The carbon market is developing at a rapid pace within Australia and internationally. Within Australia, a voluntary carbon market is already flourishing, however, this market relies predominantly upon carbon credits that are generated overseas and are matched with Australian businesses seeking to voluntarily reduce their carbon footprint. Although the Australian carbon market is operating largely on a voluntary basis, regulatory carbon markets already exist in the European Union and New Zealand. Indeed, the global carbon market is currently worth over $100 billion per year. The introduction of a national regulatory market within Australia such as the currently proposed Carbon Tax would see explosive growth in the market for domestic carbon offsets as liable corporations look to reduce their carbon footprints.
At the same time, farmers throughout Australia are facing increased pressure from the impacts of climate change manifesting themselves as droughts, floods and an increase in extreme weather events. These forces are increasingly impacting on the profitability of farming operations and causing landholders to seek ways to diversify and increase the resilience of income streams. These impacts are set to continue and intensify into the future with modelling predicting that climate change will have a particularly significant impact on the Australian rural sector.
What is the CFI?
The Australian Government has committed to establishing the Carbon Farming Initiative (CFI), which is anticipated to commence on 1 July 2011. The CFI will be available to farmers, foresters and landholders who want to generate carbon credits and will provide a new and unique avenue for agricultural businesses to generate carbon credits tradable on domestic and international markets.
Carbon markets across the globe have primarily been established through the United Nations Framework Convention on Climate Change (UNFCCC) and the parameters set by the Kyoto Protocol, which Australia has ratified. Parties to the Kyoto Protocol determine how to meet their commitments on an individual basis. However, the Protocol establishes three market-based mechanisms which allow flexibility in the way countries reduce their carbon emissions. These three mechanisms are emissions trading, the clean development mechanism (CDM) and joint implementation (JI).
The CFI is an offset crediting mechanism that operates independently of other emissions trading schemes. The CFI differs from Australia’s proposed Carbon Pollution Reduction Scheme (CPRS) and other emissions trading schemes in that it is not based on a “cap and trade” type system. Cap and trade schemes set a base quantity of emissions that can occur – and an equivalent number of carbon credits, that are issued to participants. Participants in a cap and trade scheme are given a specified number of carbon credits, with each credit allowing them to emit one tonne of carbon dioxide equivalent emissions. Liable entities are then free to increase or decrease their emissions and buy or sell their credits to others. At the end of a set period, each liable entity must surrender one carbon credit for each tonne of carbon dioxide equivalent emissions produced, or face a penalty per tonne they do not surrender a credit for.
The CFI, on the other hand, will operate on a voluntary basis and covers only agricultural and land management activities. No one is obliged to participate in the scheme and there are no emissions caps set. Whilst voluntary, the CFI provides a mechanism for landholders to generate tradable carbon credits from eligible activities on their land. The CFI is specifically designed to cover a range of agricultural activities that will not be covered in a future Australian ETS.
The Carbon Farming Initiative will include the following aspects:
- A carbon crediting mechanism;
- Funding to fast track the development of methodologies for offset projects, including on-farm demonstration of biochar; and
- Information and tools to help farmers and landholders benefit from carbon markets.
What does it cover?
The scope of the CFI covers Kyoto and non-Kyoto compliant activities, meaning that credits generated under the scheme can potentially be traded in both regulatory and voluntary markets, both domestically and abroad. The CFI is shaping up to be a significant program that will drive the uptake of offset projects across a range of activities, including:
- Reforestation and revegetation;
- Reduced methane emissions from livestock;
- Reduce fertiliser emissions;
- Manure management;
- Reduced emissions or increased sequestration in agricultural soils (soil carbon);
- Savannah fire management;
- Avoided deforestation;
- Burning of stubble/crop residue;
- Reduced emissions from rice cultivation; and
- Reduced emissions from landfill waste deposited before 1 July 2011.
What is the CFI likely to achieve?
The CFI is a significant initiative in that it is the first mechanism that allows for the creation of domestic offsets for sale on the global market. It is expected that demand for CFI credits will come from both international and domestic markets, for voluntary and regulatory compliance purposes. However, given the recent downward trends observed in the global voluntary carbon markets, it is likely that demand for CFI credits – and therefore return to landholders – is likely to remain low, at least in the initial years of the program.
Through administering all eligible domestic offsets under the scheme, the CFI offers a streamlined assessment process for project approval. This means that landholders are able to submit projects for approval without first having to determine whether or not the abatement is recognised towards Australia’s Kyoto Protocol target. This element of the CFI appears to ease the initial administrative requirements of the project for the landholder and can be seen as a positive inclusion in the design: hopefully one that will encourage landholders to submit projects for assessment.
Whilst the CFI offers a streamlined assessment process for project approval, the administrative burden of having a project reassessed every three years is likely to be significant.
The draft design of the CFI proposes that landholders will need to demonstrate project eligibility every three years, This includes, in particular, the requirement for the project to remain additional – that is, unable to occur without the revenue generated from the sale of carbon credits. Whilst the need to periodically prove eligibility is a common facet of other carbon crediting schemes and standards, the timeframe proposed by the CFI is relatively short in comparison with other schemes. For example, the Voluntary Carbon Standard (VCS) provides for a minimum 20 year, maximum 100 year project crediting period for agriculture, forestry and other land use (AFOLU) and most agricultural land management (ALM) activities. The validity of additionality is established at the renewal of each project crediting period under the VCS, which means that at best the project must prove eligibility once every twenty years.
For afforestation and reforestation (A/R) projects carried out under the Clean Development Mechanism (CDM), a maximum 20 year crediting period is allowed. This may be renewed a maximum of two times and the validity of the project baseline must be verified by a designated operational entity (DOE) upon crediting period renewal. A review of A/R projects approved under the CDM between June 2009 and February 2011 revealed that the minimum crediting period requested was 20 years, with 5 of the 15 projects requesting a 30 year fixed crediting period.
Shorter crediting periods do not, in themselves, create problems. It is unlikely that projects will suddenly cease to be eligible for crediting under ordinary circumstances. However, the cost and administrative burden of reduced crediting periods may be higher than other programs, depending on the final program design. One key aspect not covered in the CFI consultation paper is how confirmation of project eligibility might be sought at the beginning of each new crediting period. For example, will the Government determine project eligibility as part of their streamlining process or will project proponents need to engage external verifiers? In either case, there is likely to be some cost or administrative burden associated with project verification, but in the latter case, if external verifiers were required every three years, the financial costs are likely to be much greater.
Despite some potential shortcomings, the CFI offers opportunities to landholders seeking access to carbon markets and diversified revenue streams. The program may appeal to landholders who are otherwise put off by the compliance and regulatory nature of carbon trading. Given that project proponents can surrender any credits issued and withdraw from the program at any time, the value of the CFI may be its ability to introduce rural Australia to carbon trading, allowing a low risk entry to the market prior to any statutory obligation.
Kristine Dewar is a Business Sustainability Analyst at Carbon House, an innovative carbon advisory, projects and training firm based in Brisbane.
kristine.dewar@carbonhouse.com.au
www.carbonhouse.com.au
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