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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

CHAIR —I welcome representatives from the Australian Bureau of Agricultural and Resource Economics and Sciences and the Commonwealth Scientific and Industrial Research Organisation. Thank you for talking to us today. As Commonwealth officers, you will not be asked to give opinions on matters of policy, though this does not preclude questions asking for explanations of policy or factual questions about when and how policies were adopted. The committee has received your submissions as submissions 33 and 35 respectively. Do you wish to make any amendments or alterations to your submissions?

Dr Keating —No.

CHAIR —If not, do you wish to make a brief opening statement before we go to questions?

Dr Keating —Thank you. CSIRO welcomes the opportunity to appear before the committee. While we had no formal role in the preparation of the CFI bill, we do have an active portfolio of scientific investigations that are relevant to the CFI goals. These activities focus on science that can assist in reducing greenhouse emissions from agricultural activities, and science that is relevant to the storage of carbon in long-lived sinks such as forests, soils and biochar. Activities cover a broad range of topics, including measurement of greenhouse gas emissions; management options that can mitigate emissions or increase carbon storage; sensing and predictive tools to aid in the assessment of carbon stocks; and support for the development of national carbon accounting systems. We have highlighted some key reports in our submission, and we have experts here today who can comment on work that is currently underway. I would add that this is an active area of research as we speak today.

In our submission, we made some general comments, from a science perspective, on the approaches taken in the CFI bill. There are seven very quick dot points that I will flag that summarise that. These are science perspectives. The CFI does address important sources of greenhouse gas abatement. There are significant sources of greenhouse gases in the agriculture and land sector, and the CFI addresses those important sources. While forest carbon and soil carbon sinks are opportunities worth pursuing, current research would suggest the abatement likely to be achieved in the short term, at least, is likely to be modest. Environmental integrity is the core of any successful carbon marketplace, and the CFI is firmly focused on environmental integrity. The science is complex and continuing to evolve. A science strength of the CFI is that it is designed to be able to take on board new knowledge as it becomes available. Another strength is that it allows more broadly based engagement and innovation from industries and land managers. There is always the risk of unintended consequences in anything to do with land management and land use, and the CFI does attempt to address such consequences. Finally, successful carbon marketplaces are going to require well-informed markets as well as well-informed policy instruments, so continuing investment in the underpinning science is going to be needed to support a successful CFI should it proceed. Thank you.

CHAIR —Thank you, Dr Keating. Mr Morris.

Mr Morris —ABARES welcomes the opportunity to appear before the committee. ABARES is the research arm of the Department of Agriculture, Fisheries and Forestry and is responsible for providing research, analysis and advice for government and private sector decision-makers on significant issues affecting Australia’s primary industries. ABARES’ work program on climate change economics and sciences is currently focused on the portfolio industries of the department and on analysing potential land-use change under evolving policy settings.

Our most recent publication of relevance was presented at the March 2011 Outlook conference and was titled The economics of Australian agriculture’s participation in carbon offset markets. This has been provided to the inquiry as an exhibit. The paper considers a number of key issues associated with the proposed offset credits under the carbon farming initiative. Importantly, it concludes that the initiative would be most effective if it is linked with a domestic carbon pricing scheme, in the absence of which there is likely to be insufficient demand for CFI offset credits and would be most effective if land-holders can see a clear economic benefit from participating in the CFI carbon offset activities and that any land-holder’s participation in the carbon farming initiative eligible offset activities is voluntary.

ABS is also presently updating its 2007-08 work entitled Analysing the economic potential of forestry for carbon sequestration under alternative carbon price paths. It has been prepared for the Treasury as input to its policy analysis in this area. ABARES’ 2007-08 work examined the potential agricultural land available for conversion to forestry activities, both commercial timber plantations and environmental plantings, under alternative carbon price paths and was used as input to the 2008 Treasury report Australia’s low pollution future: the economics of climate change mitigation. The reason for the update of ABARES’ 2007-08 analysis is that the estimates did not factor in possible restrictions on forestry expansion for conservation reasons, the potential negative environmental impacts of afforestation such as reduced water run-offs or other important socioeconomic factors which might affect land-holders’ resistance to any land-use change. The current ABARES update work for the Australian Treasury will provide new estimates for potential land-use change under specific carbon price paths based on a more plausible set of assumptions regarding water interception, water pricing and Kyoto Protocol compliant available land, among other things. I might note here that we are working with CSIRO on that work. The timing of its public release will be determined by the Treasury.

With that we would like to conclude our statement and we are happy to respond to any questions the committee may have.

CHAIR —Thank you, Mr Morris. Senator Colbeck.

Senator COLBECK —I go to the last point you raised. You talked of the 2007-08 work you did to consider potential uptake of forestry under the CPRS. There was quite a bit of discussion around that at the time on its accuracy. I remember having a number of discussions at estimates over that and the work was actually updated. Although the numbers did not change at the end, the concession was made that the numbers in that place of work were at the upper end of what was likely. You indicate you are doing some more work on that. I would have thought that would be pretty critical to our consideration of this process because it is the work that is going to give an indication of what potential uptake might be if this piece of legislation were passed. So you are saying to us that the timing of that is to be determined by Treasury.

Mr Morris —That is correct. We are being funded at the moment to undertake that work by the Treasury, so we do that work as part of their policy analysis and will provide that to them fairly shortly, I think. Then they will determine how that feeds into the policy process and when they release that work.

Senator COLBECK —It is a bit late to feed it into the policy process if we are going to be asked to pass this legislation before the end of the financial year, which is what I understand.

Mr Morris —As I say, that is a decision for Treasury to make.

Senator COLBECK —How government manage their processes is their problem, and we will deal with that as part of the parliamentary process. We talked about that last piece of work, for 2007-08, that was subsequently updated. I do appreciate the fact that ABARES did go back and do some additional work on it. I think that was worth while given the concern that we raised, but it did raise an enormous amount of concern in the rural sector about the potential for incursion into agricultural land. It did have some reasonable analysis about costings and figures and that sort of stuff, but my recollection is that it basically said that all of Tasmania’s agricultural land would go to trees, which I did not believe. I accept the concession that that is now considered to be an upper end estimate, but it still does not give us anything decent to go on as far as what the possibilities are for this process.

Mr Morris —What you say is correct. Our view at this stage is that that is an upper end estimate. A lot of the alternative assumptions we are considering under the current piece of work would tend to push that number down. That is why we are relooking at that and building in some other assumptions on water pricing and so forth. But in terms of the release date, as I said, that will be a matter for Treasury to decide.

Senator COLBECK —I will come to CSIRO, who have obviously done another piece of work. I have unfortunately not had the opportunity to have a look at that at this stage, but it is referred to in the NFF submission, which talks about how, at a $36 a tonne carbon price, the entire food-growing area of the lower Murray-Darling would be converted to carbon sink forests. This sort of work is being referenced to us as part of submissions to this inquiry expressing concerns about the operations of the proposed legislation, and yet we do not have the latest data from ABARES. I would like Dr McKenzie or somebody to give us some information on that particular piece of work and where these numbers come from.

Dr Keating —I am aware of the reference that was in the media recently. I think the original source of it was some conference proceedings in Cairns recently. That is part of a broader piece of current activity in CSIRO. That is another extreme situation, where you could get a combination of assumptions that would lead to that outcome. But CSIRO is not saying that we believe that that combination of assumptions is likely to come together and play out in that way.

Senator NASH —But it is a possibility. That is what they are saying.

Dr Keating —It is a possibility, but only if, for instance, the capital cost, or the discount rate, for any upfront capital investment is very low. So it is highly unlikely to be a commercial reality. We do have expertise here today. My colleague Dr Phil Polglase is working in this very area at the moment. If you would like to unpack a little bit the issues we think are the key issues in determining the extent to which carbon forests would be promoted by a carbon offset price, we could go there now.

Senator COLBECK —Thirty-six dollars a tonne is a huge change from the figures that we were looking at in the initial ABARES stuff. We were talking between $160 and $197 as the range where you would start to see conversion in some of the sheep country and things of that nature. That is a relatively high number in the overall scheme of what is being considered at the moment, but $36 is much more within the realms of what is going to be more immediate, and so that obviously raises a whole heap more concern. We do not have the upgraded work because it is still being built—the ABARES stuff—but it is pretty pivotal to our consideration of this piece of legislation, I would have thought. With the number of $36 that is being referenced from CSIRO, it makes our job very difficult to do a decent analysis of what we are considering.

Dr Keating —I understand that. There are really three pieces of work going on here. There is the work ABARES is doing for Treasury, which Dr Morris has mentioned. CSIRO is having some advisory input into that work around some of the technical issues of forestry, so that is the second thing. The third one is some work CSIRO is doing itself. Perhaps I could pass to my colleague to explain what we are currently doing and the time frames we are trying to meet to get that work out.

Dr Polglase —If I could perhaps just bring my perspective to it. As Brian says, we are doing some complementary type of work. That is in progress and I expect that it may be available and published for public release in a matter of one to two months.

Senator COLBECK —That still does not fit within my time frame.

Senator NASH —Nor mine. We know it is not your fault, Dr Polglase.

Dr Polglase —We can take advice on that.

Senator COLBECK —We are not having a crack at you over that.

Dr Polglase —That is okay.

Senator COLBECK —Those who we are having a crack at know who they are.

Senator NASH —It is a glaring anomaly, I would say.

Dr Polglase —But I think we can say some things already from the available evidence that may help inform the discussion. The first one is to point out that all of these numbers you have seen—the previous Treasury analyses and the CSIRO analyses—are economic modelling. I do not consider them to be predictions or projections of land use change. I do consider them to be estimates of areas of opportunity for land use change given certain model constructs and certain model assumptions, particularly input assumptions. The models are particularly sensitive to such things as establishment costs for forestry, financial discount rates and carbon price. They are not social models in the sense that they do not actually take into account all those factors that are pertinent—the various investors and their willingness to change land use, and whether those land investors be the landholder, the farmer, or the third-party investors. You would know much more about this than I do, I think, but there are a whole bunch of factors that are not really taken into account. We use this information to test the sensitivity of those models with different assumptions and see how that produces different results in terms of what I would call areas of opportunity, rather than areas of likely land use change.

That is coming from the top down, if I can put it that way. The other way to look at it is from the bottom up, which is what is practically possible given all the constraints with regard to seed supply, labour costs, infrastructure, capital investment and so on. Just to give you an example: at the height of the managed investment scheme blue gum industry, the maximum area of plantations that could be established was about 100,000 hectares in any one year. Over a five-year period, it averaged about 76,000 hectares. That puts a useful context and constraint on what is possible. If you figure a number of about 100,000 hectares per year as being towards the upper limit, that kind of sets a constraint as to what is logistically feasible.

Senator COLBECK —What were the parameters that put those constraints in place?

Dr Polglase —It was land availability—increasingly the MIS companies found it difficult to acquire land; it was definitely seed and seedling supply, so the infrastructure to get the seedlings to plant those things; and it was labour costs—to name but a few.

Senator NASH —Can I just ask very quickly—

CHAIR —Senator Nash, can I just indicate that the coalition have got five minutes left, so you can divvy that up how you like.

Senator COLBECK —I will just ask one more question then, and it goes to the work that you are doing, Mr Morris, in updating that 2007-08 stuff. My recollection—and I may be wrong—is that a lot of the inputs to that information were directed by Treasury as part of the discussion. If I am wrong, please tell me. And that occurred through a lot of the process. Some of the assumptions that went into the analysis around a lot of the modelling for the previous emissions process were inputs that were directed by Treasury. I just want to know whether that process is continuing or whether it specifically relates to the work that you are doing.

Mr Morris —We probably need to distinguish between what are policy parameters and assumptions that go into a model and what are the assumptions which we believe are representations of the world or other things. Clearly, we do our work in an independent fashion, so assumptions which are not policy related or are in some way things which the government might determine or influence are things that we would provide. Other assumptions which are more policy related would tend to be provided by the agencies which are developing policies.

Senator COLBECK —My question is: how do I identify that? That was very difficult and took a lot of time to draw out during the last process, and that is an important part of this. For a long time we were told that, for example, there would be no employment implications from the CPRS. After time, and after drawing a lot of teeth, we discovered that that was a policy input to the process; it was not an output of the model. So is it possible for us to be provided with information that gives us an indication early in the process of what the policy inputs are versus what are, if you like, the real-world applications?

Mr Morris —Just to further answer the first question, my colleague was telling me that the main assumptions came from the department of climate change last time rather than from Treasury, and then we had some scientific assumptions from the former Bureau of Rural Sciences. I think it is a fair question and as part of the research process it would be appropriate for us to say where our assumptions are coming from. We will certainly take that on board and in preparing the report for Treasury; I think we could certainly identify specifically in the report which assumptions are more policy related assumptions, I suppose, or determined more by other outside sources and which ones are our own assumptions.

Senator COLBECK —Okay.

Mr Morris —Mr Chairman, could I just add something on the question you asked earlier regarding the numbers in the 2007-08 report. The discussion we just had focused on the upper end. They were the Garnaut 25 assumptions, which are requiring a 25 per cent reduction in greenhouse gas emissions by 2020, so they are at the upper end. But within that report quite a range of scenarios are looked at, including what we label here as the CPRS 5, which is a five per cent reduction in greenhouse gas emissions by 2020 from the 2000 level, and those numbers are much lower than those bigger reductions. So in that report there is quite an indicative range of alternate scenarios that can be quite helpful. On those numbers the impact on Tasmania, I might note, is far lower than at the upper end of the scale.

Senator NASH —I have a number of questions I will put on notice because I only have a couple of minutes. I have two quick questions now. Dr Polglase, you referred to establishment costs as part of your modelling. Did you factor into that the current legislation that provides for tax breaks for carbon sink establishment?

Dr Polglase —No, we did not. These are broad economic models not financial models, so that is another deficiency, if you like, in the modelling. They cannot and they do not pretend to describe and encompass everything and every condition.

Senator NASH —So we should take into account that that has not been factored into the work that you have done.

Senator MILNE —Can I just follow up that up. CSIRO has not taken it into account. Did ABARES?

Senator NASH —Yes, can we just ask that, Mr Morris?

Mr Morris —No, no.

CHAIR —No, you can’t!

Senator NASH —It know it’s early—and thank you all for getting up so early!

CHAIR —Mr Morris, that is the most decisive I have ever heard!

Mr Morris —You caught me out there, Senator. I was just reconfirming with my colleague that I told Senator Colbeck the correct advice on those assumptions and, yes, that is correct.

Senator NASH —So on that issue of the tax breaks for carbon sink establishment: has that been taken into account by ABARES in any of your modelling?

Mr Morris —No.

Senator NASH —It appears you were right in the first place. Is there a reason why not? It would have an effect on the input costs that Dr Polglase was talking about in the first instance.

Dr Ahammad —Our focus was long-term potential, until 2050, and also there was a review undertaken at that time, if my recollection is right. We tried to steer away as much complexity as possible at that time, so we have not undertaken that on the modelling side of things.

Senator NASH —I would venture that it is incredibly complex and I do not think we can get around the complexity by just avoiding things like this.

Dr Polglase —Can I just add that what we have done is again test the sensitivity of the system to certain assumptions. Rather than pretending that we know exactly the establishment cost of every single forestry system in every place, what we do is vary the establishment cost from, say, $1,000 per hectare to $3,000 per hectare. That encompasses something like tax breaks, and the system is incredibly sensitive to that. So rather than say that the establishment cost is $2,334 per hectare and that we will discount it for a tax break we actually try to demonstrate the sensitivity of the system to varying it by quite a large margin, which presumably would encompass those sorts of things.

The other thing is that there is no single investment model for these things, and it does vary from third-party investors. They all have their own different financial models and things, and we just cannot pretend to model that, so we are deliberately keeping it quite simple to demonstrate some concepts.

Senator NASH —Dr Keating, you mentioned ‘unintended consequences’ in your opening address. What do you see that those unintended consequences are?

Dr Keating —The ones that have been explored in CSIRO research would be things like relationships between forestry plantings and water flows, and negative biodiversity impacts potentially of forestry plantings or, for that matter, positive biodiversity impacts. Some of the consequences could be positive as well as negative. The issue that we have really been skirting around are the land contests, if you like, for agriculture and forestry—

Senator NASH —I do not think we have been skirting around that.

Dr Keating —Yes, sorry—trade-offs with food production and all those sorts of things. Land use is obviously a complex and highly interconnected issue. At one level, it is amazing that it changes so slowly. My colleague would tell me that the entire plantation forestry estate in Australia is two million hectares, as we sit here today—

Dr Polglase —Yes.

Dr Keating —and it has taken however long to get to that two million hectares, but while it does change slowly it has very far-reaching consequences.

Senator NASH —Okay. You also mentioned that this legislation ‘attempts’ to address it. Can you give us some more detail on notice on what ways you think it attempts to address it and also what ways, if any, you think that falls short?

Dr Keating —I can take that on notice.

—I want to take up where my colleagues have left off because there is a common interest here in parliament recognising that we have a global food crisis, water crisis, climate crisis and energy crisis all happening at the same time. What we have seen in the past is that when these issues are taken as silos there are perverse outcomes on the others and it takes years to sort them out. My perspective in coming to this is to see that we have a mechanism which enhances agricultural productivity, protects carbon in the landscape, uses water in a sustainable way and so on. In my view this as a gap in the agricultural research because everybody has been off on their own thing. We need to see this as an integrated whole. I see that CSIRO is now recognising this is an area of work that desperately needs to be done.

Our problem here is that we have got legislation before us without the research base to inform the decisions. We have got competition between food, fibre, energy and carbon, and this Carbon Farming Initiative strikes all of those. Whether fibre for pulp, energy for biomass or carbon stored depends on the nature and size of the market and the price, because a farmer is going to grow what can maximise outcomes, hopefully in a sustainable way. The ABARES paper says that the nature and size of the market—and I would obviously add the price—is going to determine what actually happens under this initiative. So would like to ask you, for a start: are you assuming that the Carbon Farming Initiative is linked to the carbon price mechanism that will be coming through the parliament? If so, what is your thinking on the nature and size of the market in that context?

Dr Keating —I do not think CSIRO has any assumptions on linkages between the Carbon Farming Initiative and other carbon pricing policy considerations. I am going to defer to ABARES here because they have done some more explicit work than we have on trying to estimate the likely size of the supply for carbon offsets.

Mr Morris —There are a couple or different aspects to the question. One is that you could go ahead with the Carbon Farming Initiative without a carbon price, but as we say in our opening statement—

Senator MILNE —There is no demand.

Mr Morris —there will not be strong demand for those carbon credits that are generated by the Carbon Farming Initiative or other schemes without having some price on carbon, whether that is a carbon tax, a CPRS or whatever. We highlight in the 2011 paper, as well as in our statement, that the demand side is quite important.

Turning to the other aspect of your comments, one of the reasons why we are trying to update the numbers is to take account of some of the things that you are talking about, including the effect of afforestation activities on water run-off and so forth. That will have an impact on some of those water issues in the Murray-Darling Basin, for example, and other things. There are also other factors such as economic factors in landholders’ decision making on whether they plant trees, grow crops or whatever. So we are explicitly trying to take more of an account of some of those things in this additional modelling we are doing.

Senator MILNE —To follow up on that, are you making an assumption that plantations for harvest are going to be allowed under the Carbon Farming Initiative?

Ms Heyhoe —The assumptions around the policy specifics of the Carbon Farming Initiative are being worked out with the Department of Climate Change and Energy Efficiency, and a final decision has not been made on that yet.

Senator MILNE —So really your numbers about what is possible and what is not possible are going to be very significantly affected by the positive list of what is in and what is out, clearly. Let’s just go to the methodologies, because there are a lot of people out in rural and regional Australia who think this is going to be a bonanza for rural and regional Australia. My concern here is on methodologies, and that relates to the transaction costs and therefore the potential benefit. So I ask you: which methodologies exist already for the practices that have been listed that would be Kyoto compliant, for example? What I am trying to work out here is, if there were a linkage to the carbon price and if that favoured Kyoto compliant permits, which activities could benefit from that straightaway because they have a methodology that is internationally recognised and therefore compliant?

Dr Ahammad —We have not done a comprehensive analysis of the various methodologies, but whatever we have come across suggests, given the current state of scientific research and the existing methodologies in various schemes, that manure management, methane flaring, directing to electricity generation, savanna burning and reforestation are very well established.

Senator MILNE —Did you say ‘reforestation’?

Dr Ahammad —Reforestation is very well established internationally. Our department policy area and the DCCEE are working together to look into various methodologies.

Senator MILNE —This gets to my point as to who will benefit here. If the Carbon Farming Initiative got through now and it was assumed that Kyoto compliance was fundamental to it, then the activities that would be immediately available are reforestation, manure management and savanna burning. In the scheme of things manure management and savanna burning are in relatively small numbers. I agree they are very important but relatively small. So the big push is on reforestation and the question then is: what are the restrictions on reforestation? Is it plantations or is it biodiverse plantings for carbon credits? Is that a fair assessment of first in, best dressed?

Dr Ahammad —If I may add to my previous answers to your earlier questions and subsequent question, there is a temporal element to all this. Immediately, with the current state of knowledge, these are the three things about which we are showing most promise but, over time, scientific development and research will open up a lot more opportunities for other activities.

Senator McEWEN —I have a question for ABARES and it is about Australia’s position with regard to international carbon markets. If we do not proceed with the CFI, what position does that put Australia in with regard to participating in the international market?

Dr Ahammad —This is probably not our area of expertise as such; it is more a question for the Department of Climate Change and Energy Efficiency.

Mr Morris —I think it is fair to say, though, that we need some sort of recognised system of carbon credits in Australia in order to effectively participate in those international markets. Unless there is a recognised system of carbon credits here, then it will be very difficult to actually participate in those markets.

Senator McEWEN —You obviously keep tabs on what is happening internationally?

Mr Morris —Yes.

Senator McEWEN —Are other comparable countries doing more than us to establish—

Mr Morris —There is a very good summary of that in the paper that we submitted to the inquiry. It lists quite a number of different schemes that are happening internationally in a number of different countries around the world. In the interests of time, I would refer you to that. If you would like us to go through it, I could get Dr Ahammad to go through it.

Senator McEWEN —No, it is okay, you do not need to go through it. But where does Australia stand in relation to those other countries that you have listed?

Dr Ahammad —At the national level, I guess it is the New Zealand scheme which is allowing a mandated market. The European Union has a mandated market. As for the agricultural and policy related offsets, it is mostly a voluntary market that Australian land managers can target. But, as Mr Morris suggested earlier, if we do not have a credible mechanism within Australia, then for land managers and farmers it will be a lot more difficult to explore international markets.

Dr Keating —Could I just add one comment to ABARES response, which I agree with entirely. Another dimension of the CFI is that it allows innovation in non-Kyoto markets. It is reasonably up there in the world and world-leading in terms of trying to encourage innovation more broadly across the land sector in ways that will have some atmospheric greenhouse mitigation benefits. So it opens up that possibility to break out of some of the perhaps restrictive Kyoto principles that have been limiting opportunities in the past.

Senator McEWEN —Just following on from that, Dr Keating, I understand that you are on the Domestic Offsets Integrity Committee. Is that right?

Dr Keating —That is correct. I believe that CSIRO, under the legislation, nominates a government member to the committee on an interim basis and that is currently me. The committee is operational on an interim basis. Of course, its future depends on the future of the legislation.

Senator McEWEN —The principal role of the committee is to ensure the environmental credibility of the methodologies that are considered under the CFI. Is that right?

Dr Keating —I think the only role for the committee, as far as I can see, is to provide public advice to the minister on the environmental integrity of any methodologies that are put forward against defined criteria.

Mr Morris —Just for the record, I mentioned earlier to Senator Colbeck that it was mainly a policy assumption that had been provided in our earlier work. There were a couple of additional assumptions that were provided from other agencies. The long-term commodity price assumptions in the work we did were provided by Treasury. Some information on the assumptions relating to biomass growth and sequestration rates was provided by DCCEE as well. In the next piece of work we do we will try to specify where the assumptions come from.

CHAIR —Thank you very much for your evidence this morning. Thank you for coming along this morning and helping the committee.

[8.46 am]