Tuesday, October 09, 2007

More Carbon Link Questions

Carbon Link has sure stirred up nest of activity. Its system is intricately designed, with many elements and implications. A Coalition member asks these questions:
Agreed it appears to be good news at first - but the sceptical accountant in me has some niggling questions. There is usually a financial play lurking in the shadows.
1. What large emitter pays retail for big volumes? Rio did the Qld trees deal at well under $5 per tonne.
2. 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 ?? Also using "constant values" ... artificially boosts perceived benefits ($5 in 50 years time is not the same as $5 today)
3. At a sub-$10 price do CarbonLink still do their verification for 20% - ie $2
4. 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.
5. 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.
6. 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?
7. 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.
8. The only real solid thing CarbonLink have said is that you can book in for a baselining at $20 per hectare. But what is this baselining good for? It's not needed for CCX, not good enough for Kyoto or Greenhouse Friendly. It's only real use is for a CarbonLink trading scheme that doesn't exist yet.

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