14 August 2015

Producers participating in the recent FutureBeef webinar on "Can money be made by northern cattle producers from the Emissions Reduction Fund (ERF )?" posed a number of questions to the presenters.

Here, the three webinar presenters Phil Cohn from RAMP Carbon, agricultural scientist Stephen Wiedemann from FSA Consulting and MLA's Manager Sustainable Feedbase, Dr Tom Davison, provide answers to those questions.

There has been so much angst about carbon markets in Australia, how do producers know this is the real deal?

While there have been major changes in climate policies, there has been bipartisan support for our national target of 5% reduction below 2000 levels by 2020. The $2.55 billion dollar fund is legislated with budget funding. ERF projects will be a key mechanism by which Australia hits its internationally agreed targets.

In addition, the government will be announcing new targets for the period 2020 – 2030 in August, and these will be agreed at an international conference in Paris in December. This new target means that there will be an ongoing requirement to reduce greenhouse gas emissions across the Australian economy. Producers that get involved in the ERF will gain important knowledge of the emission reduction options they have, and be well positioned to take advantage of any new policy approaches.

If I am interested in getting involved and registering an ERF project, what’s the first thing I need to do?

The first step is to understand the likely sequestration or mitigation and associated costs that are feasible for the practice or practices you think are relevant to your property. This may best be done with your advisor. Then it is critically important that before implementing your new management (planting trees, new fire management or productivity improvements etc) activity that you register your project with the Clean Energy Regulator.

What happens if seasonal conditions etc. do not allow me to deliver the contracted carbon credits in the contract time?

If you have entered into a carbon abatement contract with the government at an ERF auction, you are required to deliver 100% of contracted carbon credits (ACCUs). If you aren’t able to deliver credits from your project, you will need to ‘make good’ by buying credits from another project and delivering those to the government.

Of course, you manage the risk by determining what volume of credits you wish to forward contract. Choosing a conservative rate (such as 70-80% of what can be realistically achieved) hedges against this risk. If you produce extra credits they can be sold on the secondary market, or in subsequent auctions to the government once your project is completed. To manage the risk of under-delivery, it is important to carefully consider your level of confidence that sequestration or abatement estimates or targets will be achieved.

If you are participating in a contracted avoided deforestation project and the trees don't grow quick enough to deliver the contracted ACCUs, can the project manager purchase ACCUs from another source eg a piggery or a reforestation project and use those to meet the contracted ACCUs?

Yes, you are able to deliver ACCUs from any project to satisfy your obligations under the contract.

Rather than native forest regeneration/planting, can the planting of tropical grasses as forage / feed for livestock be eligible for approval under ERF?

Sequestration projects require that carbon be stored in vegetation ‘permanently’ (project proponents can choose between a permanence period of 25 and 100 years). Grasses and forages won't be covered under current methods as they are consumed by livestock and any sequestered carbon would be lost in the process.

However, if the planting of new forage crops or pasture improvement initiatives result in better performance of your cattle, these would be eligible activities under the “herd management” method.

Can 'double' the carbon credits be generated from production systems such as leucaena pastures that increase soil carbon through sequestration and also lower carbon emissions at the same time?

You can run two projects that apply different methods (eg. herd management and soil carbon) on the one property and claim credits from both.

How is the emission intensity quantified?

Emission intensity is calculated from two primary inputs: the number of cattle and their weight gain over the year. For each year, you need to provide opening and closing numbers and opening and closing weights of cattle by class i.e. cows, heifers, weaners, yearlings, bullocks etc.  These numbers are used to calculate emissions using a spreadsheet model that will be provided with the method. In addition to this, you will need to supply some information about diet type such as the digestibility and crude protein of purchased feeds.

Is there any research on sequestering carbon in soil – that is, the best methods – and what is achievable?

There has been a major national research program on soil carbon, and more information is available here. 

In addition, information regarding the two approved ERF soil carbon methods are available through the Clean Energy Regulator website , including supporting information on the land management practices that are eligible under the methods.

What about southern cattle producers (eg. carbon sequestration under perennial pastures)?

Individual producers will need to check out opportunities with their advisors for their individual properties using the requirements of the two soil carbon methodologies  that have been approved by government.

Do I have to reduce my herd size to earn credits with the herd management?

No. This method does not require you to reduce herd numbers. The Government recognises that changes in herd numbers are driven by other factors such as market and climate. This system does not interfere with producer decisions regarding total herd numbers – it aims to reduce the emissions intensity of the herd.

In effect, it is promoting a ‘lower carbon future’ than would be the case in the absence of the project.

What opportunities exist for small producers and those in better production regions?

For smaller producers the best option would be to participate in an aggregated project. This will ensure that economies of scale are reached. MLA has undertaken some research (not yet completed) on options for aggregation.

Regarding the herd management method, the main factor is not so much the region you operate in, but the amount of improvement you can achieve. If you are located in a high rainfall region but have under-developed pastures or management systems, you may be able to make improvements that are as large, or larger, than others in poor regions. Most pasture grazing systems in Australia have room for improvement based on genetic the potential of the herd, but the challenge is to supply feed of sufficient quality and quantity to achieve this potential at a viable cost. The method does provide extra financial incentives for achieving these improvements. 

How does the producer get paid from the pool of funds if has an established approved project?

There is no prescribed way that payments should be made to producers that are participating in an aggregated project. The sharing of costs and revenues associated with a project will be determined by agreement between the producers participating and the entity acting as the aggregator.

Does the carbon income presented remove carbon project and verification costs and if not, what is that likely to cost?

The presentation by Phil Cohn provided estimates of the costs of getting involved in developing an ERF project, including audits. Whether or not there is enough carbon income to pay for these costs depends on the size of your project (ie. how many ACCUs it creates), and the price paid per ACCUs generated.

What’s involved in the audit process? Is it expensive?

The audit process involves an independent auditor reviewing your project report and claim for ACCUs. They will check that you have implemented your project in line with the methodology, and that you have collected all data required to correctly calculate your ACCU claim. They will review supporting documentation and will also conduct a site visit to your property to ensure that what you have presented in the report matches what is happening on the ground.

Phil Cohn’s presentation included estimates of audit costs based on indicative quotes received from several qualifies auditors.

Can the audit fees be written off against tax?

Audit and other costs would be considered business expenses and so, yes, our understanding is that it would be tax deductible. But, as always, check with your accountant to confirm.

When is the next ERF auction? What do you think is going to happen?

The timing of the next ERF auction is likely to be before the end of 2015, based on advice from the Department of Environment. This has not been formally announced.

More information

Tom Davison E: tdavison@mla.com.au

View the recording of the webinar "Can money be made by northern cattle producers from the Emissions Reduction Fund (ERF )?"