Carbon Trading
Carbon trading is becoming an increasingly popular topic in today’s Agricultural and broader industry dialogue. The role it may have in the mixed farming and continuous cropping systems within the Southern Riverina, is still largely unknown, due to the lack of projects that have been commissioned under similar climatic conditions to the area. With increasing land values, there is further incentive to improve utilisation of non-arable land and look to additional income streams from this land.
The aim of the Australian Government’s Clean Energy Regulator, Emission Reduction Fund (ERF), is to provide incentives for a voluntary scheme in which landholders and other organisations, can reduce their emissions by adopting new technologies and practices within their operations. One Australian Carbon Credit Unit (ACCU) is earned, per tonne of Carbon Dioxide equivalent stored or evaded, through eligible activities as defined under the ERF.
The two main methods available for mixed sheep and cropping, or continuous cropping enterprises to participate in ERF projects, are via Soil Carbon Sequestration methods or vegetation methods.
Soil Carbon Sequestration
The eligible activities under the soil Carbon sequestration method include:
applying nutrients to the land in the form of a synthetic or non-synthetic fertiliser to address deficiencies
applying lime to remediate acid soils
applying gypsum to remediate sodic or magnesic soils
undertake irrigation activities from new irrigation efficiency savings
re-establishing or renovating a pasture by seeding
establishing, and permanently maintaining, a pasture where there was previously no pasture
alteration of the stocking rate, period or intensity of grazing
stubble retention
converting to minimum or no tillage practices
alteration of landscape or landform features to amend land
addition or redistribution of soil through the soil profile via mechanical means
It should be noted that updated methods are set to be released in October/November, 2021.
Many of the above methods sound highly feasible, as they are common agricultural practices adopted as part of modern farming systems. However, the important thing to note is that all methods established must be a change in practice from current operations, for the method to be deemed eligible under the ERF. There are also certain restricted activities in alignment with the eligible activities, which must be complied with.
Important details to consider before commencing projects:
No existing projects can be considered under the current method determinations of the scheme. This means that if a business was looking to commence a project they considered would satisfy the criteria of the scheme in the future, they would need to register the project and have baseline Carbon levels measured, prior to any implementation of the project.
There is a minimum 25 year commitment for land entered into soil Carbon sequestration schemes, meaning that any land entered into the scheme, must remain under agricultural production purposes and not be utilised for infrastructure or housing development, during this period.
It is preferable that projects be registered for a duration of 100 years rather than for only 25 years, as there is a significant discount automatically applied to all ACCUs accumulated under a project that has been entered into a 25 year commitment.
This takes the form of a 20% reduction in the number of ACCUs issued for projects, in addition to the 5% risk of reversal buffer that also comes into effect for all soil Carbon projects. The justification for this is that it allows for the Government to cover replacement costs of potentially lost Carbon stores, over a shorter project period.
Due to environmental extremes, such as drought or fire which could deplete expected Carbon levels attained during an activity commenced under a Carbon trading scheme, it would not be advisable to enter into agreements with a commitment to supply sequestered Carbon. A lower risk approach, would entail selling only Carbon credits accumulated once they are measured and confirmed under the ERF scheme, following audits.
Carbon sequestered is an incremental measurement from the baseline and then subsequent tests. If there is a decline in soil Carbon levels, credits are not issued.
Credits can be forfeited if the land changes purpose from agriculture, or if the business fails to comply with any of the other regulations as part of the scheme.
Projects under the ERF are audited to ensure compliance, which entails additional testing to validate a project’s Carbon measurement modelling method, consultation with subject matter experts, plus an accounting audit to ensure that the Carbon balance sheet for the organisation undertaking the program complies. Industry estimates suggest that a significant proportion of projects listed with the regulator, have been revoked due to lack of compliance.
To date, research suggests that the only project in Australia to have been awarded ACCUs under the Carbon Farming Initiative - Measurement of Soil Carbon Sequestration in Agricultural Systems Methodology Determination, is the Olsens’ property at Hallora in West Gippsland, Victoria. The property listed approximately 100ha with the ERF and has been awarded ACCUs in two rounds of testing thus far. The property has achieved ACCU credits, via methods including facilitation of rotational grazing, multi species pasture cropping, plus utilisation of the “SoilKee Renovator Machine” for the property’s pasture cropping system.
In the Southern Riverina, costs associated with entering programs could be quite significant relative to the potential revenue derived directly from sales of ACCUs at current prices. Initially, soil tests are required to be undertaken to establish a baseline, as well as testing at the relevant intervals to determine soil Carbon accumulation, which sources have estimated could cost in the range of $5,000 to $10,000 (ex GST) per 200 ha to 500 ha respectively, depending on the scale of the project. There are also a minimum of three audits required to be performed by a third party prior to award of ACCUs following subsequent soil testing from the baseline over a 25 year project. The first of these is estimated to cost approximately $15,000 to $20 000, with subsequent audits only slightly less.
There is an advance payment worth up to $5,000 available through a pilot program for eligible ERF projects, to assist with the initial costs of completing baseline soil sampling. The conditions for this advance payment are; that ACCUs must be provided within five years, only one advance payment can be issued per eligible project under the Carbon Credits Methodology Determination 2018, plus the testing must be for baseline sampling only.
Third party aggregators specific to ERF projects, can be sought to assist with managing projects for businesses wishing to enter eligible schemes; by assisting with risk management in organising compliance, plus covering many of the initial costs associated with projects, before any ACCUs are issued and are eligible to be sold. However, these aggregators charge significant commission on ACCUs earned, anecdotally ranging from 18% - 40% of their market value.
There are anecdotal reports of many participants withdrawing from programs, due to the high compliance costs associated with projects listed under the ERF.
The justification for high compliance costs, is that Australia’s rigorous assessment process is highly regarded internationally, leading to potentially higher values for ACCUs relative to other countries with lower compliance requirements.
It should be noted that any ACCUs generated and sold, cannot be counted towards offset targets for that business, their industry or any national abatement targets. Carbon Credits cannot be sold twice!
The steps required to generate credits (ACCUs) are:
Registration of a new eligible project.
Baseline measurement of soil Carbon prior to project commencement.
Implementation of the project, on-farm record keeping.
Soil Carbon measurement at specified intervals.
Reporting (calculation, offset report, Carbon balance sheet, audit etc).
ACCU Application Claim
Sales opportunities for ACCUs are:
Fixed price.
Sell on the Spot Market.
Hold credits for later sale.
Restoration Fund (certain eligibility criteria apply).
Vegetation Methods
The guidelines for vegetation methods are not as clearly defined as they are for the soil Carbon methods. They appear to be best suited to large scale plantation and reforestation projects, via human induced regeneration methods, as well as management of native forest regrowth. The Federal Government has however had several eligible biodiversity projects suited to agriculture in the past, including activities such as land rejuvenation and shelter belt development. Whilst no Federal projects appear to be open for application at present, there are likely to be similar additional biodiversity pilots and associated programs with financial incentives released in future, which landholders may find worth investigating.
At present, ACCUs are valued at approximately $15 sold to the Federal Government, $30 sold to corporations in Australia, whilst offshore they are worth approximately $45.
Current ACCU markets in Australia are immature, opaque and dominated by brokers. However the ACCU market has potential to grow, with the Commonwealth Government committed to standardising markets and improving transparency through investment in a Carbon trading platform, plus initiatives to reduce the cost of Soil Carbon measurement.
Farmer-owned cooperatives have been proposed to improve scale efficiencies and transparency. Through Government purchases of ACCUs, regulation will effectively occur via a reduction in supply of ACCUs, whilst Australian companies are expected to increase demand, to offset their emissions as Australia approaches a target of net-zero by 2050.
In summary, the case for farm businesses trading Carbon Credits is not as compelling as it may seem at first glance. In the southern Riverina, testing and compliance costs are likely to be significant. At current prices for ACCUs, it is hard to see a business case for these activities.
This is likely to change in the future, as corporations increasingly compete with the Federal Government for ACCUs. Those businesses contemplating a change to their farming system which could potentially increase Carbon sequestration, should consider setting baseline levels first, utilising the advanced payment pilot program.
For landholders who would like to know more, the following link is a handy tool for considering the methods of sequestration that may be applicable for them, with links to the relevant information available on the Clean Energy Regulator’s website.
http://www.cleanenergyregulator.gov.au/DocumentAssets/Documents/Sequestration%20decision%20tree.pdf