Carbon farming broadly refers to land management activities that reduce Greenhouse Gas emissions from agricultural practices or use the landscape to sequester carbon dioxide. In Australia, carbon farming is an emerging industry that is making an important contribution to Australia’s emission reduction task and is central to the Government’s climate change policies.
The Carbon Farming Initiative (CFI), which commenced operation in Australia in December 2011, was a Federal Government carbon offset scheme established by the Carbon Credits (Carbon Farming Initiative) Act 2011 (the CFI Act). The CFI enabled emissions avoidance or carbon sequestration projects for the purpose of generating Australian Carbon Credit Units (ACCU’s) which were then tradable under the Carbon Pricing Mechanism. One ACCU is equivalent to one tonne of CO2e.
In 2014, the CFI was transitioned into the Emissions Reduction Fund (ERF) via amendments to the CFI Act. Currently, the ERF is the primary source of demand for ACCUs for projects that reduce emissions or enhance carbon storage on the land.
The ERF has a budget of $2.55 billion and as at the most recent auction, December 2018, the Clean Energy Regulator had contracted abatement of approximately 193 million tonnes with a weighted average price across all auctions of $12 per ACCU. There is approximately $226 million remaining within the ERF budget.
In recent years the ERF is the primary purchaser of ACCU’s in Australia, however carbon farming projects can also generate ACCUs for sale into secondary and voluntary Australian carbon markets. The price at which the carbon is traded is determined by supply and demand.
Currently in Queensland there are 245 ERF projects registered of which 146 relate to vegetation. The SW Queensland shires of Bulloo, Quilpie, Paroo, Murweh, Maranoa and Balonne account of 122 of these vegetation projects – mostly relating to the avoided clearing or regeneration of the Mulga Lands. To date these 146 Vegetation projects have generated an income stream of approximately $65 million net the various land owners (pre tax).
Typically landholders utilise the services of a carbon farming project development firm to assist with the initial and ongoing technical assessment and reporting requirements to the ERF. Landholders usually enter into a contracted agreement with these firms with commissions paid for their services generally around 30% of income generated.
The main reason the majority of producers or investors enter into a ERF project is for the cashflow generated. The level of cashflow varies significantly depending on locality, property and project. In most instances in SW Queensland, the projected cashflow over the initial 10 years of the project is greater than the value of land on which the project is located.
Producers are utilising the ERF income for various purposes including but not limited to debt reduction, succession planning, off farm investment and on farm investment including timber treatment on areas outside the ERF project area and infrastructure upgrading including yards, buildings, water and fencing. In some instances, the ERF cashflow has allowed producers to erect exclusion fence externally and netting fence internally so they can transition their business from cattle to meat sheep.
So what are the considerations / downside to all this cash? Well there are a few. These include;
- ERF projects generally have a 100 year permanence requirement, i.e. any sequested carbon has to be retained for a minimum of 100 years. Some projects do offer a 25 year permanence option, however in this instance only 80% of the sequested carbon is able to be claimed.
- Carbon sequested and ultimately cashflow from the ERF project will diminish over time as trees regenerate / thicken and mature.
- Risk of long term carrying capacity reduction due to thickening or growth of trees.
- Limit of clearing / pushing trees within the project area for stock fodder. This said, some tree pushing may be undertaken for the purposes of promoting tree growth in line with forestry practices.
- Some projects restrict the grazing of sheep and goats resulting in the property only being able to be utilised for cattle production into the future.
- Risk of a carbon depletion event due to fire, locusts or severe drought.
- Risk of the project not abating the projected level of Carbon.
- Potential of increased operational management costs as day to day activities may become more difficult due to increased vegetation cover.
- Cost of maintaining fire breaks to assist in avoiding a carbon depletion event.
- Level of reporting required to meet the requirements of ERF project.
- Risk of loss in property value due to reducing carbon income stream and potentially reduction in carrying capacity over time. Are you prepared to impact the value of most producer’s primary asset?
- The current project may be contracted with the ERF for 10 years, however what are the options for sale of the sequested carbon post the initial ERF contract.
- Financiers are often very cautious in regards to the security of income and potential long term impacts on their security property. There is a large variance between banks on instructions given to valuers on how to value properties with an ERF project. This suggests there is a relatively inconsistent approach to how different banks assess Carbon.
On the positive side, every project is different and generally tailored to individual circumstances. A landowner can build most considerations into an ERF project as long as they are known from the outset and built into the modelling and projections. I.e. only committing part of the property to a project, exclude Category X paddocks for future fodder harvesting, include cattle, sheep and goats within a sustainable stocking mix, exclusion fencing for the removal of feral animals, construct new water points to spread grazing pressure or even potentially buy the sequested carbon back or transfer the sequested carbon to another approved project area and return the property traditional operations.
The current property market appears to be paying a slight premium for those properties with existing ERF projects or have the potential for an ERF project. However this may change into the future as cashflow streams reduce in line with maturing trees.
Carbon Farming is an evolving space. The understanding of Carbon Farming is improving as people in all sectors become more exposed to it with most becoming more comfortable over time.
In the current political environment, it appears there will always be a market for carbon, be it Government or private sector based or both. Policy differences between the two major federal political parties are likely to see the mechanism for the sale of carbon vary over time.
Ultimately entering into an ERF project is a personal decision – a balancing act between cashflow and associated income risks and future property management constraints. Landowners looking to enter any agreement that has the potential to restrict their future carrying capacity and options for management should do their due diligence very well to ensure the benefits outweigh the costs in the long term.