Geoff Hall, director of agribusiness, RSM Bird Cameron, offers his insights into the opportunities with carbon storage in trees, which could become a major potential income stream for farmers in the future.
Regardless of which political party is in power and whether there is an Emissions Trading Scheme or not, Australia will still look to carbon storage through reforestation (biosequestration) as a major component to meeting its carbon emissions reduction targets.
For many farmers, carbon storage in trees could be a major potential income stream in future but great care will need to be exercised in any plans to commit to a qualifying carbon sink forest.
The Federal Government plan under the Carbon Pollution Reduction Scheme (CPRS), for which legislation has so far failed to pass the Senate, is to issue carbon credits for carbon stored in carbon sink forests issued at the rate of 1 carbon credit per 1 tonne of carbon dioxide equivalent stored. These carbon credits can then be traded as part of the CPRS Cap and Trade scheme allowing Australian companies with emission reduction targets to acquire credits to offset their greenhouse emissions.
The value of these carbon credits could be between $10 and $20 each.
The Federal Government has also initiated a research project (allocating $20 million) to create national standards for the measuring reporting and analysing of soil carbon with a view to potentially including carbon storage in soil as a recognised carbon abatement measure.
The recently announced Liberal Party policy on climate change suggests that under their forestry measures, 1 tonne of carbon could be worth $15. Their policy also identifies storage of carbon in soils as a major carbon emissions abatement opportunity.
The upcoming Federal Election will determine whether a Labor or Liberal policy is put in place in future. Whoever wins, farmers may be in the box seat to pursue some substantially lucrative financial opportunities through forest and soil sequestration.
Australia’s commitment to carbon emissions reductions was set under the Kyoto Protocol. Under Kyoto, Australia can currently only count carbon forest sequestration through reforestation.
The current CPRS plan allows forests, including landcare, environmental and commercial plantings to be included as a carbon abatement opportunity on a voluntary basis.
That is, farmers could, at their discretion, register tree plantings to reduce salt encroachment or combat soil erosion as a carbon sink forest and access carbon credits which may have a significant value.
Farmers may also be able to register harvestable forests such as millable timber, brushwood, sandalwood and oil malee plantations. There will be opportunity to create valuable carbon credits and also derive a financial return from the disposal of harvested timber. Where forests are harvested, the estimated amount of carbon stored less the estimated amount of carbon harvested will determine the amount of carbon credits that may be issued.
According to the NSW Department of Industry and Investment “Prime Facts” Newsletter, approximately half of the dry weight of a tree’s biomass is carbon.
Also, 1 tonne of carbon is equivalent to 3.67 tonne of carbon dioxide.
That is, the carbon dioxide equivalent stored in a tree is considerably greater than its carbon weight and somewhat explains why seemingly lightweight plantations of landcare trees in dryer farming areas may be valuable carbon abatement opportunities.
Commercial plantations in dryer farming areas such as brushwood, sandalwood and oil mallee have the potential to provide income streams for farmers both commercially and from generated carbon credits.
Forests established for timber harvesting currently may only attract carbon credits effectively from the non harvested portion of the tree.
But there could be carbon credits issued in the future in respect to the carbon stored in harvested timber and also issued in respect to harvest and milling waste used as a renewable energy.
A change to the scheme rules at some time in the future to allow carbon credits from harvested timber and waste may increase the revenue stream from forestry carbon abatement and increase the value of carbon rights.
Under the CPRS, carbon sink forests must be held by Accredited Forest Entities, who might be landowners, leaseholders or carbon property rights holders.
Whilst the prospect of an income stream from carbon sink forests is appealing, there are many issues that should be considered beforehand.
A major issue is that carbon sink forests must stay in place for up to 100 years. Most of the stored carbon is created in the first 20years of tree growth so there could be a very long period of forest management without much carbon credit benefit.
Also, costs and administration of managing forests for carbon over such a long period of time are such that many landowners may prefer to sell carbon rights to a forestation enterprise and receive a regular fee.
But there are many issues to consider in contemplating a contractual relationship with a forestation enterprise (e.g. forestry company) as well.
The potential economic benefits of carbon credits are not certain yet and entering a contractual arrangement in the present political climate could be speculative and risky.
In Western Australia, carbon rights are regulated under the Carbon Rights Act (2003). A carbon right is a right to the benefits and risks of carbon sequestration (and release) on an area of land.
A carbon right is a quite separate item of property to the land and can be sold separately to the land.
That is, a farmer could sell his carbon rights to a third party such as a forestry company, but retain the land. The carbon right must be registered with all parties holding an interest in the land, including the landholder, the forestry company and the mortgagor ( i.e. the landowner’s bank)
When the sale of a carbon right takes place, the parties can enter into a Carbon Covenant which basically sets out how the purchaser and seller protect their rights in respect to the carbon right and the land.
The Carbon Covenant can be registered on the land and when it is registered, it becomes a separate interest in the land.
Legal advice should be sought for a landowner considering selling his carbon rights, negotiating a carbon covenant or any other contractual agreement relating to carbon sequestration.
Some of the issues to consider include:
1. Insurance and public liability.
2. Access arrangements.
3. Firebreaks and fire protection arrangements for both the forest and the surrounding farmland.
4. Fees for the use of the land or a share farming arrangement.
5. Identifying what part of the land title relates to the carbon right.
6. Responsibility for rates and other outgoings (remember, this contract is for up to 100 years)
7. Entry notification requirements.
8. Site establishment techniques and fencing.
9. Fertiliser and spray application requirements on the forest area and on surrounding farm land.
10. Vermin and pest plant control.
11. Water use and access.
12. Environmental protection issues.
13. Grazing arrangements.
14. On site facilities and permitted improvements.
15. Required condition of land at end of agreement.
16. Provision for parties to review the agreement periodically.
Getting the agreement wrong may cause major practical and financial problems in carrying out the landowners continuing farming activities and in meeting the conditions of the covenant.
Landowners should also consider how a carbon covenant registered on the title may affect the market value of the farm in the future should he be considering selling up at some time.
Any proposals put to landowners by forestation enterprises should be carefully reviewed by the landholder in consultation with an experienced legal advisor and accountant especially as there is currently uncertainty as to the potential financial reward from carbon credits.
This article was written by Geoff Hall, director of agribusiness, RSM Bird Cameron.
For more information, or to schedule an interview with Mr. Hall, please contact Elizabeth McKenzie at 02 9252 2266.