Direct Action may bury carbon farming, report finds

The promotion of much-heralded carbon farming initiative was one of the few areas where Labor and the Coalition found agreement on climate policy, but it seems that even this program  is under threat from the Abbott government’s proposed Direct Action program.

A new report by analyst group Reputex, on behalf of WWF, says the proposed Emissions Reduction Fund- the centrepiece of Direct Action – will not set a high enough price, or a long enough price signal, to make carbon farming worthwhile.

One of the main concerns of the ERF – largely because of its 5-year investment horizon – is that it will be swamped with proposals that may obtain a low price in the auctions to be held to win government handouts, but the projects are likely to be short term in nature and could have been happening anyway.

Reputex says land sector projects need pricing signals for at least the next 10 to 15 years in order to make changes to land use practices economically viable. With any shorter term investment horizon, farmers are unlikely to bother.

The concern about the fate of CFI is reflected in other sectors, which want a longer term (and higher) price signal to encourage investment in the sort of technologies and techniques that can bring around a transformation to a low carbon economy, and not just limited and short term emissions reductions.

Bloomberg New Energy Finance recently criticised the ERF, saying that projects would be “unfinanceable”.

While most would welcome the government being able to achieve low-cost carbon abatement, it will mean little if the abatement would have occurred anyway. That’s the biggest fear around the possible design of the ERF – that it will simply hand out money to investments that might have  happened anyway – such as efficiency measures to reduce energy costs.

This test of “additionality” will be one of the key criteria for judging Direct Action. The tighter the requirements, the higher the price will be.

Carbon farming covers range of land use practices that can protect existing carbon stores and boost rates of carbon sequestration – not to mention improving soil quality. It is considered to have the greatest opportunity for abatement after the energy sector.

Even under Labor’s carbon price, which began 18 months ago, land sector abatement was slow to take off due to uncertainty about the future of the policy. Despite a few high profile initiatives such as savannah burning in the Northern Territory, land sector abatement accounted for just 6 per cent of abatement in the from of Australian Carbon Credit Units (ACCUs). Most came from landfill gas abatement.

Reputex says nearly all of these landfill credits either pre-date the CFI, or have alternative revenue streams that can independently finance a project payback of less than 3 years.

“As a result, the main economic driver of nearly all existing projects is the desire to reduce energy bills and/or sell energy to another party, with the revenue from ACCUs most often treated as a bonus rather than a dependable investment return.”

Reputex modelled a range of scenarios. One, described as “full competition” that would include projects such as cleaning-up power stations, waste coal mine gas, landfill clean ups, reforestation and energy efficiency, suggested a price of $5a tonne of abatement. This would mean little land sector investment.

“The financial viability of existing projects built with financing based on parallel revenue streams means these projects are expected to be able to compete for funds from the ERF, even at low prices,” it says.

It fears that  large corporations could control much of the ERF bidding, crowding out other more costly – but longer lasting – forms of abatement.

“Unfortunately the Emissions Reduction Fund, as currently proposed, is unlikely to drive significant levels of abatement in the land sector,” WWF’s climate specialist Will McGoldrick said.

“The government’s support for the CFI is welcome, but in the absence of a long-term price incentive we see little likelihood that farmers and other landholders will want to participate at scale.”

“Farmers and other landholders expect to be paid a fair price for carbon saved on their land and in many cases will require longer-term purchase agreements than the five years proposed by the Government.”

While the 5-year window has been widely criticised by investors and business, it seems unlikely that it will be changed, because it largely reflects the short-term policy horizon of the new government. It has said it will review its policy in 2015, and so far has not looked beyond 2020 for abatement targets. Most people think that any more ambitious or longer term target will require either a carbon price, or strict emissions standards of the type being imposed in the US and China.

The full report can be found here.