Monday, March 22, 2010

Helping Growers Make A Decision On Trading Soil Carbon

Recently, when Minister Tony Burke said famously: “ If you’re able to improve the amount of carbon in the soil through sequestration, you get cash." He also said: "Now people can do their own sums as to what sort of deal that would end up being for farmers.” Can they? We believe they can't. That's why we have developed the Soil Carbon Offset Grower’s Risk/Return Calculator.

Soon Australian growers will be faced with a decision: "To Trade Or Not To Trade - and With Whom?". As part of our 'Getting Ready To Trade' workshops* which we have conducted throughout NSW and OLD, we have developed decision-making tools to make it easier to navigate through the confusion. The Soil Carbon Offset Grower’s Risk/Return Calculator enables you to weigh the returns against the risks. You can use this Calculator to analyse any one of the many opportunities offered to you and do your own sums as to what sort of deal that would end up being for you.
PRICE: Price Per Tonne is what we have found most growers focus on. A range of prices have been floated, from $5 to $40. Farmers always favour a higher price per tonne. But is Price Per Tonne the Bottomline? Price Per Tonne can be high, but the Grower can be disadvantaged by: • Low volume per hectare • High middleman costs • High insurance cost • Low protection against C losses • Long contract period. Price Per Tonne can be low and the Grower can be advantaged by: • Higher volume per hectare • Fixed low middleman costs • Low insurance cost • High protection against C losses • Short contract period. So Price Per Tonne should not be the sole decider.
TONES PER HECTARE: All trading systems will need to have an element of estimation* involved, as all carbon trading and all trading systems do. Tonnes Per Hectar allowable will depend on the system adopted by each operation. The Tonneage allowed in an estimation system is likely to be between 2 and 10tCO2(-e) per hectare per year. Tonneage under an accurate measurement system varies with the amount measured. The Grower will have less to trade if only Humus is measured, more if Total Carbon is measured. But the security of humus will attract a higher prince per tonne.
HECTARES ENROLLED: Carbon Farmers of Australia recommend that Growers have their property 'Baselined" and put a toe in water with 150Ha to start.
COST OF LAND MANAGEMENT CHANGE: To be eligible to sell soil carbon offsets, a farmer must be able to demonstrate that these amounts of additional carbon are the result of a change in land management. The Cost of Land Management Change can vary dramatically depending on which technique is chosen. Random costs we have heard include 'wire and water' for grazing management ($40k), installing leaky weirs (Natural Sequence Farming - $5k to $40k), spreading Microbes $7k, Pasture Cropping $3k.
The Cost of Baselining and Monitoring must be low enough to allow trade to proceed but high enough to give buyers confidence. The cost in the only system currently making public its information, Prime Carbon, has been floated at $5.50/ha/yr
Middlemen are a necessary evil. But as the smallest trading unit allowable is far higher than one Grower could supply, farmers will have to be aggregated into pools. So a necessary middleman is an Aggregator. There also needs to be management of the "Buffer Pool", part of a self insurance system which requires Growers to submit additional tonnes to cover losses from fire and drought. A Database of Units must be managed transparently. The Auditor role is important. Both the latter two make buyers confident enough to buy. We need a Broker to make the sale and there is a fee for using the system. The Prime Carbon system caps the middleman costs at 10%. The CCX equivalent is 15% and for many years was 30%.)
The Duration of the Contract should be a major consideration. The Kyoto Protocols require contracts for trees to be 100 years or at least 75 years. Such a period would be an unacceptable risk to Growers. But under the New Deal for Agriculture being shepherded through the UNFCCC Copenhagen '09/Mexico City '10 process by the FAO, soil sequestration is expected to draw down the equivalent of 50ppm for 50 years, so 50 years could be considered. Another option is 25 years. The contracts offered by the Chicago Climate Exchange are 5 years renewable and Prime Carbon's period is 5 years non-renewable. These periods do not mean the captured carbon is immediately released. Soil carbon reaches equilibrium and seeks to maintain that new level via its own resources. A Stewardship Payment system would maintain enthusiasm among land managers.)
PERMANENCE LIABILITY: Permanence Liability is a downside risk that can be managed by the Buffer Pool, which is a collective self insurance. The Grower contributes units to be held in trust. The Chicago Climate Exchange (CCX) requires that the Grower submit 1 in 5 tonnes, and Prime Carbon 1 in 2 tonnes.

The Grower needs to give their own weight to each element to make their ultimate decision.

* Practical Soil Carbon Farming Workshops by Carbon Farmers of Australia. Call (02) 6374 0329 to find out when we will be in your area. (If you have a group of farmers interested in a one- or two-day workshop, we can organise to come to your location.
**An "estimation system" uses indicators such as land management change to estimate volumes of carbon captured and stored, according to modelled data. On the opposite pole is a "direct measurement system" which seeks to detect exactly the amount of carbon captured with a view to trading the maximum amount grown. Versions of a hybrid system are most likely to be adopted for risk management and measurement cost reasons.

1 comment:

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