Is ‘carbon trading’ a good enterprise for me?
The world of ‘Carbon Farming and Trading’ is now well established in Australia, and yet its sometimes hard to find information which will help you make an informed decision.
There are a number of companies who might approach you to enter into an agreement with them for an ‘Emissions Reduction Fund’ (ERF) project, and the agreement will set out the terms and conditions under which they would like to do business with you.
But, how do you know you are getting the best deal?
What are the risks?
What do you have to do?
The following may be of assistance for you to know questions to ask or places to go for help.
1. ‘Methods’ Each project is governed by a ‘method’. This method stipulates ALL of the requirements you will be asked to meet. So, its important to know:
- What ‘method’ is my project going to be registered and conducted under?
- What are my legal requirements to undertake this method if I am successful getting an ERF contract. –
- what is my ‘project activity’ This is important because it may affect the day to day running of your property. Eg; Stock management, ability to clear forest etc.
- What proportion of my property is ‘in’ the project? Make sure you know which paddocks/areas are ‘in’ the project and which are excluded and why.
- If possible obtain a ‘guide to implementing’ the particular method – many guides are available on the CER site. These have good fundamental information. CFA also has copies of the ‘guides to implementing’ many of the methods. These give an excellent idea of the requirements.
- Are there clear indications of ‘how much’ carbon you might be able to claim, and the time frames.
2. Time Frame – These projects go over many years. This is beneficial on the one hand as you may have an assured income for up to 10 years under an ERF contract and more income earning potential for years after that. HOWEVER, there are requirements on what you may have to do.
- You need to know – Is my project over 25 years or 100 (in the case of sequestration) . And what are the obligations in a 100 year project. And the implications of a 25 year project.
3. Your obligations to your ‘partner’ company.
Many companies work for a percentage of the Australian Carbon Credits (ACCU’s) value – This has been very good for some farmers as the partner company (or ‘Carbon Agent’ as they have come to be known) may NOT ask for money up front to do all the carbon estimates and will also handle all the reporting and auditing requirements. However, agreements differ from company to company, so you need to know:
- What is the recompense the partner company receives and what does the landholder receive?
- What does the landholder need to pay for?
- How long is the landholder obliged under the contract to stay with the partner company
- What other requirements are there?
- How is the ‘price of carbon’ established – with consultation with the Landholder? This is important to be able to do your own calculations on risk/return if you are bidding into the ERF auction.
4. Risk – If your project gains an ERF contract it is a binding contract to deliver what was bid at auction. Eg: If the bid was 2000 tonnes of CO2e per year for 10 years, THAT is what must be delivered. If for any reason there is an under-delivery in any year, the project proponent may be liable to provide ACCU’s from somewhere else – perhaps the open market, for instance. (However the shortfall may also be made up the year after) Therefore you want to know:
- How is this risk managed with your partner company? Who holds the risk of under –delivery?
5. Legal Advice. There are not many legal firms who are yet familiar with the complexity of a Carbon Services or Landholder agreement. You should seek independent Legal advice about any contract as you would for any other major decision.
6. Accounting Advice Sometimes there can be a significant payment from an ERF contract – especially in the first years. Your accountant needs to be ‘on board’ with the potential income and its implications. To avoid a large tax bill in any one year, its important to know:
- When will I first be paid?
- What will that amount be?
- How will the payments come after that? – eg. Yearly or less often?
- How long does the contract with the partner company last?
*Carbon Farmers Of Australia is a regionally based Carbon Farming Company and Carbon Agent which holds an Australian Financial Services Licence, and has registered projects and contracts under the ERF. They have been involved in this space for the last 10 years and have also run the only Regionally based Carbon Farming Conference and Expo for the last 8 years.
While every effort has been made to have this information accurate and up to date using best industry knowledge, Carbon Farmers of Australia accepts no responsibility for decisions made from the information. It is provided as general information only. Farmers and Landholders should get independent legal advice on all aspects of a Carbon Services or Landholder agreement, methods, and projects.