Saturday, September 22, 2007

Terry’s river of cash: will it flow?

“A river of cash is set to flow through the bush, with agriculture’s long quest to be part of a carbon trading market to be realised by year’s end,” says Country Life, a Queensland farm journal. “It has come about, not through lobby groups or government frameworks, but through rural Queensland entrepreneur Terry McCosker.”

Mr McCosker is not holding back. “We’re talking megabucks. This will change the face of agriculture within the next five years.” He said the area of land and volumes of carbon potentially available could together massively change he economy of rural Queensland – from land use to farm cash flows to property values – for decades to come.

When the Carbon Coalition briefed Terry on the soil carbon market opportunity exactly 12 months ago, we should have expected that RCS would act quickly to capitalise. Can Terry do it with his CarbonLink system?

If there is to be trouble with any system, it is always likely to be found in the methodology for MMV – measurement monitoring and verification. The methodology used by RCS to measure and verify tonnages of soil carbon was revealed yesterday in Country Life. The “paired fenceline samples” system is the technique used by the AGO. (But the AGO used the technique for estimating soil carbon losses across Australia over time, as part of a National Carbon Accounting System, not for quantifying soil carbon sequestered for sale as abatements.) On properties that have been managed using ‘cell grazing’, soil samples are “taken in both a paddock that has been subject to improved management practices and from a neighbouring paddock that has been grazed with conventional continuous methods.” This means taking samples from a neighbour’s paddocks. These paired samples provide “an indication of the impact of what changes to soil carbon have happened since the changes in management for those paddocks and an indication of what will happen in the future,” says the report. This means the system is ‘indicative’, relying on estimations rather than ‘direct measurement’. The actual amount of sequestered carbon in the paddock is not calculated by measuring the same soil over time. The difference between an indicative or estimated offering and a direct measurement offering is the amount of money per hectare the grower can earn. The difference can be dramatic. The RCS system appears to be a hybrid of the proxy system run by the CCX and a direct measurement system such as Christine Jones’s Australian Soil Carbon Acreditation Scheme.

“An indication” is not an accurate measurement for the purposes of trading – which is the barrier the Carbon Coalition has been campaigning to break through. At no stage is there an exact, strict verification of soil carbon amounts in the RCS system, despite it being touted as ‘strictly verified’. There is a baseline survey costing $20/Ha, with comparisons made over the fenceline and an estimation. This price indicates a level of testing that may not be sufficiently robust for trading. The next measurement takes place at year 5 and year 10 “to verify that the promised volume of carbon is actually sequestered. This is of vital importance to both the value of carbon and the credibility of the CarbonLink program.” Does this mean the soil carbon is sold before it is sequestered. Ie., not on delivery but on a promise?

The Country Life report also indicates that there will be some modelling done: “From the thousands of samples taken, an average difference in soil carbon levels can then be calculated, giving an indication of how much new carbon is being sequestered”. Even if RCS was able to recruit all 4000 landholders it has trained over the years, their combined data would not be sufficient to populate a calculator that could be relied upon for predicting soil carbon in every location.

A major snare for the RCI system could be found in the Kyoto principle of “Additionality”. If the carbon is sequestered as a result of ‘business as usual’, ie. the land management decisions were taken for reasons other than sequestering soil carbon, it does not qualify as a legitimate offset. The RCS system aims to sell ‘carbon vintages’ going back as far as 1990. As this was before most people had heard of carbon credits, RCS may have a solution to additionality that is unknown to us.

The RCS system is complex. Only 90% of “net carbon in the soil” will be offered for sale, with 10% held back for a margin of error. Then a further 25% of the carbon is not sold until after the 5 and 10 year tests ‘as insurance against a shortfall’. [Does this mean 75% of the 90% to be offered will be sold before it is sequestered?] A further 20% of the value of the contract is held in trust until after the 10 year period of the contract. Then RCS takes 20% in commission, when the contract is exchanged. This complexity is not good for dealing with farmers.

RCS has tests on five properties in QLD and NSW. It expects to be able to sell 100,000 tonnes of CO2e by Christmas. This doesn’t sound like many farmers, but CO2, the main forestry carbon abatement operator has only signed contracts with 15 farmers so far in more than 3 years of operation.

Despite the questions, we welcome the entry of RCS, and say “Good Luck, Terry”.

Wednesday, September 19, 2007

Now there are two!

The arrival of CarbonLink, the RCS scheme to sell soil carbon, to join Christine Jones's soil carbon accreditation scheme is good news for everyone. It means we are closer to the day when soil carbon takes its rightful place alongside forests as a tradeable commodity.

In both cases there are still a lot of questions about the engine room of any soil trading scheme: measurement, monitoring and verification. If anything, attitudes to this aspect of carbon trading are hardening.

The Carbon Coalition favours Transparency - one of the foundation principles of Carbon Trading.

Our advice to all landholders considering trading in soil carbon remains the same:

1. Not all of your property is likely to be ideal for sequestration. Flatter,more even areas are ideal.

2. Baseline measure those parts of your property. But don't commit all your appropriate land to a single scheme. Different schemes are likely to have different conditions and requirements. You need to build flexibility into your arrangements.

3. Risk management: you are making yourself liable for requests to reimburse should carbon sequestered subsequently be lost. Be sure you have insurance, escape clauses, recovery provisions, make good arrangements that suit you.

4. 100 years or 70 years is a long time to manage land to maintain a level of carbon. How realistic are your expectations?

Your best defence is knowledge.

Questions for CarbonLink

The Carbon Coalition has submitted the following questions to CarbonLink Rod Rush and Chairman Terry McCosker after the embargo was lifted. Some information will be commenrcial in cofidence. However we believe transparency is the best policy in carbon markets.


1. Baselining: How can you afford to map and core sample at $20/Ha?

2. Verification: who is the independent 3rd party?

3. Which Government regulator do you have to satisfy? (In NSW it is the Independent Pricing and Regulatory Tribunal of NSW (IPART) in its role as Compliance Regulator.)

4. The 20% commission. Is it enough to cover verification costs? The CXX/NCAC system charges 30% and it is a visual verification system.

5. “Carbon Link will then determine via a model and experience how much carbon you can sequester.” Which model? Century? Roth C? C-Lock? Whose experience?

6. Is the 70 years acceptable when Kyoto has a 100 year rule for forests?

7. Will landholders allow a lien on their title that effectively reduces any future owner’s flexibility? (Landcare’s Carbon Smart is having trouble getting involvement because of the 100 year rule.) We are campaigning for a 30 year rule for soil.

8. On what basis was 10% buffer considered sufficient to cover contingencies? Did you consider insurance? Given the likelihood that we are going into another drought and groundcover will be strained.

10. If 25% of the 90% is to be kept in reserve "until its existence is proved by testing”? What of the 75% of the 90%? Is it not verified by testing?

11. Re “Period of sequestration is 10 years”? How does this align with the 70 years?

12. What is the smallest area a landholder can trade from under your system?

13. Does the system assumed soil bulk density or is this measured?

14. Are the payments retrospective for Carbon Farmers who have been doing this for years? We are often asked this question.

15. There has been a drastic decline in domestic price of CO2e. To $5/t. Does the model work at that price?

16. Is there provision for insurance?

GOOD NEWS: Second full value/direct measurement soil C trading scheme launched

The Carbon Coalition congratulates Coalition member Rod Rush for his part in the launch of soil carbon trading company CarbonLink Pty Ltd. “Carbon Link is in the process of verifying its first packages of soil carbon from several properties in eastern Australia. This carbon is expected to be available for trading in the coming months,” according to the company’s press release.

“We are still verifying our processes, but CarbonLink plans to aggregate carbon sequestered by groups of producers who commit to grazing management practises that over the subsequent 10 years will sequester and maintain the resource. For example, a 1 percent increase in organic matter over a 10-year period may capture about 50 tonnes of CO2 that is worth about $1000/ha gross before costs at current retail prices.

“There will be a proving period for each producer about how much CO2/hectare is being sequestered, with soils analysed in the first year of a commitment and then measured again in, for example, the 5th and 10th years to calculate any gains. Modelling may eventually be used as the science develops to support it.”

Terry McCosker, chairman of Resource Consulting Services (RCS), is the CarbonLink chairman. CarbonLink Pty Ltd is a foundation accumulator and broker on the Financial and Energy Exchange (FEX), which was officially opened on 19 September by Al Gore.

CarbonLink says it will be a foundation accumulator and broker on the FEX exchange, and be able to trade on international exchanges such as the Chicago Climate Exchange, the European Climate Exchange and the New Zealand Carbon Exchange.

Carbon Link Producer Information Pack

CarbonLink made the following information available to the Carbon Coalition some time before the launch and requested that we keep it confidential until the launch:

1. WHAT does Carbon Link do?

Carbon Link fulfils the following functions in the Carbon market
• Carbon Link will provide baseline soil carbon levels on you property. This is done through an extensive soil sampling programme, under a strict protocol determined by external bodies. Soils will be mapped by a soil scientist and the soil carbon determined by an independent laboratory. This level of sampling is required to get verified carbon.
• Carbon Link will arrange for and fund the verification of your soil carbon. Verification is a rigorous process of review by an independent third party, which certifies to a buyer, that the carbon being offered, actually exists. Verification is essential to be able to list the carbon with the exchange and registry. It will also make a difference to the price paid. Unverified carbon will not be purchased by the large emitters and will be discounted by the retail offsetters.
• Carbon Link will list your carbon with the Registry and the exchange. Carbon Link is the only soil carbon aggregator accredited by the FEX Registry. This means that it is Carbon Link’s role to put together many properties capable of selling soil carbon credits and aggregate large quantities of carbon offsets for the large emitters.
• Carbon Link can handle the sale of your carbon on the exchange. Carbon Link is a foundation broker with the FEX Exchange. As such we can advise on selling your carbon in relation to time and expected price. Selling decisions can be in your hands.
• In short, Carbon Link is a one stop shop for measuring, verifying, listing and selling your soil carbon sequestration.

2. HOW will Carbon Link fulfil the above roles?

Carbon Link will assist you as follows:
• You can book in to have your soils base lined for current carbon levels. This will be done in the order of the bookings, adjusted for regional considerations and weather eg some soils will need to be moist to do the sampling. The indicative cost for this service is $20/ha, however this may be adjusted for complexity or simplicity of the task eg flat even country will be less cost that hilly or uneven soils.
• We will produce a soil map of the area to be included in the sequestration. The sample locations will be recorded with sub metre accuracy with a differential GPS.
• Carbon Link will then determine via a model and experience, how much carbon you can sequester.
• Carbon Link will arrange for a visit from the verifier to inspect the site.
• Carbon Link will charge you a commission of 20% on the sale of credits. This commission covers the cost of modelling, verification, registry charges, brokerage costs and legals associated with the transaction.

3. WHAT are my obligations to Carbon Link?

The landholders obligations to Carbon Link include:
• Allowing the soil sampling team to visit the property.
• Allowing the verifier access to the site.
• Sequestering the carbon at or better than the rate agreed with Carbon Link.
• Implementing and maintaining a grazing management system which will give the plants and soil the capacity to sequester the agreed carbon level.
• Agreeing that the carbon sequestered, will remain sequestered for a minimum of 70 years, by who ever owns the land. The contract will state that any future owner of the land has the continuing obligation to maintain the sequestered carbon. You or any subsequent land owner will however receive annual payments to incentivise this arrangement.
• Signing a contract with Carbon Link which confirms the agreement.

4. HOW MUCH is carbon sequestration likely to be worth to me?

The following generalised assumptions are used to illustrate the potential of soil carbon sequestration. Depending on environmental conditions prevailing, soil type and management skill, the actual results will be up or down from the following assumptions.

General Assumptions

• It is possible to sequester 1% Organic Matter (OM) over 10 years (ie average increase of 0.1% per annum) in the top 10 cm and a further 0.63% in the next 20 cm of a soil profile.
• Soil Organic Carbon (SOC) is 58% of Organic Matter (OM)
• 58% SOC at a soil bulk density of 1.2g/cm3 = 16t SOC /ha
• 16t SOC /ha = 58t CO2e/ha (CO2e is Carbon Dioxide Equivalent, which is the trading unit).
• We assume the price is $25 /tonne CO2e (retail) for this example but it will vary with vintage and market (a vintage refers to the year in which the carbon is sequestered).
• We exclude 10% of the estimated SOC permanently from sale as a risk management strategy.
• Of the remaining 90%, 25% is excluded from sale until it is proven by soil testing, as an additional risk management strategy. We conservatively assume that this will not occur for 10 years.
• 10% of the remaining estimated SOC sequestered can be sold annually.
• The contract period is 70 years (which is based on the Australian Greenhouse Office “Greenhouse Friendly” Guidelines).
• Assume the Property area is 1,000ha.
• CO2e on 1,000ha is 58,000t
• 10% (5,800t) is permanently excluded.
• 25 % of the remaining 52,200t CO2e is kept in reserve (i.e. 13,050t CO2e is not for sale until its existence is proven by soil sampling).
• The remaining 39,150t CO2e has a market value of $978,750 (based on a constant price).
• Period of sequestration is 10 years

Value Calculation

The following Income is calculated using the above assumptions


Expected increase in Organic Matter 1.00%
Organic Carbon as a percent of Organic Matter 58%
Organic Carbon 0.58%
Soil Bulk Density 1.2
Soil Organic Carbon 16 tonnes per ha
CO2e Sequestered 57.6 tonnes per ha
Property Area (ha) 1,000 ha
Total Tonnes of CO2e produced 57,600

Permanently excluded from sale 5,760 10%
Saleable Sequestration (Gross) 51,840 tonnes
Reserved for sale 12,960 25%
Saleable Sequestration (Nett) 38,880 tonnes CO2e
Period of Sequestration 10 years
Saleable Vintage Quantities 3,888 tonnes CO2e

Average Price per Tonne CO2e $25.00 /tonne CO2e
Average Price received per vintage $97,200
Carbon Link Commission $19,440 20%
Income Retained for future payment Pool $19,440 20%
Nett Annual Income received by Landholder $58,320 per annum for 10 years
For 11 to 70 Years
Annual income from year 11 to year 70 $4,599 per annum
After 10 Years
Payout of 25% paddock reserve 12,960 tonnes CO2e
Price $40.00 /tonne CO2e
Commission 10.00%
Nett Received $466,560

TOTAL RECEIPTS per HA $1,325.70 per ha
TOTAL RECEIPTS per HA in 11 years $1,049,760
TOTAL RECEIPTS per HA in 11 years $1,049.76 per ha