuable if they are recognised as taking carbon dioxide out of the atmosphere for longer’.
New and Emerging Products
4.86
HVP noted that a lot of material in softwood plantations such as branches and damaged sections of logs, as well as processing residue such as bark and sawdust are not used very efficiently. HVP added that markets for these products are still developing and that ‘the conversion of these kinds of residue material into higher value products has the capacity to significantly increase the overall recovery of fibre from softwood logs.’
4.87
Similarly, New Forests stated that it has heard from sawmillers that they make 90 per cent of their profit from 30 per cent of the product. New Forests called for government incentives for the development of new products such as engineered wood, glue laminated timber, and composite products using wood fibre, sawdust, and plastic.
4.88
HVP also highlighted the potential of wood fibre in bio-materials that might include ‘replacements for plastics, solvents, pharmaceuticals and entirely new products based on sustainable and bio-degradable products from trees’. HVP called for governments to support the research and development needed to bring these products to market.
Engineered Woods
4.89
Pentarch highlighted the developments in engineered wood products which can use both hardwood and good quality immature softwood. These engineered products can have electric and plumbing services, as well as doors and windows, contained in the panel enabling construction cost savings.
4.90
Similarly, the Housing industry Association (HIA) emphasised the increasing importance of engineered timbers such as Cross Laminated Timber (CLT) and prefabricated walls in the construction industry and added that it expected demand for these products to grow over the next five years.
4.91
AFPA called for greater use of CLT stating that it was making the ‘construction of entire buildings including multi-rise from timber a reality’. AFPA stated that apartments can be built faster and cheaper using CLT and the CO2e emissions of an average CLT apartment will be 1,400 tonnes lower than the average apartment built of concrete and steel. AFPA added that CLT has been manufactured for more than a decade overseas but had only recently begun to be produced domestically.
4.92
Hyne Timber reported that it had invested $56 million in the XLam manufacturing facility in Albury which is the only CLT manufacturing facility in Australasia. Hyne reported that the XLam facility is experiencing increasing demand for its engineered timber products.
4.93
AFPA recommended greater use of CLT as part of a ‘carbon neutral city’ policy which would prioritise the use of wood in building construction. AFPA explained that relative to other building materials such as ‘steel, aluminium and concrete, timber products have very low embodied energy, with very low fossil fuel energy inputs’. Similarly, HVP called for a government ‘wood first’ policy to ‘encourage the use of wood in new residential and especially commercial construction’.
Bioenergy
4.94
AFPA highlighted the potentially large benefits to both the forest industries and beyond from increased use of sustainably produced biomass for energy. AFPA stated ‘sustainably produced biomass from timber processing activities (such as sawdust, timber offcuts and forestry waste) and other agricultural sources, can offer significant potential to contribute to Australia’s renewable energy future.’
4.95
AFPA noted that under the Kyoto Protocol bioenergy is regarded as carbon neutral and stated that Australia was a ‘laggard’ in the uptake of bioenergy, falling in the ‘bottom quartile of Organisation of Economic Cooperation and Development (OECD) countries with respect to bioenergy as a proportion of the total energy consumption’.
4.96
The Department of Industry, Science, Energy and Resources stated that forestry biomass can be used for thermal heat projects under the Emissions Reduction Fund. DAWE indicated that greater use of forest residues for bioenergy was among the priorities for the new Regional Forestry Hubs.
Committee Comment
4.97
For the past decade, the timber industry has not seen any meaningful growth in the extent of the Australian plantation estate. As discussed in Chapter 3 timber processors are facing chronic difficulties in accessing log supplies and one of the key barriers to addressing this shortfall is the absence of new plantations being established.
4.98
The economics of growing plantation trees are difficult. The costs of establishing a plantation are considerable, most significantly the cost of the land but there is also the cost of establishing road access for heavy machinery. Additionally, unlike most other crops, plantations do not provide a regular annual revenue source. While some returns may be made once or twice through thinning operations, the vast majority of the returns are delivered at final harvest, which may be 30 years after the initial investment.
4.99
Given the decades wait before generating revenue, not to mention the risks from bushfires, plantations will always struggle to deliver the rates of return generally expected by long-term investors. The bulk of Australia’s plantations have, therefore, been established with the support of governments, either through direct planting by state governments or by private companies with the help of government incentives.
4.100
One such incentive, the managed investment schemes (MIS), was particularly effective in driving plantation establishment in the 1990s and 2000s. Unfortunately, it was also notable for resulting in a number of businesses quickly collapsing and causing economic hardship though the timber supply chain.
4.101
Many MIS plantations were planted in inappropriate locations and have since transferred to other agricultural uses. Since that time there has been a strengthening of the MIS investor protections. Whether these schemes will regain investor trust and play a role in future plantation establishment is a matter for the market.
4.102
One lesson of the MIS collapse is that it is critical for any future growth to be the right trees planted in the right locations. The Australian Government’s Regional Forestry Hub scheme is an important step in ensuring that the new plantations will be located where they can economically be harvested. The Government has also announced that it intends to offer concessional loans for the establishment of plantations. While, these loans have not yet become available, they should play a role in improving the viability of potential projects.
4.103
Taxation can also serve as a disincentive to plantation establishment. With the bulk of a plantation’s revenue coming in a single year, growers can be hit with massive tax bills in the harvest year after years of generating no revenue. This ‘period inequity’ results in growers paying more tax than other businesses with a more regular revenue stream. The Committee also heard that farm foresters can be disadvantaged when attempting to use plantations as a form of superannuation.
4.104
Related to these issues, it can be difficult for growers to separate the plantation and the land it is grown on into individual assets. If it were easier to sell either the trees or the land individually this would help with farm succession planning as well as improving the liquidity of plantations assets.
4.105
The Committee supports the idea of policies that can overcome the disincentives and place the plantation sector on a level playing field. Equally, however, it is vital to ensure that new policies do not create market distortions and that plantations are only situated where they are the most appropriate land use.
4.106
Analysing the potential incentives and taxation reforms that could boost plantation expansion requires in-depth consideration, including of possible unintended consequences, beyond the scope of this inquiry.
4.107
The Committee is therefore recommending that the Productivity Commission undertake a thorough review of potential reforms to encourage plantation establishment. The review should consider potential incentives, taxation reforms, improving the liquidity of plantations, and opportunities to encourage plantation growth as a contribution to superannuation.
4.108
Farm forestry is currently only a small component of the Australian plantation industry, but in many other countries its role is much more substantial. One of the advantages of farm forestry is that it can remove the cost of purchasing land. If located in an area with good access to mills, such as in a forestry hub, plantations could offer a useful income diversification for farmers. Additionally, plantations can also provide environmental and productivity benefits for farms.
4.109
The Committee was pleased to hear that the Government is developing a National Farm Forestry Strategy. The Committee heard evidence to suggest that there is a need to assist farmers with developing technical skills related to plantation management. There is also a need to look at options to assist farm foresters to aggregate their harvests to create log parcels of a viable size for processors. The Committee is recommending these two issues are addressed in the National Farm Forestry Strategy.
4.110
There are a number of emerging markets for wood fibre, including from residues such as sawdust and branches, which could have a positive impact on plantation economics. Currently, the vast majority of the revenue available to a softwood grower comes from the sawlog with a large quantity of wood fibre wasted or used for low-value uses.
4.111
The development of engineered timbers, biodegradable plastics, and bioenergy could lead to greater utilisation of the whole tree, thus increasing the value of existing and new plantations. These materials not only offer economic opportunities, they also have environmental benefits by containing lower embodied carbon and creating less problematic waste streams than the products they replace. To fully realise the benefits of these developments it will be necessary to establish Australian manufacturing facilities to process the residue fibre from growers.
4.112
Considering the potential for innovative new products to create demand for previously low-value fibre, the Committee was concerned at the state of forestry research and development in Australia. There appears to have been a substantial decrease in Australia’s forestry research capacity since the mid‑2000s. There is a need to increase our capabilities in this area to ensure that Australian companies can be at the forefront of commercialising new wood fibre products.
4.113
One of the greatest opportunities for the plantation industry is to add value to their assets is through carbon farming. Plantations sequester carbon from the atmosphere thus delivering substantial climate change benefits. The development of a market for these benefits provides a new and on-going revenue stream for growers.
4.114
The Committee was pleased to hear of the changes to the ‘water rule’ which has previously effectively locked plantations out of participation in the Emissions Reduction Fund. The Committee notes, however, that only half of the Regional Forestry Hubs have been made eligible for these changed rules and recommends that this opportunity is also provided to the remaining hubs.
4.115
The Committee also notes that the Clean Energy Regulator is about to commence a review of the methodology used to include plantation forestry in the Emissions Reduction Fund. The Committee suggests that this is a good opportunity to consider whether the abatement benefits of the carbon contained in manufactured wood products should also generate carbon credits.
4.116
Resetting the economics of plantation establishment will require development on a number of fronts. The diversity of issues discussed here, from carbon farming and new wood fibre products, to concessional loans and taxation reform, shows how much potential for change exists. With an innovative industry and appropriate policy settings there is reason to believe that the plantation industry may once again have the potential to expand.
4.117
The Committee recommends that the Productivity Commission undertake a review of the regulatory settings relating to the establishment of plantations. This should include current and potential incentives and barriers as well as existing and possible taxation regulations. In particular, the review should consider:
possible options for minimising the impact of period inequity on plantation growers
the taxation and superannuation effects of farmers engaging in farm forestry activities
improving the liquidity of plantation assets
any other potential incentives for, and barriers to, plantation growth and their broad economic impacts.
4.118
The Committee recommends that the Australian Government and State and Territory Governments support a significant increase in Australia’s forestry research and development capabilities. In particular, this support should:
focus on the development and commercialisation of new products with the potential to increase demand for Australian timber
explore and adopt opportunities for increased on-shore value adding to Australian timber products.
4.119
The Committee recommends that the National Farm Forestry Strategy should include:
information, tools, and extension services that support farmers to make decisions regarding plantation establishment and management
options to assist farm foresters aggregate harvests to better integrate with the supply needs of processors.
4.120
The Committee recommends that the Clean Energy Regulator, during its review of the Emissions Reduction Fund method for plantation forestry, consider the options for inclusion of the carbon abatement embodied in wood products.
4.121
The Committee recommends that work be accelerated to develop an Emissions Reduction Fund methodology for carbon stored in the built environment.
this work should be underpinned by ongoing work to enhance existing methodologies for farm forestry and plantation forests.
4.122
The Committee recommends that recent changes to the Emissions Reduction Fund rules relating to rainfall levels for plantations be applied to all Regional Forestry Hub regions.
4.123
The Committee recommends that the Australian Government prioritise new carbon abatement projects which deliver co-benefits to the Australian economy beyond carbon storage, including, but not limited to, supporting local industry, creating and sustaining jobs, and generating new downstream manufacturing opportunities.
18 March 2021