Tuesday, October 09, 2007

Carbon Link Opens the Account

Our answers to your questions follow:

1. Baselining

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

The $20 per ha amount quoted is an indicative figure only and the rate will be further tested during the next round of surveys. We expect to have these surveys completed by the end of the year.

However, we have developed a very detailed financial model to model among other factors the cost of sampling and future monitoring. For example, our initial estimate was $11.50 per ha but it was increased after the first round of sampling was completed. That is, we are now in possession of much better data on various aspects of a survey e.g. staff requirements (scientists, technicians, etc) coring, sub-sampling, packaging, lab tests required and their procedures, GPS logging, traveling between sites, accessing regional landscape and soils data.

We also include under this heading sampling to determine pre 2007 vintage carbon. As you will appreciate this is a much more difficult exercise than baselining and only properties that are deemed to have an excellent chance of finding verifiable carbon will be considered.

2. Verification

Q. “Verification: who is the independent 3rd party?”

We are not at liberty at this stage to identify the verifier since no verification agreement has been executed. However, the party we are dealing with is an internationally recognized verifier in both mandatory and voluntary markets.

Although not mentioned in your question, verifiers, or, at least the one we are dealing with, require farm emissions to be accounted for as well. This is almost certain to be a requirement of any future mandated market in Australia. We are progressing well with this issue but are not prepared to comment further on it at this stage.

Also not mentioned is the scope of the verification. Projects will be verified. This is standard international approach. Projects include a number of farms in a defined area.

3. Government Regulator

Q. “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.)”

We believe you have misunderstood the statement about government agencies.

It is Board policy to involve all possible government agencies as Carbon Link goes through the verification process. This makes business sense in that Carbon Link’s products need to be as close as possible to all present and future regulations e.g. when the mooted mandated markets begin in the future.

At present in NSW no Carbon Link product has yet received IPART approval.

Since the market for Carbon Link product is currently largely the voluntary market pricing will be determined by the market.

4. Commission

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

The financial modeling indicates that the commission rate of 20% is sufficient to cover the verification and other costs. We are also of the view that competitive forces will create pressure on all aggregators to reduce this rate as the market matures. The better capitalized players will survive in this situation.

However, in a free and open market nothing is set in stone on either the revenue or cost size of the business.

We have made no attempt to analyze the CXX’s or anyone else’s cost structures.

5. Modelling

Q. “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?

As you know no model is yet calibrated for Australian soils. However, Carbon Link has pledged to supply its data to the AGO to assist it in developing the Roth C model or local conditions and our needs. It is in Carbon Link’s interest to do this. The AGO has indicated to us that they expect their updated model to be operating by the end of the 2007 calendar year. We doubt that this will occur.

We expect that any model will continue to be refined over time.

The reference to experience was probably made in relation to answering a farmer’s query about how much we thought he might be able to sequester in his soils in a particular climatic area based on results from others in the region.

6. Sequestration Period

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

Our discussions with our intended verifier and the registry indicate that 70 years will be acceptable.

7. Lien on Title

Q. “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.”

You are right to campaign for a 30 year rule for soil since it represents the planet’s best option to substantially reverse the atmospheric carbon excess. If soils haven’t achieved that within 30 years then the planet’s prospects are grim.

However, we can think of no reason why a farmer would want to release stored carbon into the atmosphere after 30 years given the environmental and productivity benefits associated with the stored carbon.

Unfortunately, many farmers associate trees with woody weed invasions. We suspect that this is why Carbon Smart is having difficulties. In time this should change but we reason that tree plantations will not be favoured on good agricultural lands. Strategic tree plantings as currently carried out do have a place as we all know in good landscape management practice and farmers will now be rewarded for this in the Carbon Link model. That is, Carbon Link has no intention of being a one product business.

Price will determine farmers’ attitude to tying up their land for long periods. There will naturally be a cost associated with converting land to a future destructive use e.g. housing development and someone should have to pay to cover the carbon loss. It is also possible to grow crops including vegetables without destroying the carbon stored provided the correct practices are used. An actively traded soil carbon market will ensure that the incentive is there to encourage such practices.

8. Buffer to Cover Contingencies

Q. “On what basis was the 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.”

Q. “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?”

10% is not the only buffer, although the initial 10% buffer approximates the labile pool of organic carbon which is the portion most likely to affected by short term events.. As you point out in the next question there is a further 25% of the remaining 90% that we will not allow a farmer to sell for a further 10 years and then only if it is existence is verified. This is a risk management strategy based on the assumption that verification in the early years will not be as exact a science as it is likely to be in 10 years time. However, we may well be able to release the carbon for sale earlier than this with the verifier’s approval.

Note also that only 80% of the sale proceeds of the 75% will be paid in the year of the sale. Payment for the remaining 20% will not begin for 10 years and then will be spread evenly over the remaining life of the sequestration period i.e. over 60 years. The funds will be placed in a trust structure and managed by a licensed funds manager with the income after management fees belonging to the current landholder. This is a further risk management strategy. For example, the aggregator will be able to draw on these funds to cover non compliance events e.g. failure to pay for future sampling costs; loss of carbon.

Verification is not easily achieved. Verifiers require a high degree of assurance and the more conservative any aggregator can be until the science becomes more accurate the more likely verification will be received.

9. Period of Sequestration

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

This relates to the way carbon will be sold. That is, an amount of carbon that we estimate that the parcel of land will sequester over a forward ten year period, will be contracted to the aggregator, Carbon Link. This is similar to what happens with trees. The carbon will then be sold according to the rules briefly discussed in Q. 8 above.

The expected amount of carbon has to be established for each property, region, climatic zone etc. This is the subject of on-going research and why a well calibrated AGO’s model is so urgently needed to reduce sampling costs. The verifier will, of course, need to agree with the estimate and further supports the need for a very conservative set of trading rules.

10. Tradeable Area

Q. “What is the smallest area a landholder can trade from under your system?”

This is still to be determined but will relate to the efficient utilization of the sampling equipment and staff resources. However, given that every part of the business will be accurately costed smaller areas are likely to be charged at a higher rate than smaller areas.

The Carbon Link model is based on tones of CO2e, rather than area. Verification costs will decide minimum areas.

11. Bulk Density

Q. “Does the system assumed soil bulk density or is this measured?”

In all sampling done to date and those scheduled for the next 3 months bulk density has been and will be measured. Any relaxation of this procedure would depend on Carbon Link being able to justify the change to the verifier.

12. Pre 2007 Vintage Carbon

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

Please see No.1.

13. Price Assumptions

Q. “There has been a drastic decline in domestic price of CO2e to $5/ t. Does the model work at that price?”

If we thought a price of $5 per tonne was going to be the norm for several years we would not have launched the business. If the price stays at $5 per tonne long term the prospects for the planet are also grim.

This is part of the reason why we need to have the business well capitalized to withstand short term price fluctuations. An undercapitalized business that fails soon after launch would cause a crisis of confidence in this fledgling industry not to mention the fight to reduce the current greenhouse gas emissions in the earth’s atmosphere.

14. Insurance

Q. “Is there provision for insurance?”

We are not aware of any insurance provider being prepared to insure the identified risks. However, we are aware that several insurance companies are looking at the issue.

15. Competition

While not specifically asked for we thought we would make a comment on competition in the industry.

Since this is a very new industry, market awareness of soil carbon is low and having several players working towards legitimizing it will only increase that awareness to everyone’s advantage.

We expect several new players to enter the market very soon, including your own Carbon Farmers. While market collusion will not be tolerated by authorities there are probably several ways in which all players can collaborate to the benefit of the industry and its stakeholders. These might include, for example, eventually moving towards a common soil carbon measurement and monitoring system; use of a common registry e.g. FEX; use of a common trading platform and terminology (e.g. a Christine Jones Standard Unit) etc.

We trust that Carbon Link’s openness to review like that being addressed here will be seen for what it is. That is, an attempt to foster the best interests of the fledgling industry.

Best wishes with your launch in November.

Rod Rush
CEO, Carbon Link Ltd

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