Curious about CarbonCrop's tech? Dive into our platform with us! Get an exclusive walkthrough by our Engineering Team Lead and see firsthand how we streamline forest carbon removal measurement, reporting, and verification.
Nick
Welcome to another session of Carbon Curious. This one is titled, perhaps somewhat sort of vaguely and generally, “How does our tech work?”
We've got a lot of tech. We're only talking about a tiny fraction of that tech today, but I have with me Hannes Hill, who's our head of engineering, and he is going to be running you through a bunch of specific processes that we use for assessing and sort of like refining our assessments of land right through to registration and recognition of carbon sequestration.
As usual, any questions, if you've got them, put them in the Q&A section. We've had quite a lot of questions come in over the course of the last few days. So we may be struggling for time to get through them, but we will try to follow up on those that we don't get to. Before we get started on the bulk of the day's presentation, I just wanted to give a quick update on some of what the tech has enabled.
So this is a view of New Zealand with those areas that we had assessed as of a month or so ago. The green areas is everything that we've assessed within the last three months, I think it is roughly, and it's almost doubled versus what we had at the end of last year, taking us from 2 million to more than 4 million hectares, and actually it's probably close to 5 million now, total assessed across the country.
All of that assessment is happening at pretty high resolution, at the level that we sort of see individual trees on individual farms and can identify them. So it's not at all something you want to be doing by hand. And quite a bit of what Hannes is going to be taking us through today is how we actually achieve that at scale while preserving accuracy and sort of auditability and integrity of the results.
In connection with us, with the sort of most recent ETS reporting cycle, we're now north of 35 million paid out to landholders for storing forest. We've analysed more than 5,000 farms, I think actually significantly more now, and we've got around 300 ETS registrations in connection with that. So without further ado, into the specifics of what we're talking about today so basically there's.
I was going to say there's five steps. There's much more than five steps. Like there's a lot that we're not going to get in today, but the basic high level process of going through and assessing the carbon opportunity on your property. Speaking today, primarily outside of your ETS eligibility, we won't be going into the ETS a lot.
Like if, if you're looking at your non ETS removals, so those carbon removals, which are occurring, but aren't credited in the ETS you need to go through analysing what you've got, identifying the stuff that's within the ETS. Hannes will explain why shortly. Identifying the areas that might be eligible to be in the ETS, even though you haven't registered them yet.
And then of the stuff that's not in the ETS, decide what other things you might want to do with it. And then once you're doing something, start monitoring them. That's the very high level picture. We've got half an hour of getting into some of the weeds. So without further ado, I'll hand over to Hannes, who'll take you through it.
Hannes
Okay, awesome. Well, let's dive straight into it. So to show that as a block there's kind of like four steps as well. The first step of assessing any land area for some removals is to look for the total forest area, and this can be done either by hand or it can be done mostly using AI power tools.
And I'll just show what this kind of flow looks like at an overall high level, so you can get some context before we dive into the tech itself. So if you go next, then the total forest area, we first want to identify the total forest area. We want to find which part of those are already ETS registered to avoid double counting, which we'll go into a bit more about the double counting avoidance.
And then that leaves us with a bunch of unregistered forest area. The next step after that is that the unregistered forest area splits into potentially ETS eligible forest area and unregistered forests. The potentially ETS eligible forest might not want to be tracked for removals, it might want to be registered in the ETS step.
And then next up for your unregistered forest, there's still a decision to make of “does the landowner want to register this forest” and the data centre obligations behind it, and all those other forests. And that is that last step, that kind of unregistered carbon forest carbon removals that other available removals to use against a net zero claim.
So, I will jump on and share my screen and we'll just do a we'll show what this looks like inside the Carbon Crop platform. Fantastic. Okay, so I've got this demo site here and this isn't necessarily a Carbon Crop customer, it's just a little area of land that we found that is a fantastic example for us to use for showing forest cover and carbon removals.
And we're going to start with a complete blank slate here. And I see the card removals of the site as a demo. We'll quickly get a look for what's actually going on here. So I've got a little farmhouse here. We've got some paddocks here that are to be used for crops. We've got some pasture here.
If you zoom in far enough, you can see some sheep running around it. So it is. Probably a lamb or a wool station. A lot of the farms that we assess are quite mixed use as well. And the thing that we're trying to assess here is the carbon removal of the forest here. So that can be used potentially for a net zero claim for some of the lamb or wool that is exported here.
And if we look over the top here, we've got two big blocks of exotic forestry here. We've got a little island of native, remember that one, that'll show up later on. And we have some indigenous forest regeneration happening over the bottom here of mixed features. We've got some mature stuff happening here and we've got some regeneration.
happening over here as it kind of comes up the hill. So traditionally, one would map this by hand, and we do have a few hand mapping tools. You'd start going in, use a new polygon tool, and start kind of drawing polygons around the whole thing. However, we also have built some AI power tools that increases, well, reduces the time it takes to do this kind of thing.
So under our layers tab, we have, I'll just quickly click through this the tool to produce polygons, and that it takes a pre-run AI analysis and turns all of the forest on the land into these big polygons here, and thus split by species as well. So we can see these two big exotic blocks up here, and we have this native forest here that's all grouped together.
It's one of the few sections over here and some smaller terminals coming down this way. So, what I want to do is, because I'm trying to get an overall picture for the carbon on the land, I'm going to set these all to a category of native carbon crop units, and that allows the system to pick them up and assess them according to our methodology.
And then when I go to our forecasts tab, I can click on this button here to calculate the carbon that we have. Now, for a project about this size here, close to a thousand hectares, it'll take a few hours to run. So I've pre run this already, and I'm going to show you what the results of this might look like.
I'll open this up here. We see the same farm again. This is kind of almost like an extra version of the carbon on the land here. This is the carbon sequestration and this is the carbon stock on the land. And jumping between the two, we see a few interesting things. We see the exotic blocks here showing up very brightly.
Note that these wouldn't be eligible for native carbon components. Components are only issued for native forests. Down here we can see the native forest that was showing up reasonably high in carbon sequestration. Over here, these kind of bright green areas are interesting. We can see that they're quite high in carbon stock, as shown by the quite bright green, at about 500 tonnes per hectare.
But they're quite low in carbon sequestration. You can see that one's this deep purple colour. These areas here correspond to the already mostly established indigenous forests. The research here is a bit thin on what actually happens to native forests after, after about one to two hundred years.
However, Carbon Corp takes a weak and conservative approach to that. If we see a forest that is reasonably old and well established, we assume that there is not much carbon sequestration happening there, or that trees falling down and new trees growing up leads us to a steady state forest. So we avoid issuing carbon credits for that.
So that is the first step, that's the analysed forest step done. Next up is the importing of existing
Nick
Hannes, if you just go back to, I think you mentioned earlier on the that little pocket of native forest up the top, and here you can see, I think quite clearly, even at, like, there was a very small area, very little bit of native under the ETS rules, you'd just bundle that in and say it's part of your exotic forest, you don't need to map it separately.
But yeah, just highlighting that where the cursor is there, it has been separately identified and correctly separately classified. And if you jump to the, oh yeah, it's got its own separate sequestration rate. I'm surprised that it doesn't show as having a different stock. Or possibly it's just not visible because it blurs together, but yeah, it's very clearly being identified as a separate area of forest, which is being separately accounted for on tract and has different characteristics. And that happens with high resolution across the whole property.
Hannes
That's right, so that is under this little area here. And in fact, if we took this whole area and registered for native carbon crop units, then the ASIS would automatically only pick up the sequestration from this, and issue carbon removals for that little patch.
So probably in this case, we'd recommend registering some of this for the ETS, if it was eligible for it.
So we also output Exotic. So those are the three categories I showed before. The Exotic forest shows up here. We have native steady state where we see these forests down here. It's native forest that we believe is no longer sequestering carbon and all the native forests that are still sequestering carbon.
Okay, on to step two which is the removing of, you know, detecting existing ETS areas. Nick, I'll let you talk a bit about why we would want to exclude ETS areas from carbon cuttings.
Nick
Yes, sure. It's so it's actually there's the default position that everybody takes is that you don't want double recognition.
You don't want double counting. These are bad things. And certainly, philosophically, we agree with that. We go to a huge amount of effort to avoid any instances of double recognition or double allocation or double counting. The sort of conservative position in that regard is that if you have some forest and it's registered in the ETS, then you are being already recognised within one day.
Accounting and carbon incentive program framework, and so you should not register it under any other framework, such as a voluntary recognition framework that's the position we take. It's a position that's encouraged by most of the sort of general guidelines and methodologies in the space. There are some inconsistencies in it, though, which you'll find if you ever apply for sort of an emissions assessment for your business activities where, let's, let's say that you, You're operating a farm and you have vehicles on your farm and those vehicles use petrol.
The emissions of that petrol will definitely be counted as an emission on your sort of voluntary emissions footprint. But you won't be allowed to count the removals associated with any forest on your property if it's registered in the ETS. Which might seem like it makes sense superficially, except All of the petrol that you're using on your farm is also registered in the ETS and is being taxed under the ETS.
So there's a bit of a weird situation where you have to pay twice, but you can only recognise your forest once. We have asked various sort of those in regulator roles within the space for a ruling on this perspective and, and whether, let's say you met your ETS obligations using native forest ETS credits, would that change your position?
Nothing definitive has come back. So at this stage we still take the same conservative approaches as everybody else, which is before recognising your native forest carbon removals for voluntary purposes, we identify anything that you have registered in the ETS and exclude it. So you can't get recognised twice.
But it's going to be very interesting how this develops over time as the sort of the regulatory frameworks mature and things like carbon Order adjustment mechanisms and the distinctions between international trade under voluntary frameworks versus treaty frameworks, kind of all gets reconciled and worked out.
It could be that actually they, they kind of merge together. But for now, you've got to count them, you've got to track them separately, and you've got to make it very clear to anybody who's auditing, auditing you that they are separate and that you do know where everything is and that you haven't allocated anything twice.
Hannes
Cool. Thanks Nick. So to avoid double counting within the Carbon Core platform, we do support importing from the Emissions Training Schemes, the CCIS format and the new 2.0 format of registered areas. So I know that these two areas here are registered, so I'm going to delete them as they're existing for us.
And I've got here a shapefile of the registered areas. We have an upload functionality, we can upload all sorts of things, including these eligible areas. If I pull that file and I drag and drop it into here, it will upload those registered areas, process them into a format that our system can understand, and then place them here on the map as registered areas.
So we see they show up here. As none of these two orange areas, which is our colour coding for exotic forests as registered in the ETS. And this avoids us creating any additional polygons on that area. So if I try to now, extra forests here, and I try to make that like a matrix comp unit, you can see that I cut it across to that boundary here to avoid this kind of double counting.
A cool thing about this if we're looking at the ETS side is that we can now see the. We also pull in the attributes between the forest type and the establishment year. And in our forecast tab, we can see the forecast values for this carbon, the kind of projected return for these two areas. We can also generate this registered areas report, which is like a very landowner focused report that tells you where the areas of forest are on your land that are registered in the ETS the area of them, how many NZUs you're going to earn, in this case 7, And it gives you a forecast for the next 10 years, as well as a graph, the same graph that we kind of saw before, showing you a bit about your registered areas.
So that's a fun little site that we can generate as well, as soon as the registered areas are uploaded. But the primary reason, kind of for the purpose of this presentation here, is identifying these ETS eligible areas, ETS registered areas, so that they are not counted as part of any removal.
Okay, next up, we have ETS eligible areas. So that's adding the registered areas. For the rest of the forest, not all of them might want to be reused for removals. Some of them might be eligible for the emissions training scheme, might want to be registered as such. And we've done very close to 6, 000 of these analyses now for landowners, so we get quite good at it.
And the tools we use are here on this platform. The ETS has a variety of different rules for what forest can and ETS. For example, forest has to be greater than a hectare. And the key one, though, is that the forest that was existing before 1990 cannot be registered on ETS in most cases. I'm going to do a quick demo of what that mapping here looks like, and do a really rough mapping of this polygon up in the top left corner here.
And I'm going to go back through this in the 1990 imagery. Here we've got the 1990 state. I'm going to use this one from 1987, which is a bit better resolution. And I'm going to, we see here that there is some forest that was already existing around about that time. So if we want to register or potentially register this polygon with the ETS, that has to be cut out.
We can use that split tool to split this polygon out. It's gonna do a really rough job here for the purposes of demo. Split out some of these rough pretty 90 forestry areas here off that whole pen over the top there and on the side. Now I could keep going with this and do a full assessment. There's polygons over here.
There's a bit of press 89 stuff there as well, but I'm just gonna keep to these ones over here. Now we can select these polygons here. That one and that one. And I'm going to send them to ETS for us and for the ETS, we need to set the species. This one is indigenous forest, and we need to give it an establishment year.
Establishment year is a bit involved, but I'm going to do just a really quick, rough guess here. I see that in 1998, it's still no forest. Go to 2006. You can see there's some forest there. So I'm going to really roughly guess the establishment year of 1997. Once we set all of those details, we can again look at our forecasts.
and see the potential forecast for this particular area. And from this make an assessment to be able to land on it, if it's worth registering as far as the registration scheme or not. So this is a bit of a conversation about how much money it's going to earn and the cost of credit guarantees and obligations under that.
Okay, so to stop what I've done here we started with a blank slate. We identified all of the forests in the land using AI. We imported the ETS registered areas. We've identified a few potentially eligible areas that we might want to additionally register in the ETS. And lastly, is we might want to use some of this existing forest here that we don't want to register in ETS as part of a carbon removal program.
For this, we would similarly use the tools to decide. Watch forest growing. So let's say that the landowner had agreed to preserve this area over here. We might split that forest into two like this here, and then decide to continue with this registration of this. For forests that we don't want to include, we could either just delete it directly off our map so that we don't see it, or I'm just going to undo that.
And we do it to keep that split in there. And the alternative is that we can take the forest areas and un-include them, which keeps them on the map, but says that we don't want to include these areas in any kind of carbon removal program at the moment. And once we've once there's an agreed upon forest area, then that can be registered with CarbonCrop, or any other carbon removal program as well. CarbonCrop is not the only voluntary scheme out there. And once registered there with CarbonCrop, we will every year generate carbon copper units where one unit is equivalent to one tonne of carbon. Allocate to a net zero program.
Okay, so that was the overall kind of demo of our platform. I want to talk a little bit about the integrity and traceability of an area forest once it is registered. So, let's say that we've gone through all these steps and this had been registered with a landowner, and they were earning units what, what ongoing obligations are there, and what does CarbonCrop do to make sure that the, Units issued and the removals assessed that kind of keep that integrity going.
So, we have three main tools that we use here to kind of present integrity. The first one is forest loss detection. So, this is a different property here that we ran forest loss detection on earlier this year. And we see here that there is a bit of a bunch of exotic forest. And all of the orange areas here were areas that our system automatically detected as being forest loss.
In this case, we know that it was a harvesting situation. This is a commercial forestry that was, that the forest there was logged. And note that this wasn't actually visible on aerial imagery. Because aerial imagery only went up to 2021. Our system uses Sentinel 2 headlight constellation by ESA to monitor for forest changes.
And we can see forest changes in recent years, two months ago. So we continually monitor forests for forest loss to make sure that any units issued correspond to trees that are still in the ground.
Nick
After that, it's just worth briefly mentioning for, there may be a mix of people on the call. But when you make a claim around carbon neutralisation using carbon that's been removed from the atmosphere and stored in a tree, it's connected to an assumption around it staying stored in that tree.
So, like, let's say you burned. I don't know what the exact numbers are. I think it's on the order of 200 litres of petrol. That creates one ton of CO2 emissions and it's going to stay in the atmosphere for quite a long time. There's no easy way to suck it out. The short of trees, which are very good at it.
So the, if you want to say that you've neutralised those emissions so that the, the net change in atmospheric CO2, because of you burning that ton of, Well, sorry, 200 kilos of petrol is zero, then you have to find something that's pulled the equivalent of 200 kilos of burning petrol, so one ton of CO2 out of the atmosphere and locked it up.
And once you've done that, it has to stay locked up for a very long time. Like if the tree pulls it out of the atmosphere, And then you kind of take some money from somebody for neutralising their emissions. And then two years later, you cut the tree down or even it falls down or any manner of things happen, which result in what's termed a reversal event.
So, the sequestration is reversed. Then you haven't neutralised the emissions over the timeframe that matters. And that's why these ongoing monitoring tools are extremely important. Like you, If you want to be able to make a claim to having neutralised your emissions with integrity, you have to be able to demonstrate that the trees that you're using did sequester that amount of carbon and that they're still there and that they're going to remain there for a significant period of time into the future.
We use a hundred years as the period for which the landholder has an obligation to maintain the sequestration. And you're not going to do that by hand. Nobody's going to bother checking. You have to have an automated framework that's going to continue reviewing it for you and making sure that the claims that you've made can be substantiated.
Hannes
Yeah, that's right.
Nick
Thanks.It's also, since I'm not sure you're going to come back to it, Hannes, there's obligations under the emissions trading scheme for deforestation detection as well. That's actually how we develop the tool and the primary purpose it's been used for. And so we've, we've done hundreds of properties through multiple emissions return cycles.
Every single one of them has this process run across the entire thing. It's saved us a lot of times from making mistakes and our landholders from making a lot of mistakes. And that's why we're quite confident applying it for this purpose as well.
Hannes
Yeah, so we think this is great for the landowner because it eases the reporting of forest loss since we were detected up front and it's also great for the carbon crop managing the emissions trading scheme and make sure that we remain compliant.
And it's great for anyone running a carbon removals program as well because you don't have to rely on the landowner telling you if something happens. On that note, if we do have to have the landowner tell us when something happens we have developed an app called FieldScan. It's available on the App Store and it allows landowners to take evidence photos of their land.
We've primarily used it for new planting schemes under the Emissions Training Scheme but we think it's, like, valuable overall. There's a lot of landowners that are doing fantastic work, and, like, fantastic work doing really good planting programs, and we want to make sure they get recognised for it.
And then being able to upload evidence and take photos on their land that are geotagged and time stamped and audited makes it really gives a whole lot of integrity to the system.
Nick
It's also a really great tool for cost effective program management because, like, often a huge amount of collecting evidence or updating information or any of these things for various scales of program, it's not about what you do once you're at the site.
It's about getting to the site to actually take the action and collect the evidence, whereas you've got, if you've got someone who's already there as a part of their natural day to day tasks, being the landholder or the farm manager or whoever you can massively improve the economics of the scheme.
And at the same time, we've actually found it has a big impact and kind of positive engagement with the restoration program. If, like, if your restoration program is just something that somebody else does and that's on your property and, You're not really involved, then you tend not to be as committed to the outcomes.
Whereas if you're involved even in just evidence collection, let alone the pest control or the planting or the stock exclusion or whatever then it's much more of a kind of your project rather than their project and it improves the project outcome, basically.
Hannes
Well, thanks. And lastly, I want to talk a bit about Carbon Tracer talking about the double counting avoidance things from beforehand, there unfortunately isn't a worldwide place where you can go to, to see what areas of forests have been registered for voluntary carbon. We really wish there was, that would be fantastic.
But we've at least tried to make our own start and make it really easy to see for all of CarbonCrop's units that were issued, where they are, and what forest is on. So, when we issue a bunch of CarbonCrop units, it looks something like this. So, here's like a demo spreadsheet. Each token, each row here, it represents one carbon unit, and it represents one ton of carbon sequestered.
We track which year it was sequestered in the location that it was sequestered at when we kind of issued it, and each individual token gets a link to CCUTrace. And this is publicly available, and this shows exactly where that token, or where that ton of carbon was generated. And which forest that kind of came from here and this is why she was the most up to imagery.
So users or people referencing this CCU, this carbon crop unit can track back that the forest is still there and does still exist. Is there more you want to talk to about that, Matt?
Nick
No, I think you covered it beautifully. The, I just note that. That Excel spreadsheet that you just saw, that is not our registry, that is an export from our registry that we sometimes use for data sharing with people who want to have their own copy of the records, but there's a database behind this that stores the history of all of the allocations, the, who the units have been allocated to after they've been initially created, which is again, very important for know, like when people talk about double counting, there's a couple of different forms of double counting.
One of them is that you issue units multiple times for the same area of forest, whether within the same program or across multiple programs having audit tools like this, that you can at least publicly show what you have registered and where is a critical part of at least being able to detect that.
But another very important part is double allocation. So like once you've got a unit for an area of forest, and it's been legitimately recognised under a single program, because it's such an ephemeral thing. If you don't have particular controls to prevent this, it would be quite easy for someone either accidentally or nefariously to sell that same unit of carbon to one or two or 37 different people.
And they all, they all think they've got a tree, but actually only one of them has a tree and the rest of them have like some made up fairy dust. We, because of the way our registry works, you actually, When you make a claim in connection with a carbon unit, you have to allocate it to a program and then only that program will retain ownership of it which will be part of what's available in Carbon Tracer in the future that you can see not only where the unit is, but also who's the unit is and what they're using it for.
Hannes
Okay, that was it for the teach demo of the site. I'll hand over back to you, Nick, for the Q&A session.
Nick
All right, I don't think we've had any questions come in over the course of the presentation so far. You must have done too good a job of explaining, Hannes. So we'll dive into the ones that came in in advance.
So, here we go. We have some exotic hardwoods which will reach the end of their sequestration period soon, even though I expect them to keep growing a lot longer. There is considerable naturally established indigenous understory and I wonder if there is a process to transition to indigenous permanent forest and continue generating credits.
Short story is that Yes, there is, although there is work underway within the regulator to extend the sequestration period for exotic tarred woods. I think it's currently 35 years and the activities ongoing are to extend that projection out to 45 or 50 years. So likely you can continue to be, as long as you're The exotic hardwoods are continuing to grow.
You're not clearing them or similar. You can just leave them registered as exotic hardwoods as they continue to grow and as the native understory progresses underneath. One of my favourite stories on this topic, which I think I mentioned in the last webinar around Milnthorpe Forest, is exactly the scenario where there's an exotic canopy of, I think, primarily eucalypts.
And a native understory that's regenerating away underneath that. In the very long term, I think the new permanent forest category does have some facility for transitioning the predominant forest type over time, and there may even be some mechanisms that manage the unit repayment liability in connection with that, but it's a lot more complicated, and I'd have to double check the specifics.
I'd say, in In practice, in the short term, as long as you don't actually want to cut down the exotic hardwoods and you're happy to let them keep growing, you can just continue the registration as exotic hardwoods, and the tables are likely to be updated to make sure that you continue to get recognised for at least the next 10 to 15 years of ongoing growth.
This is sort of the multi billion dollar question. Do carbon credits have any influence on the climate, and if so, how? I would say yes, emphatically, if they're developed under an appropriate framework and they have a meaningful price associated with them. It's very easy to see cases where carbon credits have basically failed to have any impact on the climate, despite what might have been claimed about them.
And that's usually when the carbon price is extremely low associated with them. Typically that means that they're being generated at extremely low cost. Which means that it's almost certain that you didn't have to do anything to generate them. But the bigger issue in connection with that, like it, that's not necessarily a bad thing, if it was still a positive outcome, like the, to be honest, being able to generate an enormous amount of carbon removals at very low cost is what we want.
The other parallel issue, though, is that they don't necessarily have any incentive effect to reduce emissions. Because if you can, if you can neutralise your emissions or tell people that you're neutralising emissions and not really pay anything for it. then you're most likely to just keep emitting. Even though a lot of what we're talking about today is about voluntary carbon schemes and recognition within voluntary schemes, our view and certainly my view is that the long term future for climate change mitigation is likely to be through compliance.
Programs like the New Zealand ETS and there the answer to this question is very simple that the New Zealand ETS has had a significant role in driving decarbonisation both through incentivising carbon removals and disincentivising emissions and you can see that in New Zealand's past and forecast carbon emissions profile.
The larger the carbon price goes. The stronger that incentive in both directions becomes, but it's certainly well into the range where it's having a significant incentive effect. It's also not exclusive to New Zealand. The EU, for example, has a very mature and large scale carbon trading market and it's having a massive impact on decarbonisation incentives.
On the topic of pricing. So yes, firstly, the last part of this, I cannot give advice and I'm not giving financial advice. And if we had a crystal ball of what the ETS price was going to do, then I'd be making lots of money as a speculator. But we can give a couple of comments over some of the sort of market commentary around the recent price changes.
For those of you watching closely, the. The price recently fell from around about 65 sort of 60 to 65 to 70 range to more recently has been trading on sort of the low to mid ish 50s I think that's around 55 and sort of the main trigger for that. Was the auction and like March, which didn't fully clear.
So in contrast to all of the ETFs auctions last year, which didn't clear at all, this one sold some units, but not all of the units. And the reason that happens within the ETFs auction mechanisms is that if there is. some demand for units above the clearing price of the auction, which for the last auction was 64, but not enough demand to consume all of the units that are available in the auction, then you get partial clearance, which is what happened.
And that means that there were some people who were bidders in the auction who were willing to pay at least 64 per unit, but not enough to use up the full unit allocation. And the market interpreted this basically as a lack of A lack of buyer confidence in the future carbon price because Let's say you're some, some company with very big emissions obligations in New Zealand and you know that in 2028, under the current regulatory framework, you're going to have to give back lots of ended use to the government to meet your surrender obligations.
So like, if you're, if you're burning a lot of coal, for example, then you have to surrender carbon units to compensate or to To compensate probably the best word at least to match your emissions obligations in connection with that cold if you thought that carbon is going to be much more expensive in 2027 or 2028.
Then 64, you'd probably happily be buying up lots of units now at 64 so that you can not pay too much to cover your obligations. If however, you didn't have a lot of confidence in whatever signals you were getting from the sort of regulatory framework, which is really the government and various forms or you thought that the units might become cheap, then you might choose to wait and just go, well, I'm not going to spend 64 now.
I might be able to get them for 55 in the future. That's a fairly long answer, but the. My take is that it's, it basically, to me, does signal a lack of confidence in the government's commitment to the program, which is strange because the government has very strongly indicated That they are supportive of New Zealand's decarbonisation ambitions and they intend to continue to honour the principles of the ETS and honour our obligations and commitments under the Paris Agreement.
I say the government, national, has said that. I think ACT has indicated that they want the entire scheme disestablished and that they think that we should be part of some low cost international market for carbon. I think that's an extremely bad idea and it also seems to have no chance of happening.
But despite the government's assurances that they are committed to the scheme, the market essentially seems to be saying, coal talk is cheap, we'll believe your level of commitment once you show stronger evidence of that commitment. And I say that because under legislation at the moment, you can't buy carbon through the ETS auction for less than 64 this year.
And next year, it's going to cost you even more. There's like no auction mechanism. It's not like you give it to the lowest bidder. They simply won't sell anything below 64, which suggests that the carbon that's available today is the cheapest it's ever going to be even looking ahead. So it's a little bit strange that major buyers aren't buying it.
And so that's why I say it's essentially as though the major buyers are saying. Yeah, we know that those are the rules, but we're just not really feeling it right now. Show us more reason to be confident that that is the actual price trajectory. And so it'll be interesting whether the government does anything to boost that confidence ahead of the next auction, which I think is in late June.
One further note on that, if the government doesn't provide confidence, it's actually very expensive for them because if they can't sell the units, in a way that's not the worst outcome, because if you don't sell it, it's kind of, you can keep it back and then sell it again in the future, potentially it's still yours.
If you sell a unit at the lowest possible price, then you've basically, you've given away the entitlement to industry to emit a ton of CO2. But as a government, you've only got 64 for that. The government really needs to be trying to maximise the price of the carbon to maximise the disincentive effects for emissions and also to maximise the revenue that it generates from selling those rights to emit.
So yes, it will be interesting to see how they manage the market's expectations leading up to the next auction. And I bet whoever's asked that is, sorry, they asked a similar question here. Really. I won't cover the first item on that list. I will say though, that there's, there's been some commentary that, The ETS is not fit for purpose.
I don't agree with that. I think the ETS actually works very well. What I would agree is that some of the specific settings in and around the ETS should be revised if you're going to have the most impact. But that's a very different thing to sort of vague suggestions that the ETS itself is completely disposed with and replaced by something else.
Who knows what? People aren't very clear on it. But if they say a carbon tax. In many forms, the ETS is just a carbon tax with increased flexibility. On the second point though, the difference between NZU's and permanent native forest NZU's so these, For those of you particularly who've got forest registered more recently, if you look in your emissions trading register account, or ask us to for you, if we're managing your account, you might see that there's two different classes of units.
And actually there's, there's more than this, but there's P89 forestry units, which are post 1989 forest that's removed carbon. There's also a PP89 unit, which is Permanent post 89 forestry units that's removed carbon. There's very little distinction between the two practically the way the market treats them at the moment, like either one of them is worth a one tonne CO2 equivalent.
And if you're selling them in the market, they all trade pretty much as a sort of fungible, undifferentiated commodity for the same price. And if you're some big emitter who's buying them to meet your surrender obligations, neither one of them gets you any more credit than the other one. They're both just worth one tonne.
But there is some, at least the possibility that in the future certain emitters may look to secure units from permanent forest as a preferred source of carbon removals. Or it might be that there's some change to the market structure, which means that certain classes of units get access to preferential pricing or something and others don't.
So it's sort of like a future proofing mechanism for. More variety in the carbon market, but it's not really used for anything in practice today. In the voluntary context, that could be different. It might be that some buyers voluntarily decide that they particularly want permanent units. There's a note here too that this says permanent native forest NZ use.
A PP89 unit can be either associated with native forest or exotic forest. Both classes of forest can currently be registered into the permanent category. And if you're registered in the permanent category, you'll get a PP89 unit regardless of your forest species mix. But yeah, practically at the moment there's very little difference in how they're traded unless you're accessing some sort of bespoke off market trade for, usually for some voluntary claim where someone wants to be able to say that they're using a certain type of forest.
And there you're actually more part of the voluntary market than the compliance market. Long term native forest credits, I think we've kind of covered that, although Hannes has been talking a little bit about voluntary programs today. So there is work that we've got that's ongoing there. And I'd say the, the biggest interest and opportunity that we're seeing in New Zealand at the moment is actually in the primary sector space, where there's increasingly expectations from our offshore supply chain around emissions reductions and emissions neutrality.
On biodiversity credits. I wonder if there's a way we can share it with the group. I was actually on a podcast a month or two ago where I sort of shared at some length my views on sort of biodiversity credits and the suitability of it. Broadly, we are very supportive of biodiversity, like biodiversity is good.
We should treasure it and try and encourage it. Crediting biodiversity directly and coming up with sort of exchange rates between different sorts of biodiversity, which you kind of need to do if you're going to have something like a fungible biodiversity unit. You have to start answering difficult questions like, do I prefer three kākāpō or five hectors dolphins? And how many biodiversity credits are they each worth? And which one should I pay more for?
A lot of the biodiversity programs that we've seen around. Closer in practice from our perspective to sort of restoration charity or sponsorship kind of programs, which again, very much in favour of. I think it's great that people donate money to the government allocates money to support and restore biodiversity, but I haven't seen anything yet that I'm particularly convinced by as a sort of relatively fungible commoditised token in the form that carbon removals are very much equivalent across different classes of gases in space.
And as for the Podocarp native forest and long term carbon sequestration, there's a huge amount of ongoing work for this. A big part of what we are trying to do with the native and the voluntary carbon recognition that Hannes has just been outlining is at least recognising the generating native forest that was established prior to 1990, which is in our view, a huge missed opportunity in New Zealand at the moment.
For the very long term, I guess there's two things. There's one, like, how much carbon do podocarps sequester over the very long term? That's a relatively well understood problem in the sense that if you have a bunch of, I don't know, pick your species and they're five years old, there's a reasonable understanding of how much carbon they might sequester over the next 200 years.
A more challenging question is if you have a bunch of trees and they're 500 years old, are they currently in steady state or are they sequestering carbon or are they emitting carbon due to the forest being in a state of decay? We don't actively recognise carbon sequestration in that class of forest at the moment because of the uncertainty, but it's a really valuable resource as a carbon sink and also as a biodiversity asset, so we are supportive of the research that's happening in that space.
If someone is undertaking a project to turn New Zealand farmland back into native forest that is appropriate for its location, what is the single most important thing they should know about CarbonCrop?
I would say probably that there's a lot to consider and it's pretty complicated and there's a lot of people who found the tooling that we've developed and the experience that we've got very helpful.
So firstly, I applaud the project. It's really what we should be aiming to achieve in many cases like not for all farmland, but certainly for farmland that's well suited to forest restoration and where that it's the right land use according to your priorities. But yeah, there's a lot to consider.
And we've spent a lot of time and energy now trying to make it accessible for everyone to do because we definitely don't want this to be some sort of exclusive market. Where only a certain subset of people can access carbon incentives for restoration. Because usually the restoration costs money. We've been working to make it something that everybody can be involved with.
So, get in touch and good luck and well done. Other than that, thank you very much for your time and your interest. And thanks Hannes for taking us through all the details, really interesting stuff!
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