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Carbon sink forests

CHAIR —Welcome. Firstly, I sincerely apologise for the inconvenience we have put you through in rearranging today’s timetable. We had to make some last-minute alterations to fit in certain senators’ travel arrangements and so forth. Once again, on behalf of the committee, thank you very much, gentlemen, for making yourselves available this afternoon. Before we go to questions, does anyone wish to make a brief opening statement?

Mr Curnow —I might make a brief statement. John and I are speaking in our individual capacities here—we are not representing any clients of ours—in the context of having worked in the area of carbon sequestration projects for a number of years. We would like to share our views from having been involved in that sort of work.

There are a couple of things which from our perspective are worth touching on and which may come up in questions. The important point to note with respect to the tax deductions as contained in the Income Tax Assessment Act is to put them in the broader context of the other complementary policies that relate to promoting the uptake of forestry sequestration projects in Australia, including the voluntary inclusion of those sorts of projects under the proposed Australian emissions trading scheme, which is one of the options put forward in the green paper the government released last week, as well as to consider those in the context of the various carbon sequestration rights legislation that exists at the moment in most states and territories and that has underpinned most of the projects to date. I think there are a number of issues with respect to that carbon sequestration rights legislation which we see would need some addressing as part of these various policies.

CHAIR —Thank you. Mr Walker, do you wish to make a brief opening statement?

Mr Walker —No.

CHAIR —Questions. Senators Milne?

Senator MILNE —Just to go to this issue of carbon sequestration rights, one of the issues that have concerned members of the Senate is that ‘carbon sequestration forests’ be put on the title of the property. At the moment there appears to be no requirement for that. If I have a property, get the tax deduction for a carbon forest and then sell the property to someone else, that is not shown on the title and all those issues about rights arise. You mentioned that you had some thoughts about tidying up the legislation. Can you tell us how you would address that issue?

Mr Curnow —Yes. I was referring to the carbon sequestration rights legislation in each state and territory. Let me touch on that first, and we can come back to the question of how that might be dealt with under the tax legislation.

I think the situation is that all states and territories, except the Northern Territory and the Australian Capital Territory, have some form of carbon sequestration rights legislation in place. Those different pieces of legislation confer different rights. In New South Wales, Western Australia and South Australia, they confer an interest in land. In the other states, on our analysis, they confer only a personal right and have some restrictions with respect to being able to register an interest on title. If we look at those states where there is, in fact, the ability to register a CSR on title, in our experience from having been involved in a number of these projects, the reality is that it is very difficult to get the commercial backing for these projects without holding a carbon sequestration right. In practice, the reality is that all of these sorts of projects that may take benefit from the deduction that is allowed under the Income Tax Assessment Act would seek to have some form of carbon sequestration right registered on title. I think, in that sense, it is important to remember that, practically, what we see as being likely to happen in most instances is that people developing these projects would get the carbon sequestration right registered on title.

The issue that I referred to at the beginning of my remarks was the fact that at the moment not all states and territories have the same approach. I think there is a need to make the nature of that carbon sequestration right and the way in which it can be registered on title uniform across the states and territories. At the moment, in some states and territories, you do not get the ability to register an interest on title. So, if there is a change in ownership of the land, that carbon sequestration right does not run with the land, because you have a mere personal right as opposed to something that is registrable on title. There is definitely an issue at the state and territory level about the nature of carbon sequestration rights and what protection they confer when there is a change of ownership of the land.

Senator MILNE —What you have said confirms a lot of the concern and confusion around as to how it is registered, how it is recognised over a period of time, how a buyer would know—five changes in land use down the track—what was going on and so on. You are suggesting that, complementary to this, there needs to be uniformity of those state laws through, presumably, a COAG process.

Mr Curnow —Yes, something like that. Clearly, because we are dealing here with property law, you would have to have something enacted to deal with each state and territory’s system of property ownership and registering title on land. I think that something through COAG would be one way of doing that. However, clearly there are significant differences between the states and territories. In our view, New South Wales and Western Australia are probably the two current systems that are the most developed; they are probably the best examples of the sort of system that the other states and territories should be enacting.

Senator MILNE —In relation to that, is there a significant difference, or could we just say that we recommend that the New South Wales system be adopted as a national system?

Mr Curnow —It is slightly difficult. To be specific, the New South Wales regime has one disadvantage, in our view, which is the requirement that you have to carry out a full survey plan with respect to registering that title, which can be very costly. Other states do not require that, including Western Australia. Western Australia has an additional benefit in that it recognises the sequestration of carbon in the soil, not just trees. So that potentially provides a basis for any developments down the track with respect to recognition of soil carbon under any emissions trading scheme. I think both of them have advantages and that it would be worth looking at both of them as a basis for what the other states and territories need to perhaps do. The issue in Victoria and Queensland is that it is not an interest in land; they are just a personal interest. So I think there are real issues in Queensland and Victoria with respect to the ability to enforce the carbon sequestration right against any subsequent landowner.

Senator MILNE —So what you are effectively saying is that, as it currently stands, it would be difficult for people in those states to raise the capital or interest in engaging in this process because the carbon rights issue is unclear about transfer.

Mr Curnow —That is actually not the case. In our experience, notwithstanding those restrictions, the reality has been that a lot of projects are still happening in those states and territories. So I think it is not so much a case of things which are preventing or discouraging investment but more about how we can improve the overall system and make it more robust, particularly in the context of potentially a lot of these projects opting into an emissions trading scheme down the track.

Senator MILNE —Thank you. The other issue I wanted to talk to you about is water rights. We have heard evidence today that the National Water Initiative process, in terms of judging the allocation of water in catchments, will not really be finished until 2011. This is law now, in terms of people presumably planting in catchments. The guidelines that the minister has introduced to cover these carbon sequestration forests say that you have to be compliant with state legislation. What is the legal situation if I plant, say, a 1,000-hectare forest now and then, in three years time when the National Water Initiative reports, it is discovered that the catchment that I have planted into has been overallocated and I am told that I have to purchase a water right? Is that retrospective, or can I argue that I do not have to buy it because at the time that I planted the sink I was compliant with state legislation?

Mr Curnow —I am not sure I am qualified or am in a position to answer that in any substantive way. In terms of what the issues may be under the relevant water legislation, I could not comment. Whether that can apply retrospectively is something that would be dependent on the circumstances. From a policy perspective, if projects were undertaken now based on these guidelines and an expectation that, if they meet those, they would be otherwise in compliance, it would probably mean that it then would be difficult to apply something like that retrospectively. However, I think that is probably all I would be able to say on that point.

Senator MILNE —Thank you, because that is how I would read it too. There are a number of catchments around Australia that do not have at this point and will not have for a number of years any kind of water assessment, and it may give more certainty if catchments without water plans are excluded from eligibility until such time as water plans exist. That would give more legal certainty anyway.

Mr Curnow —Yes.

Senator O’BRIEN —In terms of the tax legislation that is being considered, are there any areas in which you believe it could be improved?

Mr Walker —One point that has not been made yet is that, when we talk about schemes being designed to take advantage of these rules, the focus seems to be on the ability outside of the Income Tax Assessment Act to limit that activity. That is what Paul has been particularly focused on. The other comment that needs to be made to put these issues into context is, of course, that the Income Tax Assessment Act has quite an effective set of general anti-avoidance rules whereby, if a scheme were set up specifically for the purpose of claiming these deductions, even if it fell within the letter of these provisions, it would be unlikely that those deductions would be available in any event.

Senator O’BRIEN —I am sorry; I did not follow that. We are all screwing up our foreheads, thinking that we have missed something. Could you run that past us again?

Mr Walker —There is a general anti-avoidance rule in what is part IVA of the Income Tax Assessment Act 1936. That specifically provides that, if you do something for the dominant purpose of obtaining a tax benefit, that tax benefit will be denied to you. We seem to miss that step when we are criticising these provisions. If someone enters a scheme much like what was described earlier, where expenditure is incurred in respect of a carbon sink project, and immediately thereafter or within a short period of time that land is sold, someone could walk away with the benefit of those deductions despite the fact that they had on-sold that land. Before we look at any amendments to carbon sequestration law, the first question should always be, ‘What was the dominant purpose of the taxpayer in doing this transaction?’ If they were driven with the dominant purpose of claiming the tax deduction, the commissioner would be well within his power to deny those deductions.

Senator O’BRIEN —Is that generally applicable to schemes under the tax law?

Mr Walker —Yes. There is a general anti-avoidance rule, which is found in part IVA of the Income Tax Assessment Act 1936.

Senator O’BRIEN —If a property holder made the investment, claimed the tax and then sold the property having improved the value of the property, you think that might fail that anti-avoidance rule?

Mr Walker —It would if, in looking at the objective facts, his dominant purpose was to claim those tax deductions.

Senator MILNE —He would have to prove it though.

Mr Curnow —Just to add to that, in our view the fact that you can sell the land is not anathema to the ability to claim the deductions if, as John says, it is not the dominant purpose, and that is because of the ability at the state and territory level to register the carbon sequestration right on the title and have separate ownership of that to the land. You could imagine the scenario where, even if someone sells the land, obviously any future owner is bound by that carbon sequestration right. The purpose of having initially set that up can still be maintained, notwithstanding that the original developer no longer owns the land.

Senator O’BRIEN —I am wondering whether effectively a lease for a part of the land for that purpose would bind a subsequent property owner, although I think that, if the contract for the sale required vacant possession, that would not be possible with an outstanding lease. Do you have any comment on that?

Mr Curnow —So you are thinking of a situation where there is a carbon sequestration right registered on the title for a particular part of the land and that is subsequently leased to—

Senator O’BRIEN —Not even having anything registered on the title, but where there is a parcel of the land that is placed under trees and there is a 99-year lease to an entity who is trading in the carbon and the original property holder then says, ‘I’m going to sell the land.’ I am guessing that they would not be able to provide vacant possession in that circumstance, because the lease would continue.

Mr Curnow —That would depend to some extent on the lease, in terms of what you could do to dispose of the land while it was being leased. I think that is another issue. The key point is the question of the nature of any carbon sequestration right those parties might have, and if it is registered on the title then that will bind all future dealings in the land, whether that is on ownership or lease. That brings me back to the earlier point we made: that is why having a uniform approach is important.

A point I forgot to mention before, which you have reminded me about, regards another area that all states and territories need to look at with respect to their carbon sequestration rights legislation: the ability for an owner of the land to grant themselves the carbon sequestration right. At the moment that is typically usually only created where the land is being sold to someone who will develop the forestry project or where a developer coming onto existing land carries out the project under lease or service arrangements. If we are talking about a situation where a lot of landholders want to be able to develop projects or host projects themselves, then it would be important for that legislation to enable those existing landholders to grant themselves the carbon sequestration rights that are registered separately on titles without having that occur only once there is sale of that land or some other dealing with a third party.

Senator O’BRIEN —So you are saying that is an issue with the state legislation at the moment?

Mr Curnow —Yes. None of them actually provide for that at the moment.

Senator O’BRIEN —In the absence of that happening, where would we be with the federal legislation?

Mr Curnow —In the absence of harmonising the state and territory—

Senator O’BRIEN —Yes.

Mr Curnow —John can add to this but, looking at the language of the federal Income Tax Assessment Act, it talks about, ‘The purpose of establishing the trees does not include the felling of the trees.’ I think that would mean it is incumbent on each person who is seeking to claim this deduction that they can demonstrate that that is their ongoing purpose. So, if the land is being sold, I guess they have to make sure there is some arrangement in place that protects their interests in that sequestered carbon, notwithstanding a change in ownership. As I said, some of the states and territories have, perhaps, slightly deficient systems in that you cannot register the title on land. Having said that, you can, through contractual means, seek to restrict any subsequent owners of land. It is not, in our view, the ideal scenario, but certainly it has not stopped people carrying out those projects to date.

Senator MILNE —But, given what you have said, it could tie you up in quite a bit of cost and a whole lot of legal arrangements, by the sound of it, whereas, if we could actually streamline this at the beginning and make those rights very clear and transferable, and registered on property and title, it would make the whole system a lot easier to manage over time.

Mr Curnow —Yes, I agree with that estimate. I think that would be an important thing in reducing the transaction costs in this. And that is not just in terms of the difference—the age-old problem in Australia of dealing with different—

Senator MILNE —Jurisdictions.

Mr Curnow —regimes in each state and territory, and the administrative costs, but also the different survey requirements. I mentioned earlier on that New South Wales has the requirement for a full planned survey whereas, in Victoria, you can do it off GPS coordinates, which has a much, much lower cost. So the survey requirements within each of those regimes should also be looked at, in our view.

Senator O’BRIEN —The arrangements on title would almost certainly require survey, wouldn’t they?

Mr Curnow —That is right—not to say that there should not be a survey, but I guess there are cheaper and more expensive ways of doing surveys. So, if you can rely on GPS coordinates to initially set the boundaries of the parcels rather than having to go out and survey those from scratch—which is what New South Wales requires—then, certainly from what a lot of our clients tell us, you can keep the costs down a lot more.

Senator O’BRIEN —It might be cheaper to have a separate register.

Senator MILNE —Given your experience with carbon sequestration projects, why would we now need a tax deduction to establish them—given that the government has included plantation establishment under the Carbon Pollution Reduction Scheme and so the price signal will now be in the market? Why would we want to give people a tax deduction as well?

Mr Curnow —I think it is important to remember that the carbon—I can never get my head around this new name—the emissions trading scheme or the carbon reduction scheme—

Senator MILNE —Feel free to call it that; we know what you are talking about!

Mr Curnow —is one policy, although it is going to have broad coverage—at least as far as what the green paper proposes—covering most sectors, including a voluntary, opt-in arrangement for the forestry sector. The reality is that, in our view, there will be a reasonably low carbon price in the early years, because you are going to have a transition arrangement from having no scheme to introducing the scheme and then ratcheting the caps down over time. So I think, in that context, complementary measures in the early years of introducing the emissions trading scheme will still be very important. We have seen, for example, that renewable energy projects will not get up purely on the basis of the introduction of a carbon price because it is likely to be too low in the early years. So you need a complementary measure like the national renewable energy target. I think this really falls into a similar category, because with forestry you have very long lead times before you get substantial levels of sequestration. The first five years of most plantings do not yield much in the way of sequestered carbon and, given that, I think that the financial nature of doing forestry projects is that there are some significant up-front costs and the returns only come in later. So I think you need complementary measures, like the ability to claim tax deductions on aspects of that, to help in that transition period.

Senator MILNE —What about the omission here that there is no complementary measure to provide finance for protecting existing carbon stores either in native forests or in native vegetation, where you have substantial volumes of carbon already stored?

Mr Curnow —I have two comments on that. One would be that, if you as a forestry company with existing carbon stores opt in—and it is a voluntary opt-in as currently proposed—then you would bear any liability with respect to the harvesting and the felling of trees. That may be a reason why many of those forestry companies will not opt in under the scheme—because they would take on that liability. The other thing is, of course, that the states and territories have legislation that restricts land clearing. Whether one needs to provide an additional financial incentive to stop deforestation within the Australian context is, I guess, ultimately a policy consideration. We do have those existing laws with respect to land clearing that to date have allowed Australia to meet its Kyoto target, for example.

Senator MILNE —Yes, I know, but the problem is that there is very little monitoring or enforcement of or compliance with the land-clearing legislation, where it exists. In some states it still does not exist in any real capacity. So we are subsidising logging and land clearance at one level, and now we are going to subsidise reafforestation at another level. Basically, the carbon equation is going to be in the negative because we are going to be clearing huge stores and planting plantations which will take 100 years to get the same stores back.

Mr Curnow —I do not really have any further comment on that.

Senator MILNE —That is fair enough. My final question is on the price. What are you advising? Obviously you give advice in terms of carbon markets.

Mr Curnow —Yes.

Senator MILNE —What is your current advice to people about the likely price for a carbon offset credit for sequestration into, say, the next 10 years in Australia?

Mr Curnow —Have you got a crystal ball down there?

Senator MILNE —Not at all. That is why I am asking you: what are you advising?

Mr Curnow —We do not advise on that in any strict sense, but certainly we have our own views, and I am happy to share those. Let us look at current prices in the forestry offset market, obviously very much in the voluntary space under things like Greenhouse Friendly and previously under the New South Wales greenhouse gas abatement scheme. Typically, we see prices there of anywhere from $12 to $20 a tonne of CO2 equivalent. We have also seen much, much higher prices, but they would not represent the large volume. I think it is fair to say that at the moment there is not much price transparency, because this has all been done on bilateral trade, so there is no spot market or an exchange where you can see what the prices are. That will happen over time, of course.

In terms of the proposal under the green paper, where forestry would be a voluntary opt-in as a covered sector, I guess our expectation would be that the price for forestry permits, or whatever they will be called, would be only slightly below the permit price. It would not go above the permit price, because it would not be viable if the forestry permits were going to be more than the general permit price, so of course it would not ordinarily go above that. How much less than that it would be is difficult to say.

If you look at the European trading scheme and you look at the permit price there of European allowances of around €25 at the moment, the offset price for credits being brought in under the CDM is trading at around 85 per cent of the market price. So you may see, if we assume a $20 price in Australia for a permit, that the forestry permits would be anywhere from $15 to $17, perhaps. That is pretty much in line with the current price, but I think that, as the permit price goes up, you would expect the forestry permit price to track that, but probably at a slight discount.

That is really the first phase I am thinking of, but in terms of the next 10 years it really is a function of what caps are set. It is really difficult to look beyond that. But, if you look at the European scheme again by way of example, the current price is around €25 for phase 2 pricing. A lot of analysis has been done on what the price would be in phase 3, and there are reports out that indicate that it would be anywhere from €40 to €50. So I guess we are seeing a doubling of the price in a relatively short space of time, and I would imagine there would be a similar situation in Australia.

Senator MILNE —Thank you for that. Just to summarise what you have said: your key consideration is that we get some standardised, national legislation around the carbon sequestration rights so that we simplify things, make it cheaper for transaction costs and get some uniformity around the country?

Mr Curnow —Yes.

CHAIR —Mr Curnow and Mr Walker, once again my sincere apologies for delaying you. Thank you for making yourself available to the committee.

Mr Curnow —You are welcome.

Mr Walker —That is all right.

CHAIR —Thank you, and all the best.

[4.29 pm]