The Australian Government yesterday tabled legislation designed to implement the proposed Carbon Farming Initiative, but there is still a major unanswered question - "Who will buy CFI offsets, and at what price?"As noted in earlier blog posts, it is becoming evident that the Government's intention is that CFI offsets would only be able to be sold into voluntary carbon markets, at least for the duration of the fixed-price emissions trading scheme that the Government proposes will commence in July 2012, and extend for "3-5 years". This appears to apply to both Kyoto-compliant offsets and also to non-Kyoto compliant offsets such as soil carbon sequestration. Evidence of this intention emerged yesterday, in several interviews given by Climate Change Minister Greg Combet.
For example, the Minister is quoted in the Australian Financial Review (subscription required) as stating "The Kyoto-compliant credits ultimately under a floating price emissions trading scheme of course would be available once they are generated through CFI activities for compliance under a carbon price mechanism." The qualification 'floating price emission trading scheme' would appear to signal that the Kyoto-compliant CFI offsets will not be able to be sold into the mandatory carbon market during the fixed-price phase of the scheme, which the Government has proposed will extend for 3-5 years.
Similarly, in an interview on the ABC Radio PM program, the Minister also seems to have limited the market for CFI offsets to the voluntary carbon market.
GREG COMBET: At one level companies like Qantas or Virgin for example often offer a carbon-neutral fare; that is one area where demand will come from if passengers choose that then Qantas then purchase these offsets. Other companies want to be completely carbon neutral and so they go into the market looking for the purchasing of offsets so they can market themselves in that way.
ABC Rural radio also ran a report on the announcement, quoting the Minister as stating that the CFI offsets would be worth "about $3 a tonne of carbon sequestered" - a clear indication that the intention is that these offsets would be limited to voluntary markets.
If it is the intention that CFI offsets would only be able to be sold into voluntary carbon markets, then the rate of uptake will be extremely limited. Preliminary modelling indicates that compliance and monitoring costs alone probably exceed that amount per tonne of CO2 sequestered, especially in a risk-of-reversal buffer is required. In addition, farmers with the potential to provide Kyoto-compliant offsets would be better off waiting until these are able to be sold into a mandatory market (presumably at $20-$30 per tonne once a floating-price market is underway) before taking action to generate these.
Meanwhile, of course, farm businesses will incur increased input costs (and therefore reduced farm profitability) from day one of a mandatory carbon scheme - and even during a fixed price phase of such a scheme.
The Opposition has also been fairly bullish on the prospects of soil carbon sequestration, suggesting that up to 150 million tonnes of CO2 per annum will be able to be sequestered, at $8 - $10 per tonne. Clearly, the Opposition's intention is that it would not be bound by the Kyoto Protocol emission accounting rules. Whether or not this price would be sufficient to generate this amount of sequestration is an open question!