In the Federal Budget the Government
confirmed $2.55 billion funding for the Emissions Reduction Fund. A lag in
entering into contracts, delivery of abatement and payments will mean the
process is slower than anticipated.
A total of $1.1bn is to be paid in the
first four years.
The $2.55 billion will be paid out over ten years. Market
analyst Reputex forecasts “scarcity of
ACCUs in the first half of FY15 likely to be particularly acute due to
the requirement for the government to develop methods and participants to
register projects for new abatement activities.” The scarcity of bidders will mean funding is unlikely to be exhausted in
the early years, leaving a large amount of capital available for small and
large bidders. “Low supply and low
competition for funds may provide an opportunity for early movers to
secure higher priced contracts while participation in the ERF is low.” “Current
CFI participants - the only current ACCU generators - are expected to take a
high bid approach in the ERF's initial rounds .
”This is expected to inflate
ERF prices in early auction rounds, before prices fall in line with growing
supply and competition for funds.”
Aggregate! Aggregate! Aggregate!
The Government wants to streamline the
ERF’s processes. It’s reverse auction system will deal in minimum bids of 2000
tonnes CO2-e. The Government believes that few farmers could produce such
volumes via soil carbon. But 2000 tonnes of CO2-e extracted from the atmosphere
is the equivalent of 550 tonnes carbon in the soil. If we want to be
ultra-conservative, we could accept the CSIRO’s upper estimate of 500kg of carbon
sequestered per hectare per year.
That figure of 500kg translates into 2 tonnes of CO2-e (ie. C x 3.67 = CO2-e). So an individual farmer could put together a
bid with 1,000ha. But 72% of Australian farms are smaller than 500ha. This
means most farmers will have to join with others to go the market, by having
their offering aggregated or pooled. Aggregators will soon be thick on the
ground: NRM groups, farmers groups, trading groups, brokers, suppliers of
products and services with client bases, etc. What should you look for in an
aggregator? No.1: Knowledge. Have they done any training? (Those who have attended
Carbon Farmers of Australia 2-day Workshop have a grounding. Few, if any,
seminars conducted (with ‘carbon farming’ in the title) have included any
information about carbon markets. 2. Expertise: Have they been part of the
Government’s consultation process? Do they have a track record in the field? 3. Attitude: Do they have a healthy attitude towards
market-based solutions to funding delivery of environmental and climate
services? 4. Experience: Do they have any clients trading offset units? Have
they been engaged for some time in the processes that have led to the market or
have they just arrived? 5. Services offered: What services can you access
through them? Baseline measurement? Insurance? Auditing? Pool management?
Access to voluntary markets? Choose wisely.
PS, Another way to assemble 2000 tonnes could be bundling
different methodologies for the same property., according to the Department.
PPS, Individual enterprises that can
supply 200,000 tonnes can negotiate their own contract timings and conditions,
a recognition of the long leadtimes for bespoke projects.
Common
Sense Cuts Costs
The
cost of measurement of soil contributes a great deal to the impression that the
economics of soil carbon is all out of whack. Jeff Baldock has managed to bring
the cost down, but not far enough. A major component of the overall cost is the
calculation of bulk density. This could be simplified by using a default figure
of 1.0. I have spoken to senior scientists who believe that this would more
than meet the needs for a discount to balance the risk attached to a default.
It could be focused on certain soil types to further reduce the risk, or clay
vs sandy soils.
Co-benefits
no benefit
One
of the Minister’s criteria for including certain units in an auction is “Whether
the activity could have adverse social, environmental or economic impacts.” While we agree with
assigning a negative value for the ‘side effects’ of an activity, we also
believe that there should be some recognition of the positive co-benefits of
soil carbon-based units. And taking account of this value in the unit price in
the auction system. The budget for the Department of Agriculture’s program that
aims to promote sustainable farming could be assigned to be spent as a
fixed-price augmentation of the price secured by soil carbon projects. Wherever
it comes from, we need to ring the bell for co-benefits.
Make Good No Good?
“Some
business groups saw make-good provisions as a disincentive to participation, others were of the view that
make-good provisions would support
the underlying objective of the Emissions
Reduction Fund.” Surely one of the “underlying objectives” of the ERF is participation.
If no proponents submit units for sale, the program has failed and all
investment in it has been lost. The Identification of disincentives to
participation should be done urgently and addressed immediately.
A question of credibility
At the White Paper Consultation gathering in
Sydney on 14th May we were able to put the following “make or break”
question to senior departmental officers.. The background to the question is
summed up in these 4 points:
1. The Reverse Auction works when a group of sellers
bid a price to the buyer who chooses
(usually) the lowest price.
2.The Emissions Reduction Fund reverse
auction system is managed by the Clean Energy Regulator (CER).
3. The sellers bid for contracts to deliver
emissions avoided or sequestered by a specified date in the future. (Usually 5
years.)
4. The CER can refuse to allow a bid to be
made if it decides, among other things, that the estimates of the amount of
carbon that will be captured are not “credible”. That is, the rate of increase cannot
be referenced in ‘sound science’.
The question: “What information will
the Clean Energy Regulator rely upon to decide whether the estimates of soil
carbon are credible or not when there is controversy about the data indicating
the potential of innovative methods to sequester carbon. Dr Jeff Baldock, who
directed the $24m Soil Carbon Research Program- the latest research - described
it as a ‘single point in time’ study. As such it cannot be used to make
judgements about changes in carbon stocks. As well, it did not address many of
the latest innovations in land management. The CSIRO told the recent Senate Inquiry
into the ERF that soil carbon’s contribution to meeting the Government’s target
will be ‘small’ and ‘modest’. The maximum amount which could be captured under
pasture is 0.5 tonnes of carbon per hectare per year, according to scientific
reports. Data gathered on the farms of
best practice carbon farmers has detected increases of more than 2 tonnes/ha/yr.
Such data is suspect among scientists and often discarded. Such data described
as ‘outliers’, rare data points that skew the findings away from the average.
But, while this is a legitimate approach when the average is the answer sought,
when seeking the potential (or highest possible level achieved) the ‘outlier’
is the answer. Unable to be found on the radar of accepted data, carbon farmers
were looking forward to demonstrating the capability to capture and store
carbon in soils at rates far higher than ‘small and modest’. But a decision by
the CER that a bid lacks credibility because it proposes to increase carbon
levels at rates that are not based on ‘sound science’ could be problematic. We
recommend that proponents be permitted to take the risk of bidding higher rates
of sequestration and manage the situation via “Risk of Reversal” arrangements
in the contract.
The
ERF White Paper gives the CER flexibility to manage risk via the contract: “Projects
will be subject to a range
of uncertainties that could affect the timing and amount of emissions reductions delivered. Many are beyond a company’s
reasonable control and will be set out in the contract. For example, a
project could be affected by natural events such as floods or fires. The
contract will enable
the Clean Energy Regulator
and the business to vary the quantity
and schedule for delivery of emissions reductions if the project or measured
emissions are affected by these
specified circumstances.”
PS.
We are investigating the possibility of selling the carbon in excess of that
which is contracted in the ERF by packaging it for sale on voluntary markets,
here and overseas.
“Boo!”
It’s the 100 Year-old boogie-man.
The
truth about the 100 Year Rule has a hard job getting through to farmers. Even
25 years is not seen as a concession. To
break through the rusted-on reputation , the Government must drop a large stone in the pool, ie. do something
highly visible to remove the fear of a long contract: extend the ‘risk of reversal’ buffer that currently operates under the Carbon Farming Initiative
far enough to cover the proponent completely. The message must be as simple as
that used by the Government to “Axe the Tax”. The alternative – relying on
private enterprise to take on the responsibility – fails to take account of one
very material difference between a private vs a government regulatory solution:
The market is saturated with a high level of brand awareness of the
characteristic association between “Soil Carbon” and “100 Years. This will not
fix itself. The government can fix it by a system whereby every transaction is
‘taxed’ an amount which can cover the farmer’s liability for the entire 100
Year period. The amount taxed can thereafter be returned in increments to the
farmer as time passes and the risks are reduced. The Government can sell the
system to private enterprise once it has been established and completed its job
of removing the barrier to involvement that 100 Years represents.
Gifford, RM,
Cheney, NP, Noble, JC, Russel, JS, Wellingtpon, AB and Zammit, C 26 (1992),
“Australian land use, primary production of vegetation and carbon pools in
relation to atmospheric carbon dioxide concentration”, in Gifford and Barson
MM, Australia’s renewable resources, sustainability and global change, pp. 151
– 188, Bureaux of Rural Resources, Bureaus CSIRO, Australia
K
Y Chan, A Cowie, G Kelly, Bhupinderpal Singh, P Slavich, Scoping Paper: Soil Organic Carbon Sequestration
Potential for Agriculture in NSW , NSW DPI 2008
