It may be early days for carbon trading in Australia but many farmers and graziers are already trading or exploring how they can trade carbon.

In April 2015, the Clean Energy Regulator (CER) conducted the first "reverse" auction to buy carbon credits with the second auction being conducted in November 2015.

These auctions are funded by the Federal Government's Emissions Reduction Fund (ERF). The ERF is a scheme designed to help Australia meet its emissions reduction targets. Through these two auctions the Federal Government has now committed $1.217 billion of the $2.55 billion set aside for the ERF.

With the next auction set for Wednesday 27 and Thursday 28 April 2016 and a further auction set for the final quarter of 2016, now is the time to consider whether your business can benefit.

How do I get involved?

Many of Thynne + Macartney's clients who participate in the ERF engage the services of a consultant to assess the suitability of their property and assist with the application and administration processes.

There are a number of methods landholders and producers can implement to earn tradeable Australian Carbon Credit Units (ACCUs) including:

  • Forest regeneration – the regeneration of native forests that have been suppressed by livestock or clearing.
  • Avoided deforestation – the preservation of native forest previously approved for clearing (therefore avoiding the emissions that would have resulted from clearing).
  • Savannah burning – fire management in the early dry season in northern savannas is aimed at reducing the incidence and extent of larger, higher intensity late dry season fires.
  • Feeding nitrates to beef cattle – replacing urea lick blocks with nitrate lick blocks for pasture-fed beef cattle.

There are four broad steps involved in participating in the ERF:

  • Apply – you must apply to become an ERF participant and register your project with the ERF.
  • Contracts and auctions – to secure a contract with the CER, you must complete an auction qualification application, auction registration application, and bid successfully at an auction run by the CER.
  • Reporting and auditing – if you are successful at auction, you are required to report on your project at regular intervals and for most projects a minimum of three scheduled audits across a seven year period is required.
  • Delivery and payment – you must ensure that the number of ACCUs you have promised to the CER have been created, assessed and credited to your account by your scheduled "delivery" date.

Risks

Participating in the ERF and entering into a contract with the CER are not without risk. Some issues that participants must consider before deciding on whether to participate in the CER include:

  • Duration of commitments to the Government

  • The duration of your contract with the CER be a period of up to 10 years but you may wish to nominate a shorter period to preserve flexibility.

    Some projects are also subject to permanence obligations which require the carbon stored by a sequestration project to be maintained for the nominated period (either 25 or 100 years). If you withdraw from a project during the permanence period you may become subject to a "relinquishment requirement" which may require you to return a specified number of ACCUs to the CER.

  • Sale of property

  • Under the terms of your contract with the CER, you cannot transfer your obligations without the consent of the CER. This could delay or hinder the sale of your property.

  • Delivery failure

  • If you cannot deliver the required number of ACCUs to the CER by the required date, you can negotiate a revised delivery schedule with the CER or you can purchase additional ACCUs on the secondary market. In the worst case scenario, you may be liable to pay damages to the CER.

  • The legal right to carry out a carbon sequestration project

  • A "project proponent" must have the legal right to carry out the project.

    For example, where a "project proponent" is undertaking a carbon sequestration project they must have the exclusive "carbon sequestration right" for the project area. These rights are governed by state legislation and each state has taken an individual approach to the creation of "carbon sequestration right" and uses varying terminology.

    In Queensland, holders of certain leasehold tenures may be required to address native title issues, which potentially is a major hurdle.

  • Carbon trading consultants

  • Care should be exercised when entering into any "services agreements" with a consultant to ensure that you are adequately protected and are not liable for any unexpected costs particularly if your project does not proceed.

Landholders who wish to participate in the ERF should always seek legal advice before deciding whether to participate and before contracting with both the CER and any expert or company specialising in this area.

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.