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Australian National Registry of Emissions Units Bill 2011 Carbon Credits (Carbon Farming Initiative) Bill 2011 Carbon Credits (Consequential Amendments) Bill 2011
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Standing Committee on Climate Change, Environment and the Arts
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Standing Committee on Climate Change, Environment and the Arts
(House of Reps-Tuesday, 3 May 2011)
CHAIR (Mr Zappia)
Mr KELVIN THOMSON
- Dr WASHER
Content WindowAustralian National Registry of Emissions Units Bill 2011 Carbon Credits (Carbon Farming Initiative) Bill 2011 Carbon Credits (Consequential Amendments) Bill 2011
BALSARINI, Mr Peter James, Chief Executive Officer, Carbon Conscious Ltd
CHAIR: Welcome. Thank you for coming along today. Although the committee does not require you to give evidence under oath, I should advise you that the hearings are legal proceedings of the parliament and warrant the same respect as proceedings of the House itself. The giving of false or misleading evidence is a serious matter and may be regarded as a contempt of parliament. Would you like to add to the submission which you have already made to the committee or make an opening statement and then we will open it up for discussion and questions?
Mr Balsarini : I would like to make some opening statements and thank the committee for having this opportunity to talk to them today. I propose to give a little bit of background about the company. I will not go into that ad nauseam, it is quite a detailed position, but I think it does provide some context about our position on the carbon farming issue. I will then talk broadly to some of the positions on the Carbon Farming Initiative. One of the things that our organisation was particularly conscious of when we put this submission together was to try and make it as brief as possible and allow for some of those details to be fleshed out in discussion. That is certainly the position of the paper. Towards the end of my presentation I would like to make a couple of additional comments that relate to some things that have not been touched on. I welcome any questions along the way.
In terms of the business history, we are a listed company on the Australian Stock Exchange. We listed in early 2008. The origin of the business related effectively to November 2007. I got the call the day after the Labor government came to power suggesting that there was a business model around carbon sequestration. Broadly, the business model is around a native mallee eucalypt model, so we look for marginal agricultural land—and I will talk a bit more about that in a moment—we put in a specific native mallee eucalypt tree in a plantation format in what has been referred to as an alley format, so complementary plantings to existing wheat belt farmers. We do that for the purpose of the carbon sequestration. Without telling everyone what they probably already know as the tree grows it sequesters carbon from the atmosphere. The mass of the tree effectively represents the amount of carbon credit. Once the tree is fully grown there are no more additional carbon credits. It acts as a store.
Generally, as I have said, we are looking for marginal agricultural land. We look to plant approximately 1,000 stems per hectare. We take a very agricultural approach to this. We look at ensuring that we are managing weed burden and those types of things. We get those trees in the ground. We have quite high maintenance obligations in the initial period conventionally two to three years. We have had a very dry period in Western Australia over the last 18 months and we are feeling the full effects of that. We have a lot of issues with insects, locusts and survival rates. We have survival rates under our contractual obligations. But once those trees are established they will form a permanent plantation. It is not our intention to harvest those trees. There may be a set of circumstances into the future where they could be harvested for energy production but at its core our model is to put a permanent revegetation event in.
I have touched briefly on the sequestration process, the tree species and the planting configurations. In terms of soil types we look for what we refer to as deep, sandy soils. We are on low rainfall country. We are on 250 to 450 ml rainfall country generally. That is low and by definition that is marginal cleared agricultural country in WA and to some extent in the rest of the wheat belt areas in Australia.
This is not a very well-defined map but I will hold it up for the committee. Perth is there, Geraldton is about there where that button is and all those circles represent where our plantations are. I will pass it around. We are not in what they refer to in Western Australia as down south—anywhere south of Perth—which is the high-value agricultural country. We are very much in that marginal country. A lot of those sites actually abut the rabbit-proof/emu-proof fence. They are right out on the outer extremities of the agricultural area. A lot of that land—you may have some arguments here—is overcleared and should probably never have been cleared in the first place. As you would be aware, under the Kyoto Protocol the land must have been cleared prior to 1990 to form a Kyoto-compliant credit. A lot of that land was cleared in the 1960s, 1970s and 1980s. As late as the seventies and eighties there were Australian government incentives in place to clear agricultural land. People have the idea that this land was cleared hundreds of years ago but that was probably not true in many cases.
That is basically the model. To date we have planted about 8½ thousand hectares of trees—8.5 million trees. That is a very substantial number in the carbon space. All those plantings have been done for the purposes of carbon sequestration. There is no other driver. We financed that model partly through our raisings of capital on the stock exchange but predominantly through signing clients to those planting obligations. At a notional level, they pay us some fees upfront and they also pay us management fees over an extended period of time—that extended period of time is 15 years.
It is on the public record—we are a public company—that our two major clients are Origin Energy, a large electricity company originally based in Brisbane, I think, but now in Sydney, and BP, based out of their Singapore trading hub. We have been, we consider, very successful to have attracted that calibre of clients. It is challenging to deal with those parties when they are looking for a carbon benefit in the absence of a legislative environment for carbon sequestration or the price that goes with that.
We have relevant accreditation. We received accreditation under the Greenhouse Friendly program of the Department of Climate Change. That program is now defunct and that left a void—and that gives me a lead-in to talking about the Carbon Farming Initiative. Do members have any questions about the model—what we are doing and how we are planting—they would like to raise?
CHAIR: Perhaps not at this stage, Peter. After you complete your presentation we will go to questions.
Mr Balsarini : We would like to take some credit for the development of the Carbon Farming Initiative. We were pushing very heavily post the demise of the CPRS. Obviously the CPRS was an important variable. Post the demise of the CPRS we were cognisant of the fact that there was no scheme in Australia, voluntary or mandatory, to recognise carbon credits through biosequestration by trees. The Greenhouse Friendly program ceased as at 30 June 2010. Under the contracts we have with our clients, we have an obligation to provide them 'highest and best use' in terms of carbon. So if there were no CPRS we had to provide them with other credits. There was simply no mechanism to provide the credits. There were trees out there growing, but there was no mechanism to provide our clients with credits.
One of the aspects of the proposed CPRS had been that, to ensure that Australia obtained the advantage of the reduced carbon emissions event—being native biosequestration—there was a specific ban on exporting any of those credits internationally. I am sure you would be aware that the way to export such credits is to generate AAUs—assigned amount units—under the Kyoto protocol and export them to, potentially, European governments or Japanese companies with an appetite for such credits. We pushed quite heavily to do that and we, along with some other businesses within our sector, commissioned some reporting and provided some advice to the government on that. We were pleased when part of that advice was encapsulated in the election announcement about the Carbon Farming Initiative. We are pleased that that has now been put into legislation and is now going through this committee review process. That background should give you an understanding that we were obviously very positive about the Carbon Farming Initiative. I think I have made the point that there was no adequate legislated mechanism. I will make the point that, effectively, the Carbon Farming Initiative is a supply side solution. It provides the rules of the game. It provides a regulator, it provides methodologies and it provides an accounting system. It does not, per se, create demand. I will make a point about the current international environment. That is a very first important step: you cannot have the demand side without having the supply side sorted out.
The CFI legislation does provide international recognition of credits through the assigned amount units process that I mentioned earlier. Again, we are very pleased about that. Again, the demand side for such credits will largely depend on the negotiated outcomes at any international agreement level—that is, Kyoto post 2012 or whatever the replacement date is—or bilateral commitment. The important commercial aspect of biosequestration is that it is capital intensive upfront. If you are looking to put trees in the ground you are looking for a certainty around a stream of revenue to be able to make that investment.
I also made a comment in my submission in relation to the five per cent reduction on 1990 levels. I make the point that, irrespective of disagreement around the method to achieve such a reduction, a valid and well-designed Carbon Farming Initiative should fit into a carbon tax system, into an ETS and potentially could also fit into a government funded direct action system, which is the proposal of the coalition. I would assume that, under the coalition's proposed actions, they would have to put in a similar style of mechanism to recognise carbon abatement. They would need a regulator and they would need methodology approval. One of the constants of this is, irrespective of your position on some of those other things, I believe that the Carbon Farming Initiative provides some significant advantage for both sides of the political fence.
The last point I made in my submission was really as a result of some of the publicity and comments I had seen in the media around the Carbon Farming Initiative being akin to a managed investment scheme. I would like to put on record that I really do reconcile from that position and make the following points. There are no preferred tax treatments associated with the carbon farming legislation. It is as simple as that. As I have noted, the Carbon farming legislation supply side solution will not itself drive significant demand for tree projects. Tree projects and biosequestration projects will be done against the current backdrop of future carbon prices. If you look at who will actually invest into this you will see that it is generally large clients who have significant liabilities—that is, Origin Energy, BP and a whole host of other liable companies—under any sort of mandatory carbon legislation. Those organisations are, potentially, a far cry from the investors who invested in managed investment schemes over the last number of years. They are sophisticated; they are well organised. One of the great challenges of our business is, effectively, that when you are putting a tree model together you are selling a projection of growth. Investors want to make an investment and they want to see it grow. We have been thoroughly examined in terms of our growth projections. One thing that we hold dear is that our growth projections are actually able to meet that sophisticated level of rigour that these organisations put into that. I would contend that, through the managed investment schemes, while there are many issues around management fees and these types of things, one major issue is the growth parameters that were projected were simply not there or there were other variables around cutting trees, the distance from port and these types of things. So I would draw a sharp distinction there.
The last point, which is probably the most important, is that our model and, I think, all models of biosequestration will work on overcleared marginal agricultural land. If you have high-value agricultural land it would be very unlikely that you would put that back to native trees for a carbon sequestration event. The economics just would not work. I can anecdotally say that, of the 8½ thousand hectares that we have planted on about 14 to 15 farms, the vast majority of those farmers would be indebted substantially to banks and would be struggling to make ends meet. And they are struggling to make ends meet largely because they have poor agricultural land. What this opportunity does is provide those farmers some capital, so in some ways it will put a baseline underneath marginal agricultural land and allow them to free some capital up that may then enable them to buy some more productive agricultural land or invest in some other opportunities. So from an agricultural perspective we think it is relatively positive rather than a negative in taking agricultural land out of food production and also in terms of the social issues around farmers leaving the land. They were the comments in my submission. I have probably covered everything I wanted to say to the committee, but I am certainly happy to answer any questions the committee may have in relation to the information I have provided.
Ms HALL: Would it be fair to say that you support this legislation?
Mr Balsarini : Yes, that is correct. We are very positive around the legislation. Ideally we would like that legislation to link to some sort of carbon pricing mechanism—that is, that the credits generated under the Carbon Farming Initiative would be linked to some sort of demand driven system within Australia. But the legislation in itself is certainly of benefit to our industry.
Ms HALL: I also noted in your submission, and you mentioned it a moment ago, that you emphasise that the Carbon Farming Initiative is different to a managed investment scheme. Would you like to expand on that a little bit, please?
Mr Balsarini : Perhaps I should just clarify. I used a timber based managed investment scheme as an example in my submission, and a managed investment scheme is a bit like vaseline—it has become the word rather than what it actually is. There are fine managed investment schemes. A lot of what we have seen are timber based managed investment schemes where investors—and I will use colloquial term mum and dad investors—have invested, let's say, $20,000 and received upfront tax deductions. They may or may not have ongoing management fees over the life and there is a responsible entity who manages those schemes on their behalf with a view that the trees will at some point in time be right to harvest and they will harvest them. I think it is well on the record that a number of companies like Great Southern and Timbercorp have gone into administration. A number of those managed investment schemes and people within those schemes have very problematic issues around how they realise their investment, who manages that investment for them and whether there is any equity left in their investment.
So that is one subset and it really has been an important part of our existence since 2008 to differentiate and distinguish ourselves from that. Again, I look to the clients. The types of clients that we deal with are high-end, high-value professional clients who do rigorous due diligence. I look in particular at the incentives. There are no particular tax incentives in the Carbon Farming Initiative. I will make the point to the committee that there is a specific piece of tax legislation that exists that allows an upfront deduction for planting under biosinks until 30 June 2012. That piece of legislation specifically excludes managed investment schemes, so you cannot use a managed investment scheme. If I wanted to go out and raise money for mums and dads and put it into a carbon plantation, I could not do it under the legislation. I draw those distinctions, and ultimately the distinction you would like to see when we are looking back in 15 years time is that when our carbon plantations went in we were somewhere near our projections on growth and our investors got what they thought they were going to get out of it, which was a stream of carbon credits which created value. There is an ongoing asset there that will continue to sequester additional carbon to a point in time and store carbon over a long period of time, and parties, governments, investors and ultimately managers are happy with the outcome.
Ms HALL: Thanks. The other question I will ask you before I hand over is: as this is a voluntary scheme, one of the issues is around the take-up of the scheme. I would be interested in hearing your thoughts on that. You might also like to comment on the issue of carbon literacy and what role needs to be played in expanding carbon literacy within this country.
Mr Balsarini : In terms of the voluntary nature of the scheme, you are correct, it is a voluntary scheme. There are two streams—Kyoto compliant and non-Kyoto compliant. The nature of our business model would suggest that our credit, subject to methodology approval, would generically fall into the Kyoto compliant format. Without some sort of linkage to some carbon-pricing mechanism in Australia, that would be a voluntary event only. The voluntary market in Australia is not substantial. I could count on my hands the number of parties who look at voluntary credits. It is a very small part. Interestingly, the European market has a history of both a mandatory and a vibrant voluntary market, but that does not seem to have parlayed in Australia. Under the National Carbon Offset Standard, which was a standard that the government produced in relation to voluntary carbon credits, the voluntary credits have to be what is referred to as additional, and this Carbon Farming Initiative will meet that test.
In terms of take-up from a voluntary perspective, there will be some but it certainly will not be a major driver of investment into this type of opportunity. The nature of voluntary credits is that you want your credits now, where tree projects need to have a long-term investment time frame—10 or 15 years minimum payback period—and you are unlikely to sign up clients for voluntary systems over a 10- or 15-year payback period. So the answer to the question is that there may be some take-up but I do not think that it would be substantial. Probably the other demand side would be the international linkage, which I have mentioned before; that may provide some opportunity. But I guess the caveat on that is continued international negotiations, extension of Kyoto protocol and bilateral agreements that may be undertaken post 2012.
In terms of carbon literacy, again I will break that down into two components. If I talk about clients who may have some type of carbon liability or may have had some type of carbon liability under a CPRS and potentially under some sort of carbon tax going forward, the literacy is incredibly high. A lot of companies made substantial investments in teams and resources through the 2009 period. Some of that investment has been reduced and a number of parties have sent people away. But I think there is a good understanding that the national greenhouse energy reporting system has provided them with a mechanism to look at their carbon liability. I think there are a number of potential technologies to be instigated in a number of those businesses should a carbon price come along.
In terms of, let us say, more outside that mandatory market, I think at a small business level it is relatively poor. It is difficult to see carbon in the supply chain, and small businesses, like many other people, have a number of competing demands and it is difficult to get their head around that. That is not all; that is a general comment. I think at a mum and dad level again it varies. I would put it into an age distinction. A number of younger people have a very good understanding of this. I am not trying to be ageist; I am just making the comment. We have a voluntary calculator and what works quite well are the rock festivals and these types of things. People of a younger age actually understand that. I think that has probably been an educational process through their schooling system that perhaps the older generations have not had.
Ms BURKE: A couple of people mentioned in their submissions about the failure to get the CPRS up and this bit of blame to us as members of parliament. There is ability to get things through a Senate and there is ability to sell things with the public. From your business perspective, should you be doing anything to get this up? It kind of assists your business model. I am finding reading these submissions quite fascinating. There is this sort of third-party endorsement about getting a carbon price up there. I am wondering, from your perspective, if there is anything that people can be doing; because at the end of the day this is a business for you but it is a benefit for our overall community. How do we go and how do we link that in to make this a better reality for all of us?
Mr Balsarini : In terms of your first question, we tried as hard as we could to get the CPRS up. I used to spend numbers of days, and that was a political lobbying type process and it was at a Liberal level rather than a Labor level at the time. It would be fair to say that as a business we have a little bit of a challenge. By definition our clients are parties who have large carbon liabilities. Our process is to educate and inform. One of the frustrations from our perspective is—and again it is difficult to put a circle around—with the number of calculations, you could just say, 'My carbon liability is X so therefore it is going to cost me Y.' It takes no account of any sort of remedial action that they may take. Anecdotally there are comments around new technologies that are sitting there waiting for a price. I have got absolutely no doubt in my mind—and this not blame apportioning, it is just a comment about the political process—that it has been much more difficult to talk to clients in 2011 than it was in 2009. The proof is in the pudding. We moved with clients. What potential liable parties saw after 2009 was that everything was on the table for negotiation and that it would be counterproductive to their negotiation position to move early, for example in terms of investing in a tree project. In a simple method, going in to the minister and saying, 'We are all going to be ruined; we are going to lose X number of jobs,' and at the same time offsetting X amount of carbon. The answer to that is: we work very hard to do that. There is an industry but the industry is small and fledgling in terms of carbon offsets and we are up against a relatively well funded, well organised, well constructed campaign in terms of the negative side of that argument.
Ms BURKE: And you would be in a bind, because some of your clients would be the ones mounting the campaign against the whole thing, I should imagine.
Mr Balsarini : We have a number of interesting conversations—and they actually have a number of interesting conversations. In effect there is a duplicitous type of conversation, which is 'We don't want anything,' but at the same time they are saying, 'What can you do for us?' The public persona and the private persona are a little bit different. I guess those people are there to add value to the shareholders and if they think that is the way to add value then that is the line they take. We do certainly try to do that and we try to do that at a public level. We do a lot of sponsorship, and the sponsorship is not really for brand recognition; it is to get the name out there and to get the opportunity for carbon sequestration out and about. We do what we can.
Ms BURKE: From you work in the marketplace, this model works? As a business market mechanism, leave aside the environmental good, it is a business model that can work? A carbon market and a trading scheme can flourish?
Mr Balsarini : Yes. If I just look at our business, it is a pricing question. The reality is that if the carbon price is set at $10 we have not got a business. Origin Energy, BP or any other of these clients are not doing this for corporate social responsibility. They may put a ring around that on their website but that is not the process that they are making. They are looking at a straight way of hedging their liability into the future. One of the interesting things is that trees actually provide something that no other market mechanism does provide, which is a long-term stream of carbon over a 15-year period. Most of these clients are investing in projects that are over 15, 20 or 30 years. So trees have a role to play. They cannot take forward contracts for 15 years because there is no counter-party on the other side. But if you throw in the risk—growth risk and manager risk and all that sort of stuff—the price at which we deliver our tree credits has got to be somewhere less than they think the market is going to be. So, conceptually, our pricing might, on a net present value basis, be between $13 and $18 per tonne of carbon. If you are talking about $25, that is the type of thing. At $20 you are very marginal. At $25 you are starting to say, 'There is good opportunity there.'
But these parties would not have moved earlier if there was not an economic reason for doing so, and I think that a market can continue. We operate in New Zealand. The forestry has been going since 1 January 2008 but the scheme itself has been going since 1 July 2010. It is operating quite well. They have a capped price of $25 and the market has settled itself at $18 to $20. Forestry providers are getting credits for their underlying store of carbon.
Ms BURKE: Are they buying from you? Is that international, or just internal, within New Zealand?
Mr Balsarini : No, they cannot buy out of here. They can buy what are referred to as CERs—certified emission reductions. That is out of the developing countries. But there is a lot of investment going into forestry and, interestingly, they have a similar system where they can export their tree credits through AAUs. There have been a lot of sales to European governments—Norway and Denmark and those types of places. There is a thriving market for AAUs in Europe, but there is a stigma on what are referred to as 'hot air AAUs'—AAUs out of, let us say, the old Eastern bloc.
Ms BURKE: I was about to say that the definition is that the trees have been planted and we can verify that, if they have been planted, they are living still.
Mr Balsarini : Yes. The 'greened AAU' is the term that is being bandied around.
Ms BURKE: So we are greenwashing forestry as well as AAUs?
Mr Balsarini : I think the other side of it is the strong or government counter-party. If you had a New Zealand or an Australian government standing behind it, that would be an awfully strong counter-party.
Ms BURKE: So your trees are alive and well?
Mr Balsarini : Yes. And guess what? If they are not, it is the Australian government's problem, or the New Zealand government's problem, as the case may be, because ultimately they are accounting for it at an international level.
Dr WASHER: Really this is a bipartisan thing. And I can understand Anna's difficulty. But, under direct action, which the coalition has, this is what they are advocating. I cannot speak for the coalition—and I was part of the team that tried to get that CPRS over, and you know that, Peter, too, because we met before—but basically this is a bipartisan-type thing that we are trying to achieve here, and I would find it hard for a coalition member to stand up and say, 'Hang on; if we are going to do this under direct action, what the hell's the difference?' And obviously it is a price too.
Ms BURKE: Exactly. And you can trade that. Well, theoretically, if this gets up, you could actually trade that—theoretically; you would have to work it out.
Mr Balsarini : The simplest way to explain it from my perspective is: if you had direct action, you would have the same mechanism, and you would have one buyer, which would be government. Under a carbon pricing mechanism, you have the Carbon Farming Initiative—the same regulatory environment but you have got a host of buyers, which would be industry buyers, because they are all looking to offset their liabilities, subject to any limits that are put on them. The mechanism itself is something that is required; it is a set of rules; it is an administrator. I think it is actually really well designed. The methodology process is good because the Domestic Offsets Integrity Committee provides an opportunity to go in and talk about methodologies, get them approved and work through them, rather than having a blanket, 'This is in; this is out.' You have actually got an opportunity to develop different methodologies.
We would certainly like to do other types of trees. We are looking at opportunities in things like livestock management and that type of thing. In the history of the carbon market, if you go back 10 years, trees were a voluntary type of thing. What happened was that people got in, got involved and got comfortable with how they worked, and they have translated into mandatory. I think you will find the same thing in terms of some of those voluntary opportunities. Anecdotally, a number of parties are very positive about the way that the DOIC is conducting itself in terms of that process. So I think that is ideal from either political party's perspective.
CHAIR: I am conscious of the time.
Mr Balsarini : My apologies.
CHAIR: Very quickly, can you just clarify something. You talked about what is happening with the New Zealand government, and I thought you said that there was a price around $20 a tonne at the moment for carbon credit units. Was that the case?
Mr Balsarini : Under the New Zealand legislation—I will just clarify—there is a $25 capped price. In the initial two-year period, emitters have a two-for-one liability. If you have got 100 tonne worth of liability, you only have to pay for 50 tonne. So you work it out and you divide it by two but you have to buy the credits. The credits are trading. The New Zealand offset credits that can be generated from forestry are selling for approximately NZ$20. You put that into a price continuum. They have to settle up. It is almost like the cost of carry. If you know you have to pay $25 in six months time, you are not going to pay $25 for a credit because that is your top price; you are going to work out what the carrying value of that money is and what I would be prepared to pay today. Twenty dollars is where it is trading, and you will probably see that that will creep up towards the $25 as you get closer to when they have to remit their liability.
CHAIR: Are those credits internationally tradeable?
Mr Balsarini : There is a mechanism. If you are a forest owner—similar to this one—you can generate what they call NZUs, New Zealand units. You have then got an extra step to go through that generates an AAU, but it has been done and they have been sold into European governments. That is similar to this process: you could get a CFI but then there is a step that gets you to the AAU. Effectively, the government is accounting for that once it is offshore.
CHAIR: Thank you very much. We have run out time. You will be provided with a draft of the transcript of today's proceedings. If there are any changes that you think should be made, please feel free to contact the secretariat. Once again, thank you for your presentation today.