Forest Sequestration enters Carbon Market Down Under

In Late 2004, Australia's CO2 Group Ltd. became the first company in the world to receive accreditation for the sale of forest-based carbon sequestration credits in a functioning GHG emissions markets. The Ecosystem Marketplace takes a look at the transaction and asks how it fits in with similar attempts to deal with the issue of forest-based sequestration worldwide. In what is being hailed as a world first, an Australian company – CO2 Group Limited- has been accredited to grow forests that will produce tradable carbon sequestration credits as part of a mandatory emission reduction scheme. The carbon credits that these forests will generate will be traded alongside other credits from emissions reduction and energy conservation in a market that has now been operating for two years in Australia's most populous State of New South Wales (NSW). This accreditation was quickly followed by a sale: within days of announcing the accreditation, the company announced a major contract for the sale of carbon credits from its newly accredited -though yet to be established- forests to one of Australia's major diversified energy companies, Origin Energy. Under the contract, Origin is to purchase the carbon credits that result from planting up to 6,500 hectares of mallee eucalypt plantations in central southern NSW. Origin refuses to provide further details on the deal, except to say the company examines all carbon abatement measures and is open to "any option that stacks up". CO2 Group Managing Director Andrew Grant, meanwhile, said through the Australian Stock Exchange that "The contract will require the establishment of the largest dedicated carbon sink project ever undertaken in Australia and sets a new benchmark on the global emissions trading market." There is currently no way to tell how many carbon credits will result from the planting of these 6,500 hectares. Following in the footsteps of CO2 Group is Forests NSW, the state forestry agency, which is said to be applying for a similar accreditation and may actually go one step further by being able to register and sell the first "sequestration" abatement certificates based on carbon fixed in existing forests. The State agency, which is seeking credits for 10,000 hectares of eligible eucalypt forests, hopes to be able to sell the certificates before the 30 April deadline when NSW power companies are required to show they have reduced or offset their 2004 emissions to a pre-determined benchmark or pay a AUS $10.50 penalty on each tonne of excess CO2 equivalent they have on their books. There is, apparently, at least one buyer in the wings for Forest NSW's abatement certificates once these receive accreditation. Another major entity is also poised to enter this suddenly booming market: Global forestry leader and carbon offset pioneer, Hancock Natural Resource Group (HNRG). According to David Brand, the Director of HNRG's Sydney-based New Forests Program, his company is likely to submit its application for accreditation sometime in early 2005. Hancock, however, has the advantage of established links to the Australian investment fund industry, and is already forest asset manager for a fund established specifically to capitalize on emerging environmental markets such as the NSW carbon market (see article at www.ecosystemmarketplace.com/news/article.feat.021.php). Although Australia is often written off internationally as a greenhouse laggard because of its government's widely criticized decision not to ratify Kyoto, there is nonetheless quite a bit happening on environmental markets down under. For instance, all of the players spoken to by Ecosystem Marketplace were adamant that there is a lot of international interest in Australia's up and running mandatory emissions trading market, even if it is so far confined to just one State, NSW. Penny Baalman, the Forests NSW Carbon Investment Analyst, told the Ecosystem Marketplace that "NSW will have the first operational mandatory GHG Scheme anywhere in the world, and one of the few that immediately includes forest sinks as an abatement sector." She adds that, "Rules under Kyoto and otherwise have to a large degree placed forest sequestration in the 'too hard basket' and there are a number of elements with regards to forest sinks that pose reasonable challenges when a Scheme and/or market wants to ensure the integrity of removal or sequestration credits. "Through my interaction with two of the major international standardization organizations -ISO and the GHG Protocol- and from tracking other early national and regional schemes, the NSW Scheme appears to now be gaining recognition for leading the pack in many ways." This Australian leadership is nothing new. Already several years ago, a team at Forests NSW -then led by David Brand- was quick to realize the long term potential for forest-based sequestration, provided that itwas based on trusted standards and credible science . This early work was then followed by several attempts to set a standard for Kyoto compatible Afforestation-Reforestation projects within Standards Australia. Baalman, who was involved from the beginning with the setting of the interim Australian standard (AS 4978 Interim 2002 – Carbon accounting for Greenhouse sinks), also helped feed the results of that work into the ongoing development of similar instruments at the international level (e.g. portions of the ISO 16040 series on measuring, monitoring and reporting emissions). These are the standards that are used to certify and accredit projects and providers within the NSW GHG emissions trading scheme. According to Baalman, one of the key issues related to forest sequestration and accreditation in any trading system is how to ensure that sequestration is considered as credible as other forms of emissions reductions. In NSW, this issue is dealt with by being extremely conservative in the amount of sequestration credits than can be claimed by any given forestry project. Specifically, the NSW scheme requires that for any accredited project there be an audited probability that the actual carbon sequestered has a 70 % statistical probability of being greater than or equal to the carbon claimed. This, say observers, is essential to make sequestration as credible as competing efficiency and demand reduction based abatement certificates. Overall, the NSW scheme works because the government requires that major power producers, energy distributors and some major industrial users reduce their emissions to a set benchmark or pay a penalty per tonne of excess emissions. To do this, they can purchase abatement certificates from accredited providers. By this means, NSW plans to reduce power related greenhouse emissions down to 7.27 tonnes per capita by 2007, and then hold the per capita emissions constant until 2012,. The NSW Government Independent Pricing and Regulatory Tribunal administers the system and registers ownership of the certificates but does not trade them. Apart from internal trading – many companies in effect need certificates and have options to create them – trading is carried out directly between parties or through brokers. Because companies can claim tax credits against the purchase of abatement certificates but not against the payment of penalties, the certificates can trade at a premium over the penalty and a broker statement perused by EM shows this is currently the case for both spot and forward prices. One of Australia's foremost Greenhouse scientists, and the newly appointed head of the Australian Conservation Foundation, Ian Lowe, believes that "these sorts of schemes, if they are handled well, can be win-win-win because they can achieve other objectives like reducing soil salinity, reducing erosion, providing shade and improving biodiversity as well as soaking up carbon – but the crucial thing is to ensure that the carbon stays locked up," he said. It is a concern echoed by NSW Total Environment Centre director Jeff Angel, who has been involved in the consultations over the NSW scheme. "There is a level of risk in forests, they can for instance burn down," he said. Angel said another concern was that forestry sinks should be biodiverse, and not monocultures. But the main issue conservationists had with sequestration was that it could "be an easy way out for business as usual". As one of the technical specialists, Baalman said she sometimes felt like "the meat in the sandwich" between environmental NGOs and industry – particularly at the international level. "I don't think it's possible to make all members of such diverse interest groups such as these 100% happy," she adds, "but I think both (the Australian and the emerging International) Standards have achieved an acceptable level of consensus." It is also a fast moving field. Work on new or extended standards continues in both Australia and internationally and all players are concerned to maintain a sufficient level of consistency to entertain national or international markets. CO2 Group's Andrew Grant believes that there are reasonable prospects that the New South Wales sequestration credits will one day be valid outside Australia "because it just doesn't make sense to exclude Australia from participation in any market." He adds that even the emergence of bilateral markets with the US -another country that refuses to ratify the Kyoto treaty- would be better than no market whatsoever. He further notes that the Premier of NSW, Bob Carr, "has stated he would like to link his scheme with other international schemes, if at all possible." In the shorter term, prospects of a wider carbon market developing within Australia continue to pick up. Earlier this month, the Premier of the country's second most populous State, Victoria, again called on the Federal government to set up an emissions trading scheme and committed his State to work with other States to set up a proxy national scheme in the absence of Federal government action. But a study conducted for the Victorian government said it would not be economic for the State to go it alone with an emissions trading scheme. The announcement made no direct mention of Victoria signing up to the NSW scheme, but both Premiers have previously expressed interest in exploring options of independently participating in international emissions trading markets. (note that the next major milestone will be an announcement from the Inter-state working group on the state-based approach early next year, which is rumoured to be announcing that the states will move into a detailed design phase for the state based emissions trading system. In the meantime, Baalman and her Australian technical colleagues monitor international developments for mutual consistency and say they would like to ensure that there are as few impediments as possible to an eventual linking of any Australian emissions trading scheme with other emissions markets at the international level. She notes, for instance, that Australian work on setting carbon accounting standards was among the source materials for California's Climate Action Registry (CAR) (see article at www.ecosystemmarketplace.com/news/article.feat.031.php) Nevertheless, she does see several key differences between these two systems, the only two that tackle the issue of forest sequestration directly:

1. NSW allows only afforestation/reforestation projects, while California adds two conservation categories.(actually there is an 'improved forest management' category and an 'avoided deforestation' category in California.
2. NSW requires reporting of the greenhouse gas emissions associated with the project, while the equivalent rule in California allows either entity or project based accounting.
3. NSW uses the Kyoto definition of reforestation and the 1990 start date, while California's equivalent definition is "restoration of native trees on areas that were not treed for at least 10 years."
4. Both schemes use different measures to account for uncertainty

Despite these differences, Baalman stresses that, in practice the California and NSW rules "are fundamentally quite similar". In other words, as rules and regulations for including forest-based sequestration in any GHG emissions trading scheme are developed independently in places like Australia, California, and Europe, there is still hope that the schemes will be sufficiently similar to one day allow for harmonization and trading across the various countries. If and when that happens, CO2 Group Ltd, Forests NSW, and Hancock Natural Resources Group, could be well placed to capitalize on emerging opportunities. Phil Dickie is an Australian freelance journalist who can be contacted through www.melaleucamedia.com.au