New Zealand is both an Annex I Party to the UNFCCC, and an Annex B country of the Kyoto Protocol. By ratifying the latter, NZ has committed to reduce greenhouse gas emission to 1990 levels. The country should take domestic actions and can also use any of the Kyoto Protocol flexible mechanisms. Afforestation and reforestation on low carbon density land has been recognised as a carbon sink and hence a possible mitigation option for climate change. The current situation for New Zealand is that at least over the first commitment period (2008-2012) the country is in deficit, because emissions have continued to grow over the 1990 level, there is an increase in the deforestation rate and lower rates of new planting.

The objective of this study is to analyse the potential of the New Zealand forest sector as an integrated system to mitigate climate change. It also analyses the impact of different mechanisms on potential area of new land planting, management of stands, and the supply, allocation, and demand of wood, and wood products.

The New Zealand forest industry carbon balance (i.e net atmospheric exchange minus emissions) is modelled for different national estate scenarios, log allocation of harvested volume and residues used for bioenergy. The net present value of these scenarios is estimated and the economic viability assessed. The level of incentives needed to increase the returns to an economically viable level is estimated in term of carbon unit value ($/tC). Moreover the land use economics at a project level (land market value vs land expectation value) is assessed. Incentives needed in monetary terms and carbon value are also estimated. The implications of discounting carbon benefits are discussed.

It was found that the carbon balance of the whole industry should be analysed for policy development on climate change mitigation options. New planting, longer rotation ages, avoiding deforestation, and allocating additional harvested volume to sawmills showed positive impact to the atmosphere. New planting appeared to be not economically viable, thus incentives are needed. It is acknowledged that, there are emissions from the sector that were not included, and that data and models used need further research to improve the accuracy of the results. Moreover, assumptions on the economic issues and an analysis of simultaneous implementation of more than one mitigation option would also improve the results.