Tuesday, October 09, 2007

Carbon Link answers the questions

Rod Rush again explains the Carbon Link system through a response to the questions submitted to the Coalition by a member.:


Our answers to your most recent questions are below.

I trust that you will publish any other questions and answers as they arise that you might receive on other trading systems.

Q: “There is usually a financial play lurking in the shadows.”

Of course there is. CarbonLink intends to build a profitable business.

Q: “What large emitter pays retail for big volumes? Rio did the Qld trees deal at well under $5 per tonne. Projections based on $25 (and in fact $40 is used in year 10 for the sale of the back-up 25% with no reason given for the jump in price ) when the current market is sub-$5 are "generous" - redo the numbers on $10 per tonne and ??

While nothing is certain in life Carbon Link is comfortable with the price projections in its business model. Several experts at a recent industry conference also expressed similar views on future prices.

Q: “Also using "constant values" is pretty unprofessional as it artificially boosts perceived benefits ($5 in 50 years time is not the same as $5 today)”

We agree that receiving $5 today is not the same as receiving it in 50 years time. Most farmers these days, especially those who have completed the RCS and Holistic Management courses are well aware of the time value of money. For the sake of simplicity and to allow farmers to track the calculations constant values were used.

Q: “At a sub-$10 price do CarbonLink still do their verification for 20% - i.e. $2.”


Q: “Methinks the impact on values for land may be real - maybe not in the desired direction however. All the real money flows out to the owner of the land in years 1 thru 10. But for Years 11 thru 70 using the example the annual income to the landowner is $4,599 on 1000 hectares - just $4.60 per hectare - what restrictions/obligations are placed on the owner during this period - and do these restrictions/obligations act to limit his/her options to a value perceived to be much more than $4.60 per hectare. (I have not even discounted the $4.60 for inflation - do any sort of DCF and the income for years 25 on is negligible in todays terms - $4.60 in 25 years time using a 5% inflation rate is just $1.28, in 50 years just 35 cents). If you were buying a property in 10 years that had "done its dash" with soil carbon, and you were lumbered with a meagre annual return for some hefty obligations (any penalties??) what way would you want to see the price adjusted? Carbonlink website has the following note - Contracts with the land holder will have a “put-and-take” clause which means they will get paid for carbon sequestered but they or subsequent owners will have to buy credits back if carbon is released within the lifespan of the project. This is my most serious concern - even using their numbers you are selling at $25, but your buy-back obligation in year 10 is at $40 - this could be ruinous.”

One must understand the productivity benefits of sequestering carbon in the soil. Who would want to release the carbon and forego the productivity and environmental benefits?

Anyone sequestering carbon in their soils just for a quick buck is doing it for the wrong reasons and will probably fail anyway. They need to be convinced of the ‘sustainability’ benefits first otherwise the management will be reactive and not proactive.

The other part of the answer is below.

Q: “The money to actually pay the $4599 comes from what is described as "Income Retained for future payment Pool" - using the example in their info by year 10 there will be somewhat more than $194,400 in this pool - this capital sum has been seeded by the farmer out of his income - let this sum earn even just 5% interest and you have $9720 - pay out the $4599 and there is a $5121 surplus - what happens to this?? How is this retained money treated - is it the farmers money held in trust by CarbonLink - or is it another "fee" paid by the farmer - there are some serious tax and fiduciary issues depending on the answers.
This is a very rough view and does not allow for taxation but their numbers make a "constant value" assumption so lets go with equally rough here - if you want to capitalise the say 5% interest earned each year on the $19,440 retention and allow it to build up you start off with more than $194,400 - close to $250,000 in fact - who gets this extra? At $250,000 and using 5% interest earned you have $12500 interest income less the payment to the landowner of $4599 - so the starting difference in year 1 is not $5121 - it is now $7901. This seems to be a standard "funds under management" type of deal with money for the bankers.”

To get a soil carbon project verified you need to be very conservative in both the calculation of the carbon sequestered and in paying out all of the funds up front. This is the principle that Carbon Link started with.

The funds will accumulate to quite sizeable amounts over time. These funds remain the property of the farmer. Carbon Link is not a funds manager and has no intention of becoming one. Therefore, discussions are being held with funds managers about how best to achieve the goals of safety and return on investment.

Q: “If the farmer must guarantee the carbon for 70 years what guarantee is there that the money in the income retained pool will be there for 70 years?”

See answer above.

Q: “Looked at over the 70 year time period this is a VERY front-ended deal with a long long tail loaded with a sting. The “smart” move for any landowner entering into such a deal would be to bleed the dollars out in years 1 thru 7 or 8 – then sell the 60 year liability and potential need to buy back credits to some other mug.”

We are talking about saving the planet! The restrictions on landholders are currently annoying (e.g. invasive scrub) but our bet is that when soil’s potential as a carbon sink is recognized there will be some very strong legislation put in place to protect the sink.

Our bet is that it will take more than 10 years to fill the sink – probably more like 20 to 30 years depending on the location.

Again why would someone want to destroy the productivity benefits of the accumulated soil carbon? If someone really wants to plough the farm then he will have to calculate the cost of doing so (loss of carbon income; loss of productivity; cost of covering the emissions; plus almost certain government penalties) versus his estimate of the income from doing so.

Most close to the industry are well aware of the productivity benefits that the best regenerative graziers are getting from their land. The drivers of the Carbon Link business are the several thousand farmers and graziers who have been trained by RCS. Certainly these families are interested in the dollars but they are more interested in handing on a very healthy landscape to those who follow them.

Q: “The only real solid thing CarbonLink have said is that you can book in for a baselining at $20 per hectare - what is this baselining good for - not needed for CCX, not good enough for Kyoto or Greenhouse Friendly - only real use is for a CarbonLink trading scheme that doesn't even exist yet. The cynic in me questions just why this was announced so prematurely.”

Please see previous answers on the projected cost. The Carbon Link business model uses a local business as its preferred registry and exchange. Also, as we have told you before, Carbon Link also intends to make its rules as close as possible to those likely under any mandated scheme.

The reasons Carbon Link was launched when it was are very obvious and have been relayed to all serious enquirers. These are that we capitalised on the launch of the Financial and Energy Exchange (FEX) by the former U.S. Vice President Al Gore, and that we provided evidence of commitment to our early stage investors and the several thousand RCS clients who have been demanding such a service for sometime. The FEX exchange has been extremely supportive and is very committed to a long term relationship with Carbon Link.

I look forward to seeing you in Mudgee at the conference.

Best wishes,

Rod Rush
CEO, Carbon Link Pty Ltd

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