1.1 Overview

The business case for carbon farming: improving your farm’s sustainability

 
Carbon farming involves changing, or introducing, specific on-farm practices designed either to reduce greenhouse gas emissions, or to store carbon in the landscape (also known as carbon sequestration).
The reasons for undertaking carbon farming may range from seeking a new and profitable farm enterprise to capturing the environmental and co-benefits of managing carbon on-farm.
In particular, carbon farming—when undertaken using an appropriate methodology or method and satisfying the regulatory requirements of the Emissions Reduction Fund (ERF)—will allow the farmer or landowner to earn Australian Carbon Credit Units (ACCUs). 
ACCUs:
  • can be sold on voluntary carbon markets
  • can be sold to the government through the ERF (subject to conditions explained further in this manual) 
ACCUs can be earned in two ways: by reducing farm emissions that would have otherwise occurred, or by sequestering carbon in sinks that can be managed as part of the farming operation.
Any income from the sale ACCUs—along with the co-benefits from carbon farming—will not come free of charge. Setting up and maintaining a carbon farming project will involve costs and risks.
To earn ACCUs, the carbon farming project must comply with the relevant regulations. The farming enterprise must first demonstrate that it has the legal right to undertake the project. The project then needs to be able to measure and demonstrate (through a variety of possible ‘methods' or ‘methodologies') that emissions have been reduced (or that carbon has been sequestered) in addition to any emissions reduction or sequestration that would otherwise have occurred. This principle of additionality is central to regulations for carbon farming. In addition, under the ERF, a project needs to be new in order to be recognised.
Undertaking a carbon farming project will also involve compliance, financial and economic (or opportunity) costs. Real effort and financial and other resources need to be devoted to the project, and those costs must be subtracted from any benefits in order to get a true understanding of the value of the project.
As explained in Box 1.1, this manual is particularly concerned with carbon farming that takes place within the context of the ERF. 

 

 
Box 1.1: Clarification: ‘carbon farming' versus the CFI and the ERF

‘Carbon farming' is a general term that covers changes to farming and land management practices to reduce greenhouse gas emissions, to increase carbon sequestered in the landscape, or both. Farmers can farm carbon in this general sense without any involvement in regulatory or other outside requirements.

If carbon farming is pursued outside of any regulatory structure, particularly a structure that provides a scientific basis and assurance about the amount of abatement or sequestration taking place, the farmer will not generate recognised ACCUs that can be sold to the government or on voluntary markets. In this case, the business case for carbon farming rests on co-benefits alone, but those co-benefits may, of course, be substantial.

The methodologies underlying the ERF provide crucial scientific guidance on verifying and measuring the amounts of greenhouse gases associated with the carbon farming project. While costly to undertake, the methodologies are also extremely valuable, as they provide a basis for using the best science to understand on-farm carbon management. Furthermore, credits that are robustly generated in this way have potential monetary value.

Throughout, this manual assumes that carbon farming takes place within the framework of the ERF. Carbon farming in this sense is intimately associated with particular methodologies and the requirements of those methodologies.

 

 

  
 
Box 1.2: Glossary: the terminology for examining a carbon farming business case

Additionality is a core principle underlying the CFI and the ERF. It ensures that any emissions reduction or sequestration under a particular project is additional to what would have taken place in the absence of the project. Under the ERF, a key additionality concept is that projects must be new.
An Australian Carbon Credit Unit (ACCU) is an emissions credit unit that is equivalent to at least 1 tonne of carbon dioxide equivalent (CO2-e). ACCUs are issued by the Clean Energy Regulator (the CER) in return for activities completed under the CFI or the ERF. ACCUs are financial products and are personal property. They have no expiry date and can be kept or sold, in particular to the government as part of the ERF.
Carbon (C) is an element that is a key component of many (but not all) greenhouse gases. Carbon is often referred to when discussing sequestration.
Carbon dioxide (CO2) is the major greenhouse gas usually referred to in most discussions but it is not the most important gas within the agricultural sector.
Carbon farming is a general term that covers changes to farming and land management practices to reduce greenhouse gas emissions, to increase carbon sequestered in the landscape, or both. Farmers can farm carbon in this general sense without any involvement in regulatory or other outside requirements.
The Carbon Farming Initiative (CFI) was a voluntary carbon offsets scheme. The Australian Government initiative allowed farmers and land managers to earn ACCUs by reducing greenhouse gas emissions (such as nitrous oxide and methane) and storing carbon in vegetation and soils through changes to agricultural and land management practices (also known as carbon farming). The credits earned are ACCUs. The CFI was folded into the Emissions Reduction Fund in December 2014.
Carbon markets include a variety of platforms on which forms of recognised abatement instruments (including ACCUs) are traded. They include regular stock or futures exchanges and exchanges established especially for carbon instruments.
Carbon sequestration projects generate abatement by removing CO2 from the atmosphere and storing it as carbon in plants as they grow, or in the soil.
The Clean Development Mechanism (CDM) is a facility under the Kyoto Protocol. It creates emissions reduction credits through emissions reduction projects in developing countries. Certified emission reductions are a type of carbon credit issued under the CDM, and are traded on secondary markets. NOTE: at the time of this update the CDM, which was due to be reviewed at the end of 2020, had been temporarily extended until November 2021 due to delays to the review process brought upon by COVID19.   
CO2-e refers to the carbon dioxide equivalent of other greenhouse gases and provides a common measure for discussing gases from different sources.
Compliance costs are the costs incurred in complying with the regulatory requirements of the CFI. They include, for example, the costs of record keeping, reporting, auditing and so on.
Conversion of carbon to CO2-e. Often, emissions and sequestration are referred to in both carbon (C) units and CO2 (or CO2-e) units. It is important to be able to convert between the two. Units of C can be converted to units of CO2 (or CO2-e) by multiplying by 44/12 (or 3.667). This is based on the atomic weights of the two substances: the atomic weight of C is 12, while the atomic weight of CO2 is 44 (12 + 2 × 16). Thus, 1 tonne of carbon is equivalent to 3.667 tonnes of CO2-e.
The conversion of carbon prices works the other way around. Prices in units of C can be converted to prices in units of CO2-e by dividing by 3.667. Thus, $10 per tonne of C is equivalent to $2.72 per tonne of CO2-e (there is less carbon in a tonne of CO2 than in a tonne of carbon, so it receives a lower price).
Economic or opportunity costs are the income potentially forgone through aspects of the CFI. For example, sequestration under the CFI has a 100-year permanence requirement. This may involve an opportunity cost for the land under a forest, for example.
The Emissions Reduction Fund (ERF) is an Australian Government scheme that replaces the Carbon Farming Initiative (CFI). It is designed to help Australia to meet its emissions reduction target of 5% below 2000 levels by 2020. Through the ERF, the government will purchase lowest-cost abatement (in the form of ACCUs) from a wide range of sources, providing an incentive to businesses, households and landowners to proactively reduce their emissions.
Emissions trading refers to a regulatory arrangement in which reductions in emissions are traded on a market platform. The most common form of emissions trading is cap and trade, in which liable entities are subject to a cap on emissions and must purchase permits for any emissions above the cap. They can also sell permits they hold if their emissions fall below their cap.
Financial costs are expenditure needed to establish and maintain a CFI or ERF project. This includes set-up costs, equipment purchases, capital investments and ongoing maintenance costs.
Greenhouse gases are all the gases considered to contribute to the greenhouse effect— including methane, CO2 and nitrous oxide, each of which has particular relevance for carbon farming. Each greenhouse gas has a different effect in the atmosphere. To place them on a comparable basis, quantities of different greenhouse gases are converted to a common unit of tonnes of CO2-e using scientifically established conversion factors.
The conversion factors are known as the global warming potential (GWP) of each greenhouse gas. GWPs are used to convert masses of different greenhouse gases into a single CO2-e metric. In broad terms, multiplying a mass of a particular gas by its GWP gives the mass of CO2 emissions that would produce the same warming effect over a 100-year period. Australia's National Greenhouse Gas Accounts apply GWPs to convert emissions to a CO2-e total. The following table summarises the GWPs of greenhouse gases relevant to agriculture.
 
GAS
 GWP PRE 2015-16
 GWP since the IPCC 4th Assessment Report
 
 
Carbon Dioxide
1
1
 
 
Methane
21
25
 
 
Nitrous Oxide
310
298
 
Kyoto and non-Kyoto credits (and ACCUs). The original CFI law distinguished between Kyoto and non-Kyoto projects and credits. Projects that count towards Australia's climate change targets are known as Kyoto offsets projects and generate Kyoto ACCUs. Non- Kyoto offsets projects were projects that did not count towards the targets and generated non-Kyoto ACCUs. The original reasons for this distinction, and recent changes to it, are as follows:
> In the first commitment period of the Kyoto Protocol, non-Kyoto activities included increasing soil carbon, reducing harvesting in native forests, and revegetation. The CFI made provision for non-Kyoto activities because those activities make up a significant proportion of land-based emissions reduction opportunities.
> Following agreement to change the international accounting framework, Australia elected to count almost all land-based activities towards its 2020 emissions reduction target from the end of the first commitment period of the Kyoto Protocol.
> Currently, the only activities that are not counted towards Australia's target are the management of wetland areas such as seagrass meadows, marshes and swamps, and feral animal management. Projects to restore mangroves and to reforest and revegetate coastal areas and areas subject to flooding would not be classed as wetlands projects and would be counted towards Australia's emissions reduction target.
> The new ERF legislation removed the distinction between Kyoto and non-Kyoto projects because that distinction had limited ongoing relevance.
Methodologies or methods set out the detailed rules and processes by which a particular aspect of carbon farming can be conducted.
Methodologies (the terminology used under the CFI) detail the nature of the abatement, the techniques for achieving it and the requirements for measurement and reporting. To earn ACCUs, activities under the CFI must take place according to a suitable methodology.
Methods (the terminology used under the ERF) detail the nature of the abatement, the techniques for achieving it and the requirements for measurement and reporting. To earn ACCUs, activities under the ERF must take place according to a suitable method.
Mt means millions of tonnes. Thus, Mt CO2-e means millions of tonnes of carbon dioxide equivalent.
Reverse auctions are a common mechanism for the procurement of goods and services by private firms and government agencies. In a reverse auction, sellers offer a price (bids) for a contract. The lowest bid price typically wins the contract. This is the reverse of a conventional auction (such as in a saleyard), in which buyers offer a price (bid) and the highest bid price receives the product.
Sensitivity analysis tests the economic case for a project by varying underlying assumptions. The sensitivity of outcomes (the present value of net benefits) provides useful information about risks associated with the project.
Threshold analysis calculates particular thresholds for economic viability, such as by calculating the minimum ACCU price needed to break even (that is, where the present value of benefits equals the present value of costs, the point at which the project earns the discount rate). Assessing the likelihood, or difficulty or ease, of achieving the thresholds provides further insight into project risks.

 

  

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