Monday, May 19, 2014

ERF’s $2.5bn survives Joe Hockey’s Razor Attack

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.[1][2][3][4] 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.

[1] “In Australia, research has demonstrated that pasture improvement (such as sown pasture or fertiliser application) can lead to significant increases in SOC sequestration (500 kg C/ha/yr, Gifford et al. 1992*) compared to unimproved pasture. Long term trials in Australia have shown that this rate of SOC increase can be maintained for at least 40 years as a result of pasture improvement (Russell and Williams, 1960).”
[2] 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

[3] Russell, JS and Williams, CH (1982). Biochemical interactions of carbon, nitrogen, sulphur and phosphorus in Australian agroecosystems. In: Galbally, IE and Freney, JR (eds) “The Cycling of Carbon, Nitrogen, Sulfur and Phosphorus in Terrestrial and Aquatic Ecosystems”. Australian Academy of Science, Canberra, September 2006, Hunter Water Corporation
[4] 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

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