Australia: Cashing In On Forestry Carbon Credit Schemes

Introduction

There is increasing global interest in placing a cash value on the maintenance of forests. In doing so, forests have the potential to deliver new income streams in a climate conscious world, particularly in developing nations.

Whilst high hopes rest on a framework for a post-Kyoto agreement being made in Copenhagen next year, opportunities already exist under the Kyoto Protocol and other emerging schemes.

The Kyoto Protocol is an agreement between nations of the world to reduce greenhouse gas emissions. Where nations are failing to meet reductions to which they have committed, there are mechanisms available to implement projects that will offset emissions, like planting trees.

Financiers are seeking to invest in the emerging asset class of forestry carbon credits, principally for their cash returns, but also because they are good for the environment.

gadens lawyers' PNG office (which opened in 1969) is already advising on accessing PNG's forests for carbon credit purposes.

Forestry carbon credit schemes

Mechanisms for generating forestry carbon credits, and some issues surrounding these mechanisms, are outlined below.

CDM A/R projects

The Clean Development Mechanism (CDM) is used when a developed nation conducts a project in a developing nation. The goal is to help achieve the emission reduction targets of the developed nation, whilst also investing in the developing nation.

By way of example, say a large scale power generator in NSW has to surrender permits under the proposed Carbon Pollution Reduction Scheme (CPRS) and the permit price at the time is $30 per tonne of carbon dioxide equivalent (CO2-e). Under the CDM, the power generator could plant trees in Papua New Guinea and, under Article 12 of the Kyoto Protocol, generate Kyoto recognised Certified Emission Reductions (CERs) to be imported into Australia and used instead of permits (to the extent allowed under the CPRS). If the cost of each permit equivalent is less than $30, then the power generator makes a saving.

CERs are basically carbon credits that offset an equivalent quantity of emissions.

Aforestation/Reforestation (A/R) projects under a CDM are appropriate where land has either never been forested (where aforestation is applicable) or where land has been deforested (where reforestation is applicable).

CDM A/R projects have a complex approval process which can take up to 18 months. Despite this, CDM A/R projects represent consistently good value credits ranging between $25 and $45 per tonne CO2-e.

The Commonwealth Government green paper indicates that Australians will be able to use a limited amount of CERs to offset or minimise the quantity of permits that they need to surrender under the proposed CPRS.

But there is no need to wait for the CPRS as CERs generated under CDM A/R projects could produce cash returns once approved in an existing market, such as the European Union Emissions Trading Scheme, which is currently the biggest market.

REDD

Currently, CDM A/R projects provide cash for people in developing nations to cut down their trees and re-plant, but not to stop them cutting trees down in the first place.

Reducing emissions from deforestation in developing nations (REDD) is expected to form part of a post-Kyoto agreement. Whilst there is no certainty that REDD will be approved, there is much excitement among the carbon markets given the opportunities and the practical sense the scheme makes.

It is said that an ounce of prevention is worth a pound of cure. REDD is an attempt to prevent deforestation by providing a value higher than that which can be achieved per acre from cultivated land. If a land-owner can earn more from preserving the flora already on their land, rather than growing palm oil or soya beans, then forests can be left to sequester carbon naturally.

If approved, REDD credits would be permitted post-2012 and would significantly expedite the approvals and assessment process surrounding forestry carbon projects.

Voluntary market

While REDD is still a while away, the voluntary carbon credit market is active and growing rapidly. The voluntary carbon market is not governed by the Kyoto Protocol but rather voluntary standards. Ultimately it is expected that the carbon reduction value created by these projects will be transferable under the post-Kyoto agreement. Regardless, a market exists now and funds invested are growing.

Prices currently achieved in the voluntary market vary greatly from $10 per tonne CO2-e through to $75 per tonne CO2-e. There is currently a strong market in Australia and the USA for voluntary forest carbon credits through brokers such as the Chicago Climate Exchange.

Investors are able to maximise the carbon value of their forest portfolio by carefully selecting forests with as many benefits as possible. Evidencing additionality, avoiding leakage (see below for more on additionality and leakage), demonstrating high biodiversity value and strong community enthusiasm will translate into higher prices.

Diverse forest asset features also reduce the risks associated with potential changes in offset and emissions trading regulations and, importantly, maximise cash returns to investors.

Australian CPRS

In addition to CDMs, which are limited to projects in developing nations, there will be opportunities for investment in forestry in Australia. The Commonwealth Government green paper indicates that, under the CPRS, reforestation that takes place in Australia will entitle forest owners to permits equivalent to their net sequestration.

Only forests established after 1 January 1990 on previously cleared land will be accepted. The maintenance of native forests which have not been cleared will not be included in the scheme. The Commonwealth Government white paper on the CPRS is expected before the end of the year.

Forestry carbon credit project issues

With CDM, REDD or voluntary carbon credit projects, it is necessary to understand and address three key issues: the baseline scenario, additionality and leakage.

A baseline scenario is simply that which would have happened if a project was never undertaken. This is necessary in calculating how much carbon has been sequestered by the project. It is important to use sound and consistent methodologies when determining baseline scenarios.

Additionality is demonstrated by showing that the greenhouse gases removed by the project are in fact greater than what would have occurred if the project was not implemented (ie, the baseline scenario).

Leakage occurs when there is an increase in greenhouse gas emissions by an activity which occurs outside a project but is nonetheless attributable to the project. Say, for example, that a million trees are planted in PNG to sequester CO2. However, if the trees are transported to PNG, using heavy fuel oil, from Western Africa where they are grown using emissions-poor technology, more carbon may be "leaked" in implementing the project than the benefit demonstrated. Leakage should be avoided or at least minimised.

Conclusion

Climate change initiatives continue to evolve. Forestry carbon credits represent a new input for emitting companies and a new asset class for investors. In addition, forestry carbon credit schemes present a real opportunity to achieve positive climate change outcomes for developing and developed nations.

Guy Williams is a director of tda Environmental Consulting and an advisor to gadens lawyers on climate change issues.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.