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Carbon sink forests

CHAIR —I welcome representatives from the Department of Climate Change. I remind senators that the Senate has resolved that an officer of a department of the Commonwealth or of a state shall not be asked to give opinions on matters of policy and should be given reasonable opportunity to refer questions asked of the officer to superior officers or to a minister. This resolution prohibits only questions asking for opinions on matters of policy and does not preclude questions asking for explanations of policies or factual questions about when and how policies were adopted. Officers of the department are also reminded that any claim that it would be contrary to the public interest to answer a question must be made by a minister and should be accompanied by a statement setting out the basis for the claim. As you do not wish to make opening statements, we will go straight to questions.

Senator JOYCE —The object of this exercise is to reduce the amount of carbon in the atmosphere. Is that right?

Mr Ryan —Yes.

Senator JOYCE —We had evidence today about carbon sequestration via the growth of perennials. Perennial summer grasses such as buffel grass and Mitchell grass especially, Flinders grass to an extent, and even wheat, have, on a per acre basis, a better capacity to sequester carbon than dry sclerophyll forests. What do you have to say about that statement?

Mr Ryan —I think there are two issues. The first one is that this measure is directly targeted at activities that contribute to Australia’s Kyoto protocol target, which includes the establishment of new forests since 1990. Grassland activities do not contribute to the target and so the incentive is to get that national benefit. The second issue is that, in terms of the relative benefits, the benefits of forests and the ability to account for their growth and carbon sequestration are well established. Grasslands and grassland systems are an emerging area of knowledge. There has been some work done and it is ongoing. The government has an interest in this area and is supporting work in this area. But the relative advantages of carbon storage in those two types of systems are not clear cut.

Senator JOYCE —So we are going down this path because it is part of the premise of the Kyoto protocol targets, which do not go to grasslands. Does that mean that we are heading towards an outcome because it is one that is determined by what seems apparent now to be a dated document—that is, the Kyoto protocol target—and that that document has primacy over the objective of what scientifically has the best capacity for storing carbon in the ground?

Mr Ryan —It is the particular focus, yes, to contribute to our national Kyoto targets, notwithstanding the potential for changes in arrangements and recognition of new knowledge in the future.

Senator JOYCE —It seems ridiculous that we do not just put aside the Kyoto premise if it has become evident that there is a greater capacity to store carbon by another means. Why are we tied to the premise of the Kyoto protocol targets if there is newer science emerging that there is a better way to do it? It might be unsavoury but we have had capable witnesses today saying that perennial grasslands will have a greater capacity to store carbon. If the new science conclusively proves it, does that mean we will therefore be asking people who have put in the forests to take them down and plant grasslands instead?

Mr Ryan —I think that is a difficult question to answer. As I have said, in one respect it may depend on the outcomes of future international negotiations. In Australia looking at its own interests, as other countries would, it would also be looking at the potential benefits as well as disadvantages. The government has done some work to inform some of the decisions already taken in accordance with the Kyoto protocol rules about the potential benefits in grassland systems but also the potential risks in terms of losses. With our variable climate, as well as particular aspects of the accounting rules, there are risk issues in terms of loss as well as gains that need to be taken into account.

Senator JOYCE —Have you formulated or modelled the process of getting an upfront tax deduction and then an income stream from the increase in carbon from an investment in grasslands? Has that been part of your modelling or was it purely, wholly and solely, only dealing with trees?

Ms Mummery —Perhaps I could just emphasise, as Mr Ryan noted, that the government’s priority is to enhance its ability to contribute towards measures which will directly make a difference with regard to our current national account and our current accounting rules.

Senator JOYCE —But they only take trees into account, not grasses.

Ms Mummery —And certainly that is obviously a point of emphasis and priority for the government. There are, nevertheless, other measures. The government certainly has invested in a new measure called Australia’s Farming Future, which is starting to look at other ways in which the agriculture and land sectors can contribute to our overall greenhouse objectives. So I think it is very important to note that this particular tax measure is focused very much on our carbon account—

Senator JOYCE —In summary, that is surrounding trees, not grasses. In fact, it does not acknowledge the benefits of the new science that is taking into account the capacity of the perennial grasslands to sequestrate more carbon than a similar area of forests.

Ms Mummery —But I think, as I noted, there are other potential avenues for the government to look at other measures.

Senator JOYCE —Can you tell me where the tax deduction comes for the sequestration of carbon via grasslands? Where does it provide that I can get a tax deduction for doing that?

Ms Mummery —I think, as Mr Ryan noted, this measure is focused on forest sinks as our Kyoto account highlight.

Senator JOYCE —So there is no place I can get a tax deduction for the sequestration of carbon via grasslands, is there?

Ms Mummery —Not that I am aware of; but tax deductions are something the Treasury will need to advise on.

Senator JOYCE —And that is ignoring the facts and the science that is becoming apparent to us of late, isn’t it?

Ms Mummery —No; as I mentioned, the government is looking at broader ways that the land sectors can contribute to our greenhouse objectives, and Australia’s Farming Future—

Senator JOYCE —They are looking at it; they have not created it.

Ms Mummery —It is certainly an early agenda, but there is likely to be further work looking at that question.

Senator JOYCE —Do you acknowledge that this scheme is an MIS in its premise and how it operates?

Mr Ryan —This tax measure specifically excludes MIS arrangements.

Senator JOYCE —If I might be so bold as to suggest this, can you tell me what is the difference between how this measure works and how an MIS works?

Mr Ryan —While Treasury would need to answer the detail as far as tax structures are concerned, in simple terms it requires that direct investment, as is identified in the legislation.

Senator JOYCE —Do you get an upfront tax deduction for capital investment under this process?

Mr Ryan —Yes, an upfront deduction for investment in establishing forests for—

Senator JOYCE —In an MIS do you get an upfront tax deduction for the capital investment?

Mr Ryan —Yes, but it is available for the managed investment scheme structures, which—

Senator JOYCE —Under both processes, is that not the encouragement to get people to invest in them?

Mr Ryan —That is correct—they both encourage investment and provide an upfront deduction.

Senator JOYCE —Under this one, is it not the case that the person also gets the benefit of an income stream from the increase in weight that is noted as being carbon sequestrated in the timber on the place?

Mr Ryan —The incentive for investment here is to get an income stream from the carbon sequestered in the forest.

Senator JOYCE —In that case, it is better than an MIS because I get two things. I get the upfront tax deduction and then I get an income stream from a passive investment, which sits there increasing in weight. That has to be the case; otherwise, people are not going to invest in it. But that is how it is going to work, isn’t it?

Mr Ryan —There would be the expectation of that return.

Senator JOYCE —What is there to stop people going to prime agricultural land and saying, ‘This place is going to get the greatest return on weight’? Obviously, it relates to water, rainfall, soil depth, soil type and the capacity for a tree to grow as quickly as possible. Is there anything in this act that says, ‘Prime agricultural will be excluded from being covered under this act’?

Mr Ryan —No.

Senator JOYCE —Why not?

Mr Ryan —The amendments to the legislation are simply a tax measure to encourage the establishment of carbon sink forests.

Senator JOYCE —Do you think that it is peculiar that some people suggest that prime agricultural land will not be used when it is not precluded in the act and therefore could be used and that if a prudent investor saw that that land would provide the greatest increase in the weight of carbon that is exactly what they would use?

Mr Ryan —It is true that it is likely that you would achieve good growth rates on productive land. In terms of the decisions, it is an investment decision involving weighing up the alternative land uses.

Senator JOYCE —Do you acknowledge that through the departments of land in various states there is ample capacity for the differentiation of land types by rainfall, soil type and contour that would enable certain land types to be described as non-prime agricultural land, which would reduce the threat of this being an investment process on prime agricultural land?

Mr Ryan —I am not able to comment on the specifics of the state governments’ arrangements.

Senator JOYCE —Are you aware of state governments that have certain tree-clearing guidelines in place at the moment?

Mr Ryan —Yes, I am aware of tree-clearing guidelines.

Senator JOYCE —Do you acknowledge that they use satellite equipment and a whole range of other mechanisms, along with modelling, that can tell you even to the square metre what land type a particular area is? Do you acknowledge that on some types of land certain activities are allowed and certain activities are precluded?

Mr Ryan —Again, it is difficult to comment on the details of state arrangements. We are aware that different state governments have capabilities developed to varying levels in regard to monitoring land cover and land cover change and, presumably, the other characteristics of the land.

Senator JOYCE —Do you intend to approach the state governments to see whether the processes that they use can be overlaid on the processes that you use so as to be part of a solution in precluding prime agricultural land?

Mr Ryan —No.

Senator JOYCE —Has anybody approached you about entering into those discussions?

Mr Ryan —No.

Ms Mummery —The critical point from the department’s perspective is that we have had some analysis from ABARE. They advised us that it is unlikely that this measure will drive the substitution of prime agricultural activity by forest sinks.

Senator BOSWELL —Did you question how they made that assessment?

Senator JOYCE —Unfortunately, there is a lot of conjecture about the relevance of ABARE. Unfortunately, ABARE has had a pretty bad track record in that it gets things wrong, starting with oil prices and moving on to just about every other soft commodity. Have you decided not to preclude prime agricultural land based on the evidence given by ABARE?

Mr Ryan —No. The ABARE report was commissioned by the department after the recent debate to help inform our consideration and hopefully the committee’s consideration. The legislation was implemented earlier.

Senator JOYCE —On the ramifications for the Murray-Darling Basin, and especially on the run-off of water, have you done any modelling on water run-off if this is used excessively?

Mr Ryan —No, the Department of Climate Change has not considered that for this measure.

Senator JOYCE —Have you done any modelling or socioeconomic studies as to what ramifications this will have in the sugar-growing areas, especially as the production of mills goes below critical capacity and they shut down?

Mr Ryan —The ABARE report that we commissioned identified a range of different regions, covering different rainfall zones and productions systems, including those particular regions, because it was clear that was one of the areas of interest.

Senator JOYCE —My final question—and you might take this on notice—is: would you be prepared to table all your socioeconomic statements about the effects of this policy on certain regions? And do you have any socioeconomic studies on the economic consequences of this policy for certain regions?

Mr Ryan —We commissioned this new piece of analysis by ABARE specifically for this purpose. The Department of Climate Change did not conduct other analysis.

Senator JOYCE —You do not have any socioeconomic studies on the economic ramifications of this policy, do you?

Mr Ryan —Other than the ABARE study, we have not commissioned other work.

Senator MILNE —My question follows on from Senator Joyce’s. Did you do any analysis of the impact on biodiversity? If so, who did you consult?

Mr Ryan —There was no specific analysis of the impacts of the measure on biodiversity. The range of environmental outcomes were taken into account in developing the environmental and natural resource management guidelines that have been established through the legislative instrument.

Senator MILNE —So who did you consult in developing those guidelines as to the impact they might have in terms of either undermining or improving biodiversity?

Mr Ryan —In terms of biodiversity considerations specifically, the guidelines were developed within the Australian government and in consultation with our colleagues in Environment. There was also consultation conducted consistent with all tax measures with interested parties, including organisations like Greening Australia, which obviously have a close interest in biodiversity.

Senator MILNE —That is interesting, because we just heard from your colleagues from the Department of the Environment, Water, Heritage and the Arts in here, and the head of biodiversity said he was not consulted, was not asked. I would be interested to know who was asked about biodiversity. What is there in this legislation that prevents the clearance of the northern savannas across Australia for conversion to plantations or prevents the conversion of brigalow to plantations?

Mr Ryan —The first point goes back to an issue we discussed at a previous hearing—that clearly a fundamental eligibility requirement is that forests will not be eligible if they are established on land that has been cleared of forest since 1990.

Senator MILNE —What is the definition of a forest?

Mr Ryan —The definition of a forest described in this legislation follows the definition that we use for Australia’s national Kyoto protocol reporting for afforestation, reforestation and deforestation.

Senator MILNE —Is savanna a forest?

Mr Ryan —Savanna systems include grassland and woodland systems. There is a potential for some woodland systems in savanna to meet the criteria for a forest. The criteria include a height of two metres and a crown cover of 20 per cent. Neither of those are very high criteria, so some woodland systems found in savannas could fall into those categories.

Senator MILNE —But a lot will not.

Mr Ryan —That is correct.

Senator MILNE —And that is my point—that with this legislation you will deem that a whole lot of native vegetation can be cleared and converted to plantations, to monocultures, because it will not fit the definition of a forest—the two-metre height and the 1990 date. So you will end up clearing huge swathes of native vegetation under this. You might put to me now, ‘But it is covered in the guidelines,’ because it says in the guidelines:

… avoiding clearing land of remnant native vegetation as determined by the relevant state or territory legislation …

How good is the Northern Territory legislation on land clearance?

Mr Ryan —I am not in a position to comment on the Northern Territory or other jurisdictions’ legislation specifically. It is not within our ability to comment on that specifically.

Senator MILNE —But you should be able to comment on it because you are putting in place guidelines that are likely to have a perverse outcome in Tasmania and the Northern Territory, where there is no such thing as land clearance legislation, let alone enforcement and compliance. You are actually going to provide for massive land clearance of native vegetation and loss of carbon, to put in monoculture plantations. Is that your intent?

Mr Ryan —No, it is not the intent.

Senator MILNE —Then how is it to be stopped?

Mr Ryan —As you indicated, that is why there is that provision in the guidelines.

Senator MILNE —You say ‘compliant with state legislation’. There is none.

Mr Ryan —As I said, I do not think we are able to comment specifically on state legislation. Our understanding is that there is clearing legislation in place in all jurisdictions.

Senator MILNE —Then I would like to know what your understanding is of the Northern Territory’s and Tasmania’s land clearance legislation and their levels of compliance and enforcement. Now I will get to the water provisions, because again there is the same stuff here in the guidelines, ‘providing it is compliant with the state legislation’. Are you confident that the majority of catchments in Australia have hydrological data such that a decision like that could be made?

Mr Ryan —I think that, as some of the earlier witnesses have said, it is an area of substantial work that is developing and will continue to develop over the next few years. Clearly in some cases there is not substantial data available yet.

Senator MILNE —Okay. Thank you. There is not substantial data yet. This is law now. If I were a company I could go and do what I liked now and plant monocultures all over the place, because by 2011 somebody will have signed off a plan but my trees will already be in the ground, won’t they?

Mr Ryan —Yes. I think that, as we discussed previously, this set of guidelines is clearly aimed at linking directly to existing measures that are in place—regulatory and non-regulatory measures, including planning.

Senator BOSWELL —Who wrote the guidelines? Did your department do that?

Mr Ryan —Yes.

Senator MILNE —But you are assuming that those regulations are in place. Our experience tells us that there is a real mixed bag around the country in terms of what state and territory governments have legislation for and what their levels of compliance and enforcement are. So, deliberately or otherwise, we are going to see these perverse outcomes, just as we have with the managed investment schemes. Do you concede that that is possible?

Mr Ryan —I think that in all cases, firstly, obviously the regulation is up to the states unless it comes into Commonwealth jurisdiction. These guidelines provide that extra—

Senator BOSWELL —But this is Commonwealth government legislation. We are not discussing the state legislation; this is Commonwealth government legislation.

CHAIR —Senator Boswell, Senator Milne has the call.

Senator MILNE —Thank you. Go on, Mr Ryan.

Mr Ryan —I suppose I was stating that the legislation that we are referring to is in most cases implemented by the state governments—these controls.

Senator MILNE —Yes, but essentially you are devolving the compliance and enforcement to state governments when we know before we start that the state and territory government legislation is at best patchy and hardly ever enforced or complied with—in some cases badly, in some cases well.

Mr Ryan —The guidelines link directly to those existing provisions and how they are implemented.

Senator MILNE —Yes, and that is the point we are making. If I can go on from there, it says here:

The Climate Change Secretary must give the Commissioner a notice in writing under this subsection if the Climate Change Secretary is satisfied that one or more of the conditions … have not been satisfied for the trees.

So how is the Secretary of the Commonwealth Department of Climate Change going to make a judgement about a monoculture plantation planted in the Prosser River catchment in Tasmania?

Mr Ryan —The taxpayer, in submitting a claim, is required under those provisions of the legislation to provide the evidence demonstrating that they have been met.

Senator MILNE —So they say, ‘I’m putting in a plantation in the Prosser River catchment, for which there are no hydrological data and no land clearance laws of any kind, so therefore I comply.’ Is that compliance?

Mr Ryan —The department will be assessing the claims against available information.

Senator MILNE —That is the available legislation. That is what I am telling you.

Senator HEFFERNAN —We ought to just own up that there are some serious flaws in what we are proposing. We are not stupid.

CHAIR —Sorry, Senator Heffernan; I will give you the call, but Senator Milne does have the call. I will come to you next.

Senator HEFFERNAN —Yes.

Senator MILNE —Mr Ryan, you said at the beginning—and I think this is very important—that people are expecting a return on these carbon sink forests and, as Senator Joyce said, the best land with the most water is going to produce the greatest volume of carbon fastest in a carbon market. Therefore you are going to get these plantations and they are going to be monocultures because they are easier to manage and look after than a biodiverse planting. So where is the incentive in this legislation to plant in poorer areas with less rainfall or to put in a biodiverse planting? Where is the incentive?

Mr Ryan —The legislation simply provides that incentive for establishment with the guidelines as an additional surety for other environmental benefits in addition to carbon sequestration.

Senator MILNE —No, the legislation provides an incentive to go and plant a carbon sink forest, which includes the definition of a plantation. Where in the guidelines is the incentive to plant in marginal areas with poorer rainfall or to plant in a biodiverse way? Where is the incentive?

Mr Ryan —The guidelines do not specifically require that. In terms of the incentives to plant in poorer areas, as our ABARE report discusses, there are financial issues that the potential for large-scale establishment in prime agricultural areas appears low, based on competing land uses.

Senator MILNE —It is purely on the carbon price. So you are not putting anything in place to encourage resilience in ecosystems, biodiverse plantings, 100 years—even on the title; it is purely on the carbon price.

Mr Ryan —In terms of those environmental outcomes, the guidelines as a whole cover those issues and specifically refer to consistency with regional natural resource management plans which, of course, have targets particularly focused on biodiversity benefits.

Senator MILNE —And how many of those do we have around the country signed off?

Mr Ryan —To my knowledge, they exist in all of the natural resource management regions.

Senator BOSWELL —How many people—

CHAIR —Sorry, Senator Boswell, but everybody wants to ask questions and I am just keeping an eye on the time. We do have only 20 minutes left.

Senator HEFFERNAN —I just want to ask—

CHAIR —Senator Milne has the call—

Senator HEFFERNAN —All right.

CHAIR —and Senator O’Brien has been waiting too, so I am going to go to Senator O’Brien first.

Senator MILNE —This will be my last question. You say that the regional plans exist. Do you believe they are adequate to protect catchments and to protect ecosystems, given what I have just said about the definition of a forest and the potential for conversion of native vegetation?

Mr Ryan —The guidelines cover the combination of those regional plans, which may have voluntary aspects as well as the regulatory elements in terms of land-clearing provisions.

Senator MILNE —So will you take responsibility when hundreds of thousands of hectares are planted across the country in monoculture plantations and we lose the northern savannah?

Mr Ryan —I do not think I am able to answer that question.

CHAIR —On that, Senator Milne—

Senator MILNE —Think about it.

CHAIR —can I go to Senator O’Brien.

Senator O’BRIEN —I will try not to load the questions like that.

Senator MILNE —Someone has to take responsibility for this.

Senator O’BRIEN —But the officer at the table is answering about the legislation. It is an unfair question.

Senator HEFFERNAN —I want to ask—

CHAIR —Senator O’Brien has the call.

Senator O’BRIEN —I take you to the ABARE material that you have been referring us to, which has been circulated to the senators with the material from your department.

Senator HEFFERNAN —Is that—

Senator O’BRIEN —Can I ask the questions without your rude interruption, senator?

Senator HEFFERNAN —Righto.

Senator O’BRIEN —Really, I am getting a bit sick of it.

Senator JOYCE —Chair, I have to go. Do you mind?

CHAIR —Thanks, Senator Joyce.

Senator JOYCE —Thanks very much for that.

Senator O’BRIEN —I am just looking at page 11 of the document. As I understand it, that document is telling us that there are three scenarios: low scenario, reference case and high scenario. Can you give us any more information about how we should understand those three concepts? I am sure it is in the document but I just thought there might be an abbreviated explanation.

Mr Ryan —They are derived from a selection of the ABARE agricultural returns, recognising that, in the agricultural surveys for any particular region, there are a wide range of land values. They cover certain percentiles within the range. ABARE selected a number of different scenarios to indicate a range by—

Senator O’BRIEN —So are they land value bases?

Mr Ryan —Yes.

Senator O’BRIEN —So the low land value scenario—that is the low value of the land?

Mr Ryan —Yes—as a proxy for returns from the land.

Senator O’BRIEN —And it is suggested, as I understand it, that in a high-rainfall area in the low land value area, grazing land would need a carbon price of $133 to justify converting to a carbon sink forest.

Mr Ryan —Yes. Under these specific scenarios.

Senator O’BRIEN —And is that in relation to the cost of planting the forest or is it in relation to the value of the land as well?

Mr Ryan —Yes. The costs are factored into the assessment so it is basically a comparison of those costs against the land values.

0Senator Heffernan interjecting

CHAIR —Senator Heffernan, with all due respect, you never get shut down. I think we give you a very good opportunity to ask your questions, but Senator O’Brien has waited patiently all day and Senator O’Brien has the call.

Senator O’BRIEN —As I understand the proposal, the tax offset does not apply to the value of the land; it applies only to the cost of creating the carbon sink planting.

Mr Ryan —Yes. For certain costs.

Senator O’BRIEN —So when we try to understand these figures, they have built in the value of the land. So the economic decision that has to be made in the context of the carbon price takes in the value of the land. The proposition from ABARE is that a prudent investor would not convert that land to a plantation until that figure was reached.

Mr Ryan —That is right. So it is taking into account the land value compared to the costs and returns from carbon returns for replacement of the alternative land uses.

Senator O’BRIEN —I thought that you were also saying that this was not able to be compared with a managed investment scheme because the investor would be the actual planter; they would not be able to effectively sell the rights in smaller lots to others. Is that what you were saying?

Mr Ryan —The deduction is available for the party that makes the direct investment. So my comparison to managed investments schemes is that they establish a different investment structure. I am not qualified to comment on that. That is what the legislation specifically excludes. So this is limited to that direct investment.

Senator O’BRIEN —I am trying to understand what you have been telling us. A company that wanted to sell shares in such a planting in effect would not be able to sell them on the basis of an upfront tax deduction, would they? I just wanted to ask that because it was not clear from what you were saying earlier on.

Mr Ryan —That is my general understanding.

Senator O’BRIEN —Do you want to clarify that for us, because there has been a lot of toing and froing about whether this is comparable with managed investments. I am not certain myself. I thought that you were saying something different. The committee would be assisted if you could make clear to us what the relationship of this scheme is to managed investments in terms of the way investors could become involved and make use of the upfront deduction at least for the first three years.

Mr Ryan —Yes, we can. I think it is a question that we would need to clarify with our Treasury colleagues.

Senator O’BRIEN —I am happy with however it is clarified and for it to be clarified in that way.

Senator HEFFERNAN —Can I raise a point of order, Chair?

CHAIR —What is your point of order?

Senator HEFFERNAN —We actually need Treasury looking at this stuff because I have been briefed by these people—and it was a very good briefing, I might say. The issues that you raise, Kerry, are pertinent but they are Treasury issues. I actually know the answers to those questions but only because I have got them out of Treasury.

Senator O’BRIEN —Rather than convening another hearing, if we can refer my questions to Treasury and ask them to answer them then that may be a solution. On the basis of these figures, I see elsewhere that there is a decrease in the threshold carbon price of between 4.1 per cent and 16.1 per cent, depending on the assumed value attached to the agricultural land. Does that mean that the more valuable the land the higher the deduction, or is there no such relationship.

Mr Ryan —I am not sure which part you are referring to.

Senator O’BRIEN —I am referring to page 8. It talks about fencing but it also talks about decreasing the threshold carbon price.

Mr Ryan —No. It is specifically referring to the differential effect of excluding the fencing costs. It is just talking about the percentage difference that is reflected in the right-hand column in table 5. It is just the range of differences there. We specifically asked ABARE to look at the difference between the effects with fencing and without fencing, recognising that there are a range of activities, some of which require fencing and some of which do not, and it is a significant cost.

Senator O’BRIEN —Did you supply ABARE with the information on costs or was that material they supplied for themselves?

Mr Ryan —We provided ABARE with costs.

Senator O’BRIEN —Their calculations are made based upon the parameters partially supplied by the department and partially based on the existing reference material that ABARE have upon which they base their farm survey.

Mr Ryan —Yes, that is right. As with a number of aspects of this industry, being a reasonably new activity, the costs vary with the type of activity. We used the available information, which is reasonably limited. In a number of ways the costs are comparable with other types of tree-planting activities and there are some differences. We have represented a range for that reason, recognising that it varies in different—

Senator O’BRIEN —These are planting seedling types of operations, are they, rather than seed spreading and hoping types of operations?

Mr Ryan —We would expect that the range of costs cover those different types of activities.

Senator O’BRIEN —So from a seed broadcast effort—

Mr Ryan —That would likely be lower cost. If it was direct seeding, there is still a cost.

Senator O’BRIEN —It ranges from direct seeding to planting seedlings?

Mr Ryan —Direct seeding costs would be right at the lower end of the estimated costs.

Senator O’BRIEN —Any of the assumptions in the work are included in the paper that we have—is that right?

Mr Ryan —Yes.

Senator O’BRIEN —The calculations are able to be tested by anyone who wishes to question them, by the assumptions contained in the document, with the exception of ABARE’s farm survey material?

Mr Ryan —That is right

Senator O’BRIEN —It would be available elsewhere.

Mr Ryan —The specific data is not reported in here, that is right.

Senator O’BRIEN —Thanks for that. And just to be absolutely clear: when seeking a tax deduction, it is not open for the investor to claim the value of the land as a tax deduction under this provision?

Mr Ryan —That is correct.

CHAIR —Now, Senator Heffernan and then Senator Boswell.

Senator HEFFERNAN —Could I just answer a couple of those questions. An emitter can get the tax deductions.

CHAIR —Are you asking or answering questions?

Senator HEFFERNAN —I am about to ask a question. But I am giving the answer on that: an emitter can get a tax deduction, a landholder can get a tax deduction and a leaseholder can get a tax deduction. Thank you very much for the briefing and I appreciate this paper, which I will give to the committee. I had an excellent briefing the other day. On the modelling that you arrived at, the $80 that Senator O’Brien was referring to—under the modelling it happened to be $80 a tonne before decent land—can I just point out the weakness in that. You are attaching the calculations to land value as a fair bit of the thing?

Mr Ryan —That is right.

Senator HEFFERNAN —You realise land value has nothing to do with land use?

Mr Ryan —It was the method selected.

Senator HEFFERNAN —I know, but it is flawed. I am about to tell you, the government and this committee that it is flawed. I am talking about broadacre land. If you drive from here to Sydney and go down the hill from McDonald’s, on your right there is a property of 1,200 acres. It is worth about $4,000 an acre, not for its use but for where it is. That could be planted out under this. It is a valuable run-off area into Black Dog Creek. The difficulty with the calculations—and I have not actually seen the modelling as this does not give the modelling—is that, if you rely on land values rather than return on land values, it is a nonsense. That land would give you no return on investment. It would not matter to the person who owned that land whether they ran billygoats or planted a carbon sink forest. It would not matter because they do not buy it for the return. They buy it for where it is and all the rest of it. Do you appreciate that?

Mr Ryan —I would comment that the method was developed by ABARE in consultation with our department. They provide the economic advice.

Senator HEFFERNAN —I understand all that. That is why we need Treasury input. But do not forget that, for this committee, ABARE does not have a lot of credibility because they are the mob that said oil was going to be $46 a barrel now. It is just a gibberish sort of program. This is completely flawed, if that is what the model is built on. It should not be on land value—I am sorry. But I am very grateful for the briefing. If we could see the way the model was actually built—to arrive at $80 a tonne, this is going to happen; at $20, this will happen; and at $120, that will happen. I would love to see the actual model. I do not see where, in all of this legislation—with all the worry and thoroughness of the committee and the departments—there is an incentive, if it is revenue neutral to the emitter, to have less emissions.

Senator O’BRIEN —The land values are on page 4.

Senator HEFFERNAN —But that is not the model of how they built them. You need the model.

Senator O’BRIEN —It is the model.

Senator HEFFERNAN —Anyhow, where is the incentive if it is revenue neutral to have less? Part of the debate has got to be about how we get these people to have less emissions. It is like the power supply: you could get people to turn off half the lights in this room—we do not need them all. It is the same thing with emitters.

Mr Ryan —The objective of the legislation, as we discussed at the start, is to help to reduce national greenhouse gas emissions, and we know that there is an interest in investing in forests as one of the options.

Senator HEFFERNAN —Which is to be applauded. It is a great thing for this committee. We have looked at the other viable alternative to this, which is on its way in under the American voluntary model. Are you acquainted with that—perennial pasture?

Mr Ryan —Yes, I am aware of that.

Senator HEFFERNAN —All right.

CHAIR —Senator Boswell, we have about three minutes left.

Senator BOSWELL —When you do your assessments on these carbon sinks, do you take into consideration how much land will be lost to food production and food security?

Mr Ryan —To answer that I would refer again to this: we specifically commissioned this new analysis in response to some of the concerns that were expressed in June. The implementation of the legislation aims at encouraging carbon sink forest establishment, and we know that common practice, as has been discussed, is for smaller scale plantings in the areas that are less productive.

Senator BOSWELL —That is not what is happening to MISs. They are on the very, very best land—the very best land. I think there are something like 20,000 hectares in the sugar-growing areas of Queensland, which is having a pretty significant effect. But you seem to have a lot of faith in people just putting it on the worst land. This is not happening under MISs. Senator Joyce, who was an accountant, believes this will be a supercharged MIS because you will be getting an income stream and a tax deduction.

Mr Ryan —We would expect that investors would be doing it on the basis of getting an income stream. That is the purpose of having a tax deduction.

Senator BOSWELL —We believe that, if it follows the process of MISs, it will go on the best land, it will intercept water—

Senator MILNE —It will be a monoculture.

Senator BOSWELL —and it will be a monoculture. As I interpret it, Mr Matthews gave eight or nine reasons why this legislation should not go through, because a number of state operations have not been put in place. That is all I have, Mr Chairman.

Senator HEFFERNAN —Do you agree that the guidelines which are set around this are generic?

Mr Ryan —That would be one way to describe them. The intent was that the guidelines were not to impose any new specific requirements beyond existing ones.

Senator HEFFERNAN —The difficulty with them being generic is that right now, as we sit here tonight, there are acquisitions for forestry which have nothing to do with this inquiry but a lot to do with the landscape which are under the present guidelines in New South Wales which bear no connection to an environmental outcome or a water interception impact under the guidelines and which that document ticks off.

Senator MILNE —There is some confusion as to whether forestry operations can get a tax deduction to establish monoculture carbon sink forests and harvest those forests in rotation. So, for example, currently under the Greenhouse Office rules, you could put in a thousand hectares of monoculture and say you will always have net 600 hectares equivalent of carbon but progressively on a rotation do the whole lot. Is that going to be allowed under these guidelines?

Mr Ryan —No. I think you are referring to the greenhouse-friendly guidelines which are not specific to forest type except that they must be Kyoto compliant. As you have correctly said, those guidelines require that you are only able to sell the amount of sequestered carbon that can be maintained. So if that amount is in harvested forest systems, they are not excluded, but you need to be able to maintain that level. That is one particular approach applied for that scheme with its own rules. For this tax measure, planting a forest must be for the purpose of carbon sequestration and not for harvest, which is explicitly excluded in the legislation. They are different.

Senator MILNE —So the net carbon stuff does not apply in this bill?

Mr Ryan —No.

Senator BOSWELL —Have you had a few inquiries about this?

Mr Ryan —We have received a number of inquiries since the legislation was passed.

Senator BOSWELL —How many inquiries?

Mr Ryan —I do not have the exact number. It is not a large number.

CHAIR —You might want to take that on notice.

Senator BOSWELL —This is an old question. Senator Heffernan has asked it a number of times. Senator Heffernan has a farm and sets up a carbon sink. He claims his tax deductions but sells the farm to Senator Milne, who is not very environmentally friendly, and she knocks it down. How do you claim the tax deduction back from Senator Heffernan?

Mr Ryan —The provisions of the legislation specifically relate to establishment. Any subsequent action would relate to the Australian Taxation Office’s monitoring regime.

Senator HEFFERNAN —As you know, Mr Ryan, we went through this. The answer is there is vagary with the states. The argument in court which would follow would be between the original emitter who contracted to the—

CHAIR —I am sorry, Senator Heffernan, we have gone way over.

Senator HEFFERNAN —This is an important point because this has to be a recommendation from this committee. The whole thing swings on this. Unless these things are registered on the title and surveyed into the title, it is a complete and utter farce.

Mr Ryan —The question is particularly relevant, as you have said, to market arrangements. As I have said, it is not dealt with through this legislation, because it relates to establishment. We provided for the committee’s information a copy of a discussion paper that the Department of Climate Change has publicly issued, which deals with a range of issues specifically relating to forests establishment and the design of the Carbon Pollution Reduction Scheme, and this issue is being considered there.

Senator HEFFERNAN —But you would agree with the general proposition, though, surely.

Mr Ryan —I do not agree that it is directly relevant to this legislation, because the incentive is for establishment of forests. It does not implement—

Senator HEFFERNAN —Please do not disconnect the real world from the legislation. The real world says—

CHAIR —On that, Senator Heffernan, I would ask you to wrap it up. It has gone well over. We have had three days on this committee; you have had plenty of time to ask that.

Senator HEFFERNAN —Mr Chair, I will go for another 10 hours to make sure we get it right.

CHAIR —No, no other questions. Senator Heffernan, you may want to have a private briefing and have your 10 hours. I have repeatedly asked you to wrap it up.

Senator HEFFERNAN —Righto. But surely, if it is not registered on the title, the proposition that Senator Boswell put can actually happen.

Mr Ryan —It is a possible outcome.

Senator HEFFERNAN —Thank you.

CHAIR —Mr Ryan and Ms Mummery, thank you very much. I thank senators and all the witnesses. I would also like to thank the Broadcasting and Hansard staff and, of course, the secretariat.

Committee adjourned at 6.20 pm