An econometric‐process simulation model was constructed to investigate the effects of an Emissions Trading Scheme (ETS) on forest management and land use in New Zealand. Profit maximising agents which choose between forestry and agricultural land uses were simulated under carbon price scenarios of $20, $50 and $0 per tonne CO2 equivalent. The model suggests that an ETS will lead to increased afforestation and rotation age, and decreased silviculture and deforestation. A $20 carbon price or higher led to an overall increase in carbon sequestration by the forestry sector, driven predominantly by afforestation on lower fertility sites. Higher carbon prices increase the range of available land for planting. Future carbon price expectancy was critical. Rising carbon price expectancy led to large scale afforestation, but also to significant deforestation. A falling expectancy prevented deforestation but also stifled afforestation. The most sustainable solution was a stable carbon price expectancy allowing land to consistently work towards an economically optimal use. The recommendation of this report is for policy which promotes a stable long‐run carbon price and flexibility for change between land uses. Suggestions include a guaranteed maximum carbon price, or allowing a forest to be felled at reduced penalty if another is concurrently planted.
