Investors warm to carbon farming

03/05/2022 - 08:34

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Australia’s carbon market has been through a tumultuous two months, but local players are positive about long-term growth.

Investors warm to carbon farming
Nigel Sharp (left) with Carbon Neutral director Denis Watson and chief executive Ray Wilson. Photo: David Henry

WESTERN Australia played host to a surge in carbon farming activity 15 years ago.

That was when companies such as Carbon Neutral, Carbon Conscious and CO2 Australia started planting millions of native trees across the Wheatbelt.

They built upon the early work of volunteers at Men of the Trees and the hundreds of farmers who planted oil mallee trees to help control salinity on their properties.

With financial backing from big gas and energy companies seeking to offset their greenhouse gas emissions, the business of tree farming seemed poised for rapid expansion.

The introduction a decade ago of Australia’s carbon trading scheme – which enabled project developers to earn money from the creation and sale of carbon credits – was another positive.

Fast forward to the present and industry veterans like Carbon Neutral chief executive Ray Wilson say it is still a cottage industry.

However, he remains positive about the sector’s prospects, driven in large part by international moves toward decarbonisation.

Carbon Neutral has always had an eye on the global market; having obtained certification in 2016 from an international body, the Gold Standard forum, it is the only Australian exporter of carbon offsets (carbon credits).

Local companies entering the sector have also chosen to bypass Australia’s carbon market.

“The European market is much more developed, their thinking is much more advanced,” InterEarth chief executive Howard Carr told Business News.

“That results in a much deeper and more liquid market, bigger volumes, more stable prices, and less sensitivity to changes in government policy.

“It means when we talk to investors in Europe, they know exactly what they are on about.

“It’s a whole different culture and system and ultimately for us the price is better as well.”

Another Perth startup, Decarbonology, is also planning to bypass the Australian market.

“There is a lot of uncertainty in the Australian system,” Decarbonology director Cameron Edwards said.

“We have seen some real concerns recently in terms of, for example, human-induced regeneration credits, and whether in fact those carbon credits have achieved the carbon uptake promised.”

Cameron Edwards(left), Michelle Rhodes and Chris Lund are the founders of Decarbonology. Photo: David Henry

Human-induced regeneration is one of 38 carbon abatement methods approved under Australia’s Emissions Reduction Fund.

Of the 1,167 ERF projects approved in Australia to date, HIR projects are by far the most common.

This method applies where landholders regenerate native bush, typically by reducing stocking rates on cattle and sheep stations or by halting the clearing of bush.

Former regulator Andrew Macintosh caused a storm earlier this year when he questioned the veracity of many ERF projects and their claimed carbon credits.

The key test is additionality: does the project achieve additional carbon abatement beyond what would have occurred anyway?

 For instance, was the pastoral station already planning to reduce stocking rates or halt land clearing?

A recent decision to revoke the ‘commercial and public lighting’ method neatly illustrates the issue.

Under this method, project developers could earn carbon credits by upgrading the lighting in commercial buildings, thereby reducing electricity use.

Having previously approved eight projects using this method, the Emissions Reduction Assurance Committee has decided that, because of the falling cost of more efficient lighting systems, such upgrades have become a business-as-usual occurrence.

Mr Edwards said the Australian government had spent billions of dollars buying offsets.

“If they do not abate the claimed amount of carbon emissions, that will have serious flow-on effects,” he said.

He noted that ACCUs – the carbon credits bought by the Australian government – were not recognised and sold globally.

“We are bypassing these concerns and operating in global offset markets based on international standards,” Mr Edwards said.

Decarbonology co-founder Chris Lund said the Australian system provided incentives for Australian industry, farmers, and investors but did not necessarily meet global standards.

“The spotlight has come onto and will continue to focus on our system because there is now a recognition Australia is part of a global supply chain that expects genuine additional offsets that meet international standards,” Professor Lund said.

Another issue in the Australian market is uncertain pricing for ACCUs, particularly after a March decision by Energy and Emissions Reductions Minister Angus Taylor.

Many ERF projects hold fixed-price contracts with the Australian government, with an average price of around $12 per ACCU. Each ACCU represents one tonne of carbon abatement.

Mr Taylor decided projects could exercise an option to sell their ACCUs on the open market, where prices had increased by around 200 per cent since January 2021, to $50.

The result was a collapse in the market price of ACCUs, which is bad news for people looking to develop new projects.

Despite this, project proponents remain positive because of international trends, particularly the increasingly active role played by big investment funds demanding that listed companies take more action on climate change.

That has been reinforced by regulators such as the Australian Securities and Investments Commission focusing more on ‘greenwashing’.

Another driver of change was the introduction in Europe of the Carbon Border Adjustment Mechanism (CBAM), which is effectively a carbon tax. It means exporters unable to demonstrate carbon neutrality will be taxed to account for that.

The mechanism will be phased in between 2023 and 2026.

“The introduction of CBAM is a watershed moment for industry,” Mr Edwards said.

“Many companies will need to calculate and record their whole carbon footprint if they are exporting from Australia and that commodity is imported into Europe, directly or indirectly.”

He said industry in Australia would be forced to rapidly catch up with global measurement and reporting standards.

“There is a massive step change; it has been a cottage industry but that is changing,” Mr Edwards said.

Growth plans

These global trends translate to a big opportunity for WA. Mr Wilson said the Wheatbelt region had about 1 million hectares of farmland at risk of going saline.

This could be revegetated with salt-tolerant trees and funded by development and sale of carbon offsets.

Carbon Neutral is gearing up to pursue this opportunity. Since 2007, it has spent about $50 million, planting 30 million trees across 15,500 hectares of company owned land in the Mid West.

Mr Wilson said annual plantings were set to expand rapidly.

“We will plant 3,000 hectares this year; within a few years, we expect to be planting 20,000ha each year,” he said.

The business’s growth plans have been helped by financial backing from Melbourne-based Tiverton Agriculture Impact Fund, which acquired a 65 per cent stake in the company last year.

Tiverton’s Nigel Sharp has joined Carbon Neutral’s board, alongside long-time shareholder Denis Watson.

Mr Watson had been the major funder for Carbon Neutral, with his money coming from an unlikely source: the Australian distribution rights to the Little Trees car deodorisers.

Tiverton operates on the belief that sustainable economic, environmental, conservation and social benefits can not only be achieved concurrently, but each of these outcomes is interdependent and mutually reinforcing.

It uses a ‘regenerative’ agriculture model on large-scale horticulture and broadacre agriculture and Carbon Neutral is planning to incorporate that approach over time.

Mr Wilson said Carbon Neutral’s projects delivered a range of benefits: as well as generating carbon credits, its projects boost biodiversity by providing habitat for flora and fauna, and deliver economic benefits, including job creation.

These benefits were quantified in Gold Standard’s audit of Carbon Neutral’s Yarra Yarra biodiversity corridor in the Mid West.

Mr Wilson said this study – the first of its type he was aware of in Australia – found the co-benefits were worth more than the carbon value.

To accelerate its growth, Carbon Neutral has adopted a more flexible strategy.

Until now, it has purchased land for its carbon farming projects, the most recent being ‘Kooyong’ farm west of Mullewa.

Its plan for Kooyong involves reforestation of areas with poor quality soils while retaining premium land for sustainable farming and generation of soil carbon credits.

To meet the growing demand from large emitters to invest in carbon farming projects, Carbon Neutral has developed a long-term partnership model.

The generation of carbon credits will be split according to capital and management contributions.

For example, Tiverton has recently partnered with the Sentient investment group to buy land near Albany for tree farms.

In this case, Carbon Neutral will be the project manager.

It has recently hired experienced forestry investor and carbon farming pioneer Tony Jack to support its growth.

Woodside Petroleum is another company buying marginal farmland for trees.

Woodside says it has spent about $100 million over the past decade on various carbon farming schemes.

The company established its own carbon team in 2018 and since then has bought five farms in WA.

It planted trees on 3,000ha during 2020 and 2021 and plans further plantings this year.

Woodside is also evaluating carbon projects using the HIR method.

 A different approach has been adopted by Japanese energy giant Inpex, which has teamed up with ANZ Bank and Qantas Airways to establish carbon farming projects in WA.

The three companies signed an MOU this year and are targeting their first planting of native trees in 2023.

Their plan is to integrate the tree farms with existing operating farms.

They also hope to start producing biofuel for the aviation market, using the timber as the feedstock.

Biofuel production has long been seen as a big opportunity for the Wheatbelt, making it commercially attractive for farmers to grow more trees while also displacing traditional fossil fuels.

The latest budding entrant to the sector is Future Energy Australia, a joint venture between ASX company Carnarvon Energy and Melbourne-based Frontier Impact Group.

The joint venture recently secured a $2 million state government grant to support the planning and construction of a biodiesel refinery near Narrogin.

If it proceeds, the refinery is likely to provide a new market for the estimated 900 farmers who have planted oil mallee trees on their properties over the past 20 years.

Measuring success

Decarbonology was established a little over a year ago, and its founders bring diverse experience to the business.

Professor Lund is an expert in carbon accounting and decarbonisation strategies, while Mr Edwards brings experience in infrastructure and project development.

A third name is non-executive director Michelle Rhodes, who was a founder of consulting firm 360 Environmental, which was recently sold.

Decarbonology’s services include helping businesses understand their greenhouse gas (carbon) emissions and providing advice on ways to alleviate risks and liabilities by reducing emissions.

It is also developing its own carbon offset projects. Decarbonology planted 30,000 trees last year and is in the process of planting 300,000 seedlings this year in the Wheatbelt.

A key focus for the company is an automated system to accurately measure carbon emissions and abatement using international standards.

“People will need to independently and transparently verify the claims they are making about their greenhouse gas emissions and strategies to reduce them,” Professor Lund said.

“You have to be able to certify and verify carbon emissions throughout the whole process and supply chain and therefore you need a very strong audit trail.

“That can be a laborious process if you don’t have the systems set up.”

He said Decarbonology could calculate industry and sector data and assist firms throughout the whole value chain to reduce their emissions.

“Being based on an open-source platform and common data format, the Decarbonology system allows everyone to more easily lean in and work together to understand and reduce emissions throughout the value chain, if they wish to, as opposed to having the data locked up in proprietary systems with different formats,” Professor Lund said.

“Companies that are genuinely seeking to be carbon neutral will be wanting to share information so stakeholders, investors, tax departments and so on can verify the source data around the world.”

Carbon removal

InterEarth has been established to pursue a highly ambitious goal: to commercialise its innovative system for removal of carbon dioxide from the atmosphere.

The concept of carbon removal is being pursued by multiple companies around the world and in many cases it is a variation on carbon capture and storage.

Swiss company Climeworks is a global leader; last year it opened a large-scale facility in Iceland that uses machines to suck carbon dioxide out of the air before storing it underground.

Sydney company Corporate Carbon, which is involved in more than 100 carbon projects, is pursuing a similar goal after securing a $4 million federal government grant last year.

InterEarth has a radically different approach.

Its project involves the regular trimming of native trees and the burial of the woody biomass in specially constructed underground chambers.

Zurich Insurance Group recently selected the Perth startup as one of three new international partners to help it achieve net zero emissions.

And London-based green investor Counteract recently invested $500,000.

Counteract managing partner Andy Bonsall rated InterEarth as a world leader.

“We only back CO2 removal solutions and InterEarth is the world’s best opportunity for CO2 removal at scale in the near to medium term,” Mr Bonsall said.

InterEarth plans to use the seed capital to continue its field trials in the Wheatbelt with a view to planting its first commercial-scale operation in mid-2023.

Company founder Howard Carr grew up in a farming family.

“I came to understand the increasing challenges of the most marginal eastern Wheatbelt country,” he said.

“I think it is universally accepted that it is getting more risky and more difficult to sustain the current land use in these areas.”

He also sees shortcomings in other carbon strategies being pursued.

Tree farming, for instance, carries fire risk.

“Your carbon credits can go up in smoke,” he says.

And growing trees for biodiesel production, he says, locks up productive land that could be used for other purposes.

InterEarth removes carbon dioxide from the atmosphere by burying harvested wood in specially constructed underground chambers. 

InterEarth plans to grow a range of native trees that suit low-rainfall, marginal land that Mr Carr says should probably not have been cleared in the first place.

But rather than a ‘set and forget’ planting, InterEarth will regularly harvest the trees.

“We harvest the trees, we bury the biomass in a hole, and the carbon is locked away,” Mr Carr said.

“There is no fire risk, and the credits are banked in Fort Knox underground in special conditions that we create.”

Fellow director Simon Avenell said the coppicing of the trees encouraged regrowth.

“We have the potential to capture more carbon than a perpetual forest and keep on doing it for as long as required, so you need less land for the same carbon capture effect,” he said.

Mr Carr said InterEarth’s carbon removal process was conceptually very simple, but the real value lay in multiple small steps.

“When we describe the process to potential investors and customers, at first they are stunned by the simplicity, but when we explain it, it’s the combination of lots of small improvements,” he said.

One crucial aspect is the species it plans to grow.

The eucalypts and acacias not only grow well in low rainfall areas, they also have chemical and physical attributes that impede decomposition in the chamber, thereby storing carbon for longer.

InterEarth uses certain soil types and compacting methods to optimise the storage chamber.

It is also developing precise measurement techniques.

“We understand exactly how many molecules of carbon go into the chamber,” Mr Carr said.

Its trials also measure the rate of decay.

“They show a fantastic preservation of biomass.”

Mr Carr said InterEarth’s novel process was the subject of a patent.

“The novelty is also manifest in the fact we have just got our first methodology approved for the granting of credits into the European voluntary market,” he said.

Another positive Mr Carr is promoting is the creation of jobs and economic activity from the regular harvesting and transport of biomass.

It contrasts with HIR projects that lock up land with very few, if any, workers and very little economic activity.

“This is really important when we are talking to the local shires and the people that will stay in the communities,” Mr Carr said.

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