If you're working on a carbon removal program with your farmers in your supply chain, or you're a farmer looking at a program from one of your processors, make sure to have a watch (or simply read the transcript below).
In this CarbonCurious Nick Butcher (CarbonCrop Co-founder) and Rebecca Hunink (CarbonCrop Head of Growth) discuss carbon sovereignty, the opportunities arising from supply chain carbon removal programs, and what good looks like.
CarbonCurious Transcript - May 2024
Nick
Let's go. Alright, 12. 32, never has a clock been watched so closely. Welcome along to another episode of Carbon Curious. Today we are talking about carbon sovereignty and keeping control of your carbon. And there's a whole other aspect of carbon sovereignty which we're not talking about, which I'll touch on just for contrast.
But with me today I have our Head of Growth, Bex Hunink. Who possibly couldn't because I may have mispronounced her name because we were just joking about that a moment ago, but I'm pretty sure I got it right Bex. Can you click ahead to the next slide and then everyone can see how it's spelled as well as how it's pronounced.
And as usual questions can be submitted if you click along another one Bex. In the little drop down box, we had a ton of questions come in for this episode, so if you submit one, we'll do our best. No promises, as usual though, we'll follow up with the questions that we don't get answers to. Right, a little bit of background again on us this is the latest picture of the extent of New Zealand that we have currently assessed.
or carbon, and actually I think this one is now a bit old as is the data on the next slide, a bit old, but the key point that's relevant here for what we're discussing today is that we've a key part of the sort of to do list for making good decisions that preserve your carbon sovereignty is knowing what your entitlements and your options are.
If you don't know that, it's very difficult to figure out anything at all and we've been sort of continuing to expand those. In are providing this background information to, so currently we're actually now well over 4 million hectares of land assessed over $35 million worth of carbon paid out more than 5,000 farms analysed, and more than 300 farms registered in the ETS or, or in the process of being registered in ETS.
Today we are going to be talking about carbon sovereignty, as I mentioned before, and I will hand over to p for a little bit of background on the scope of the discussion.
Bex
So carbon sovereignty I guess we will, we'll start out by talking about what is the opportunity for native forests and farmers and businesses in the primary sector. What is carbon sovereignty as a result of that, what are value chain or supply chain carbon removals and how do they form into a program.
And then take a look at a couple of what is a good program versus a not so good program. And then just wrap it up with, you know, zooming back out to the big picture at the end of the day. So if we start with the opportunity really this has come about because as we all know, New Zealand's primary sector is a really heavy net exporter and market access is changing rapidly due to carbon footprint.
International customers are putting more and more pressure on to decrease that footprint so that they can meet their own targets. Compliance and regulations on reporting are popping up like little mushrooms after a rain shower. And most businesses get started by tackling the low hanging fruit.
For example, switching your coal boilers to renewable energy. For example, things that are in your direct business operations or to do with your energy. So those are your scope one and scope two. But the reality is that for most businesses your supply chain is 11 times larger. Your emissions footprint is 11 times larger and for the ag sector that's even greater. 90 plus percent of your emissions footprint in your supply chain is not unusual.
Nick
And when you're talking about your Bex here, you mean from the perspective, of kind, of a downstream process. So if you're a, if you're a landowner and a farmer, 90 percent plus of your emissions is probably your on farm emissions, the scope one.
But these programs are being designed by people who are somewhere down the chain in the process. They're looking back up the chain at where their emissions come from. And usually that's not their own activities. That's the activities of somebody supplying them, like a landholder.
Bex
Great clarification.
But all of this creates an opportunity. Indicative visual here, not to scientific scale, but New Zealand's ag sector emissions vastly outstrip the amount of sequestration, particularly native sequestration, that's available worldwide. on farms to neutralise those emissions. There's 25 to 35 percent of New Zealand's forests are on privately held land and a huge chunk of that is on farmland and there are native forests behind the farm gate which can't get into the ETS but are sequestering carbon and so those forests are available to participate in supply chain carbon removal programs, which are, which are popping up.
So those are things that are organised by the processes to help them get their footprint down. And as this, the visual will show this, there's a really, a limited supply of these native forests which are available to participate in those. So it really will be a competitive space. So
There are a few early movers who are going out about it right now in different ways. But almost all of the primary sector processes are under pressure to get their emissions footprint down, and are coming up with plans of various shapes and sizes to, to address that. And, you know, early movers have an advantage You know, an uncluttered playing field and relatively fewer options for farmers to take advantage of, so less competition for those removals.
And so that really brings us to the point of the discussion of carbon sovereignty and why farmers need to keep control of their carbon. And so what are we calling carbon sovereignty? It's really that control, so. You decide as a farmer or supplier into those processes or exporters, you decide who gets what carbon and when.
You know, obviously that's a very black and white view on things, and when it comes to carbon, contracts are involved, and, you know, then things start to become more nuanced and I think, so, you know, for example, Here are some examples of like forestry leases, forward contracts, um, registering for the ETS or planting programs where, you know, you may, for contractual reasons, seed some control.
And there's some considerations here.
Nick
There's not even just contractual reasons. I mean, there'll be a contract, but it's more that it might be in your interest to cede control. So we're like, we're talking here about quite a lot about supply chain carbon removals and other things, but really the carbon sovereignty is relevant for anywhere where you have a choice about what to do.
Like if you don't have a choice, then the decision is very easy because you don't get to make one. What's changing with this landscape is that in many countries there's little to no choice. In New Zealand, at least for a while now, we've had the choice between shall I register my forest in the ETS if I'm eligible to, or shall I not?
And there's a lot to consider in that decision. But the more of these alternative programs come along which are being prompted by incentives that various processes are creating to try and address their supply chain emissions. That means you have more choices, which means that you have more opportunities, which is great, but you also have more, more opportunities to lock yourself into something that you might later wish that you'd kept your options open.
But we, I just want to kind of make super clear up front, we are definitely not against locking yourself in. Into things, per se. There's a lot of really good reasons to lock yourself into stuff. Like, if, if you register in the ETS, you're locking yourself into the rules of the ETS. They're very restrictive, they have long term implications, you definitely want to go into it with both eyes very, very widely open, and know what you're doing.
But it can make a hell of a lot of commercial sense. It's like, as long as You know what you're doing and it makes sense with your land use and you're happy with the commercial implications. Similarly with a voluntary carbon program, it may well make sense under certain circumstances to lock yourself in.
You just want to be thinking through parameters like, what am I giving up? How much am I getting in return for what I'm giving up? How much does this restrict my future freedom? And so running through a couple of these, like a forestry lease is a great example of a long term lock in. Like a typical forestry lease might be for 30 years.
You essentially cede the rights to your land to somebody else who's going to plant forest on it and then harvest it. But it can make a lot of sense to do that. Like you get paid for the lease, you don't have to worry about operating the forest yourself, somebody else is going to take care of it. You just want to be super clear on how much you're getting paid.
How that compares to how much return that land could have generated through another activity. What state the land is going to be left in at the end of the lease. Like is it going to have a liability on you for like, remediating the forestry slash. Is it going to have some carbon liability sitting on it that you have to deal with?
If you don't figure out the answers to these things, before you get involved, you're likely to get really badly burned. Or you might be lucky and be working with a partner who's just really like, their terms are just fair terms without you looking at them, but it's best to be looking through the terms yourself and figuring out every single part of it.
It's also worth noting that in some cases it's completely fair that the partner you work with, may take the majority of the value generated. But if they're doing that, it should be because they're making the majority of the contribution. And in the case of like a, a major planting program, planting can be astronomically expensive, especially once you include like pre, pre plant, prep, fencing post planting pest control, like, ongoing management, you know, if that's the majority of the cost and it makes sense that the party that you're working with gets the majority of the return, but you want to check those numbers and make sure that they stack up and you're not just leaving a whole heap of value on the table.
So there's a lot of different implications. We're not saying that taking money is bad or that locking yourself in is bad. You just really need to run the numbers and make sure that you're, you're keeping your options open to the extent that you reasonably can, and you're getting the best value that you reasonably have access to now and into the future.
Bex
Yep, absolutely. Making an informed decision about what's best for you and your property. So supply chain carbon removals, you know, what is that program and why is it coming up now? It's coming up now because every, well, many companies are setting net zero 2050 targets with an interim target of a reduction of, you know, typically around 30 percent of their emissions footprint by 2030.
No one is expected to be net zero tomorrow but the ability to show progress towards that goal as the pressure is coming on. And so a carbon removal program from, from a, from a farmer's point of view is really being able to enroll multiple areas of your farm and in multiple programs. For example, the ETS, if you're a sheep and beef farmer you, your wool buyer might have a supply chain carbon removal program.
Your meat processor might have one and maybe your regional airport is also interested. So it's these sorts of opportunities which is why taking advantage of these sorts of opportunities as they arrive are one of the reasons for maintaining that carbon sovereignty.
Nick
And knowing how they interfere with each other, because like, what this picture kind of illustrates very approximately, a thing you'll notice that none of those little boxes intersect each other.
And that's where you can really get into trouble and where the pain of, kind of, not considering your future flexibility kind of hits. Because if you, if you register your entire property in the ETS There's sort of various different potential interpretations of this, but one of them definitely is that your property is no longer, the carbon removals on your property are no longer available for claims under another carbon removal program because you might end up counting them twice.
That one there's a little bit of a grey area. But let's say, for example, that the wool buyer and the livestock buyer's little boxes were right on top of each other. That's a great way to get in trouble because you'll have two separate claims being made about two separate units of emissions, both using the same unit of removals.
And that would fail every integrity test that I know of and it'll immediately get you into hot water. Which means that if you sort of took the extreme approach that perhaps you had to deal with your livestock buyer that they had the rights to your entire farm and it's locked up, that means it's very hard for you to go and form any kind of relationship with another potential program because you don't have anything left available to contribute. It's kind of tied in and those are the, that's the situation you need to be super careful about in terms of the midterm implications. It may well make sense to do that for a couple of years on sort of a trial basis or depending on the considerations it could even make sense for a long term if you got a forward contract on terms that you're very happy with.
But Like the worst case scenario, which we'll sort of get to later on, is that you give up everything and return for almost nothing, and you're stuck. Like, that's not a situation that you want to end up in. Yeah. And it is possible to have happen if you sort of don't think through the options.
Bex
And it used to be relatively simple, right?
It used to be mostly just ETS, relatively little action happening around in carbon offsets. But as primary sector businesses increasingly look to their own backyard to get their emissions footprints down, there'll be more and more channels opening up. And aside from emissions, there are many benefits to, to the processors and exporters for doing this.
Stickier suppliers, more resilient supply chains, investing locally instead of sending money off overseas to buy offsets. So it really needs to be a win win. And as a supplier, a grower, a farmer you want to make sure that. You can take advantage of opportunities as they arise because things are changing rapidly.
So we thought we would, we would just touch on some things which we believe makes a good carbon program. And there are really five key things. And Nick, feel free to jump in here as well, but you know, clarity, flexibility, contribution, value, and alignment being five key things. And they cover Quite a few elements starting with clarity.
Do you know what everything means in your contract? Carbon markets can be filled with jargon. You know, do you, do you really understand exactly what it is that you're signing up for? Can, you know, can someone who, can the person who's offering you the contract break it down for you clearly and and simply?
But also clarity around and transparency around your obligations. How long are you committed? What are your commitments if you leave the program halfway through? What are you obliged to do to continue supporting the program as a participant? What happens if your trees fall down? You know, if there's another Cyclone Gabrielle or a Port Hills earthquake or fire. Then what? You know, so those are some things that you need to consider and which kind of leads us a little bit to flexibility as well. Do you have the ability to diversify to spread across different carbon programs? If a new carbon program comes up with better terms, are you able to participate?
How much of your forest are you committing? Because when it comes to carbon, you're registering areas of forest. You know, and so how much of that are you prepared to do each year? Can you leave the program entirely? You know, it's very difficult to leave the ETS if you're registered as a permanent forest.
It's different with supply, or it can be different with supply chain carbon programs. What happens if you no longer supply that company anymore? You know, what happens then? I think another piece is a really like alignment with your on farm goals. There's a great expression “no regrets areas”.
Like, are you committing areas of your land, areas of your forest, which you are definitely not going to be doing anything else with. So enrolling those areas of forest in these carbon programs, you will definitely have no regrets.
Nick
That's a bold statement. You're less likely to have regrets.
Bex
Less likely. That's true. That's true.
Nick
Not a guarantee of a zero regret future.
Bex
That's true.
No a guarantee of a zero regret future.
Is there an alignment of interest? You know, if you support native regeneration you know, does the carbon program incentivise more native regeneration, or is it more around new planting?
Some philosophical alignments, you know, is a sign of a good program. In terms of value, what are you getting paid? And when are you getting paid? And How much do you get paid when? And how does that compare to the market? That, you know, some of these things can be difficult to find out if there's not a huge amount of choice in your supply chain carbon programs.
But, you know, asking to speak to other participants in those programs can be a good way to find them out. And as Nick alluded to before, around contribution, like it's a balance. Who's taking the risk? Who's putting in all the money? Who's putting in all the effort? Carbon sovereignty isn't necessarily around holding everything tight to your chest.
You know, in contracts there are some, some ebbs and flows but it's around striking a balance that's there that you're happy with.
Nick
Yeah, I'd almost go to the other extreme and say that if you hold everything tight to your chest looking back in time and also ahead, you're likely to lose out rather than profit because the, like, maximising the value here, especially with supply chains, but even in general across, like, the ETS, it's almost certainly about collaboration with multiple parties.
And to sort of like create a solution if you're just trying to do everything yourself or you're trying to just hang back, you know, you, you keep your options open, but you likely lose out on quite a bit of value. Most of the value is likely to come by giving yourself the opportunity to collaborate.
And it actually across all of these, there's a sort of, they're all quite tightly coupled to each other. It's not like you can evaluate everything about clarity independently from flexibility, because if you've got a lot of flexibility, then it matters less if there are certain elements that aren't quite so clear, because it might be that you can just go, "Oh, That didn't turn out how I wanted"
So a good example would be clarity around how much you're going to get paid in the future.
With, like, even the ETS, there's a lot of uncertainty there, with sort of continued, like, regulatory reform and stuff, but especially in the supply chain programs, the ones that we're aware of, they're in their early days, and no one's going to be able to walk up to you and say, I will give you a guaranteed off take agreement for 100 percent of your carbon for the next 20 years at 200 a ton.
If anybody does walk up to you and says that, please do message me because we've got lots of people who'd be interested in getting involved. It's more likely to be something like, we have an opportunity here that's an uncertain amount for some certain period of time. But you can, and that gives you uncertainty, but if that's coupled with flexibility along the lines of, you get to decide whether to renew your engagement with us on an annual basis, and you only have to engage for some small fraction of your forest area initially, then you've sort of got, you can balance out the lack of clarity.
and potentially the sort of uncertainty around value by taking advantage of the flexibility. And that, that gives you an opportunity to start playing the game, but without just putting it all on the table and locking yourself out of future options. And there was one, another one on value, which is also really important to consider in the context of supply chain.
A lot of these supply chain actors, They're looking to actually use this as a point of differentiation and the packaging of the product is really interesting because like the ETS is sort of a, a completely separate model. You've got your, let's say your, wool products that are going out to the market in one bundle and your ETS registered forest that you're selling to the ETS through some standard secondary market in another bundle.
They're totally different commodities and they're pretty much unrelated, at least in their standard formulation. If, however, you reserve some of your forest. and you started selling it with your wool product to create net zero wool, it could be that the premium that net zero wool features in certain markets is larger than the sort of additional value that you could realise for that carbon independently, and like the sort of the leading brands in the space are looking for those opportunities to create additional value through differentiation and sort of blended products.
Again, in many cases there's no guarantee of that because they have to persuade some downstream market like buyer to actually put a premium on those products, but that's what they're aspiring to.
Bex
And that's a, I think, a great point where value and contribution link, you know, a lot of the, that take the, that wool example that you just used you know, they're out there trying to create demand as well for low carbon products, and that's a major contribution.
Nick
On the, I guess we'll get to this a little later on, but it's interesting too how programs can be very good on one axis and almost, Arguably bad on another axis as a result. Like I would, I would say that the ETS is really pretty good at clarity. Like there's, there's two aspects to that. Those that there's the technical fundamental clarity where there's like hundreds of pages of legislation and regulation, and it's pretty clear.
Like comprehensible clarity is potentially a different thing. And you wanna be pretty clear when you're registering in the ETS that you know the implications of your registration and like possibly you haven't read all of the hundred 30 pages yourselves, but somebody who you know has and you trust them and they've given you a sort of a presses of it all and it makes sense.
Some of the elements of the ETS that Bex mentioned earlier, it scores very badly by, like, can you leave? In the case of a permanent ETS registration, the short answer is no. The slightly longer answer is no, unless the minister says you can, specifically on application, which is pretty close to no.
And even if you do get the opportunity to leave under the current rules, if you do register an area from the ETS, You have to pay back all of the carbon that was ever registered to that area. There's no opportunity to kind of transition into another program. So there's, you know, it's a limiting thing, but on the other hand, the ETS is quite good in terms of flexibility of area.
Like it's, it's entirely within your rights to pick out a little bit of your farm, register that in the ETS and continue doing whatever you wanted with the rest of your farm. The ETS doesn't care, it lets you do that. And so yeah, there's, in the second coming slide, we're going to sort of show a good program and a bad program, and they're kind of deliberately extremes of the scenario, where the good program's like a halo, and the bad program's some comic book villain who's like cackling in a corner.
Most of the people designing these programs are trying to create value for you, the landholder, as well, because if they don't create value for you, then it's going to bite them later on. But it's, they usually fall somewhere in that spectrum between, and you want to be looking for the ways in which they're bad, balancing those against the ways in which they're good, and deciding if on balance it's the right thing for you in your situation.
Bex
Wow, shall we look at them now? So I guess a compare and a contrast situation. So, you know, a good program, you might have a contract for your 2024 carbon but the flexibility to go elsewhere in 2025 versus say a 30 year commitment where you have no opportunity to renegotiate and no guarantee of actually being paid for any of the carbon that you've committed.
Would be two extremes. Where, you know, a good program in terms of the no regrets area is, say, you've only registered your fenced native gullies in a supply chain carbon program, and any new planting that you have planned on your property will go into the ETS. Whereas the other extreme being your whole farm is committed to one particular carbon program, regardless of what your future plans are for, for any planting there.
Or for example, there are four different areas of forest which you've got registered in four different schemes including the ETS, much like that visual that we had earlier. Versus say being fully enrolled in one supply chain carbon program that you can't register in any others at all. Or saying, in a good scenario, you can join a new carbon program if you choose to leave a particular supply network versus the other extreme, which you can't leave ever, you're committed to that program no matter what.
Or say a good program may be that right now you want to be enrolled in a supplier carbon program, but in five years time you change your mind and you decide you want to be a net zero farm. So you want to keep your own carbon to offset your own footprint. Whereas in a bad program, all your carbon is committed elsewhere.
And so you lose that opportunity. So those are just some examples and we've drawn, we've drawn a long bow but they're not entirely unrealistic either.
Nick
No, and they're not even universally bad.
So we're looking at the 'bad' program, for example, if you considered a typical forestry lease, it would tick almost all of those boxes for 'bad' program, like It's basically not your land anymore for the term of the lease in terms of like operational activities and profit and whatnot.
But it can make a hell of a lot of sense because you've got like a strong security of income, you know, you're confident in what's going to happen, you've thought through it all, the numbers make sense. It's not to say that it's universally bad, but generally you, especially with the current status of the supply chain programs where there's very, Few that I know of, if any, which are like a certainty of long term reliable value with obligations on the supply chain partner to definitely deliver that value come what may.
Given, given the uncertainty that generally exists, you want to make sure that you retain flexibility because it could be that next year something better comes along, and if you don't put yourself in a position where you're able to re evaluate and move between offerings based on their competition, you're unlikely to get the best deal in the midterm, even if you've got the best deal in the short term.
I mean, especially talking to like, active farmers, this seems like the most obvious thing in the world to point out, because you're in the business of creating a commodity product and then picking channels to market for that product and potentially switching between suppliers based on who gives you the best deal.
It'd be very unlikely that you'd sign into a 30 year supply commitment with someone without any, and in fact, as I understand in the dairy sector in New Zealand, there are laws against that. being able to do so, like you can't lock, lock, lock entities into this extent. But even if you did, you certainly wouldn't do it if there weren't guarantees over what compensation you might receive.
It was like, we'll, you know, we own it all, but we won't necessarily tell you how much we're going to pay you for it. You just walk away immediately. And so that it's really those extreme scenarios that you want to avoid and try and keep your options open.
Bex
Yeah.
And at the end of the day, as we sort of said before It's about making the best decision and informed decision for you and your land and the value will go to those who engage with the opportunity and not those who hang back. But it's making sure that, you know, you're getting a fair deal. Things are changing rapidly and in ways that can't necessarily be predicted. And approaching things in the same way as you would approach your livestock supply or your milk supply. Really, if it's not farmer friendly in the long term, everything is just, you know, Going to backfire.
So those are sort of the two key points that we want to leave you with. Is it fair and is it farmer friendly?
Nick
Yep. And those, I mean, the, the, those are the primary sector supply chains that we're talking to. These are two that we're, like, usually reinforcing, and they're usually very well received.
Because the, the processors who would be potentially presenting these programs to you, or if you're a processor and you're listening to this, the, the people you're designing for, they will know that that's going to be evaluated on these metrics, and even if you manage to get someone in for a first year, if it's something that kind of amounts to a land grab and you get them locked in, it's probably going to blow up in your face later on once they realise what's happened, and they're like seeing that there's better options available elsewhere, and they're kind of getting, getting stuck where they don't want to be stuck.
The, the farmer friendly thing, is like, obviously everybody in this situation is an adult, there are commercial relationships in play, no one's really out to be their best friend forever and like leave all of their stuff on the table to their detriment for the benefit of another, but if you're not thinking about this kind of thing in a farmer friendly way that kind of gives farmers options and gives them fair value and recognises the fact that they're the ones who own the land.
They're the ones who are growing the forest. They're the ones who are generally making most of the investment. You know, with the qualifiers before, where if some other party is making a lot of the investment, they should get a lot of the value. You've got to make sure that you're. respecting their interests and respecting their contribution, because otherwise you're basically just appropriating value that they've created and that's going to go badly wrong at some point.
The other thing I'd say in closing is that this is not intended to be like a fear and doubt, so in kind of exercise, there is a lot of really good work being done in these programs of all sorts, including like certainly voluntary supply chain carbon programs, the ETS as well can be a really good option.
Those who are looking at co investment programs around the ETS like New Forest Financing and Establishment, there's a lot of really good options. I'd say that if you're a farmer, and you're probably already doing this, like, This is a time where diversification of revenue is a really handy thing to have and working actively with your supply chain to create higher value products is a really good thing to do.
So I would say it's quite the opposite of us suggesting don't do it. I would say rather actively do it to the extent that you can manage to find the time and energy to engage with the programs because they can be complicated. Just do it with your eyes open, and make sure you keep your options open because for the most part lock in can be somewhat artificial and if you're getting really locked in for the really long term and it's not clear why, that's the main situation where I'd say, like, what's going on?
Why am I, why am I having to commit to this further? Because usually you should be able to retain the same kind of flexibility that you have around your stock program. There's one exception to that which I'll add before we move into general questions though which is, and we, we get this question a lot and that's around the long term obligations.
Usually if you're selling carbon removals, you're selling a commitment to remove a ton of carbon from the atmosphere, or rather, you have removed a ton of carbon from the atmosphere and locked it up in a tree. You're selling a commitment to keep it locked up. So a extremely common obligation which you should expect, and certainly this is in the ETS, it's always like this, and in most of the programs that we're working with it's intended to be like this, is you're still on the hook for the tree and the carbon that was sequestered in that tree you Even if you leave the program.
That's not weird. That's not anybody being unreasonable. That's to ensure symmetry of the obligations around the, the sort of neutralisation that you did. Because let's say it's, you neutralised a ton of CO2 equivalent of methane on your farm, or somebody else's farm, with the carbon being stored in your tree.
If you cut the tree down, the methane's still out there. No one's going to recapture that for you. It's still having some global warming effect. So, you should expect to have ongoing obligations around the forest that you register and are paid for. You shouldn't expect to have those obligations if nobody's paid you for it.
Like, then it's just why, why would you restrict yourself?
Bex
Yeah, that's a really good point.
Cool.
Well, I think that brings us to the end of the carbon sovereignty section. And thank you to everyone who pre submitted questions for us to take a look at. We received so many. We picked a bunch and we will get around to answering all of the, the questions individually, most probably in a FAQ at the bottom of where we post the webinar,
Nick
There was one other thing I was gonna say about sovereignty, which is the bit that I said I'd come back to and I didn't. There's a separate topic of carbon sovereignty, which is sort of around the separation of voluntary schemes and national schemes and.
There are various issues and some, I mean, New Zealand has the ETS. That's a state level scheme. And it's kind of like, in some cases, it resulted in a loss of sovereignty for those with pre 90 exotic forest. Like you, if you had pre 90 forest in New Zealand, that's exotic, regardless of whether you register in the scheme or not.
regardless of whether you decided that you liked it and you want it to be included or not, you're affected by your obligations for that pre 90 forest. So there's like the various decisions that states can make, which, you know, have genuine sovereignty over the land. They can impact your sovereignty as a landholder.
And it's good to, like, as you see those being discussed and they're coming, like respond to the consultations on them, make your opinions known. Like it would be very easy for effectively your carbon to be confiscated. by a change in regulation. I'm not saying that that's on the cards or that that's what's being proposed, but it has happened in other countries including in some cases, retrospectively, I forget the countries, there have been several where they're like, the government made a statement that as of today, 50 percent of the revenues associated with voluntary carbon programs and registrations in this company are the property of the government.
It was sort of like a new tax that was instituted. Definitely a massive loss of sovereignty. or a massive loss of like rights to your carbon. In some cases not so much you can do about it as an individual but keeping abreast of the regulations that are coming that might impact your rights to your carbon and your rights to claims associated with your carbon can be pretty important or at least like telling your various like interest groups for your industry that this is a thing that you care about and that you want to make sure that you don't get ripped off through some some sort of other special interest group being served.
Bex
Good point.
Nick
Sorry Bex, I thought it was like, it's a whole other category, we're not going to get into it today, it's got ramifications of all sorts of things, but it could use the same label and it's also super important.
On to the questions.
Bex
Alright.
Can we use carbon credits to offset carbon purchased on farm to become carbon neutral?
Nick
Carbon produced on farm to become carbon neutral.
Not purchased, yeah, so, sorry, yeah, so, and then what happens to the carbon credits sold after the farm is sold? So, short answer, yes for multiple different interpretations of carbon credits.
So the simplest one is, let's say that your farm produces some carbon. And you want to be emission neutral and you have a whole heap of carbon removals occurring on your farm. Like this is like the, the most vanilla situation that there is. All of the standard frameworks allow for this scenario.
Yes, you can do it.
You can also use potentially carbon credits that you source. externally from elsewhere, which could be the phrasing of this question, to offset your on farm emissions. But I would say this is a much trickier situation and you definitely want to get expert advice from whoever is conducting the assessment of your farm's carbon neutrality to make sure that firstly, you get credits if you're going to that suit the claims that you want to make and the standards that you want to make those claims to.
And secondly, that you pay a fair price for those credits because the variation in cost. depending on the channel you buy through, can be in order of magnitude. I would say for most farms in New Zealand, I would be a bit surprised if I found a farm that was sourcing carbon credits from somewhere else to offset their emissions.
Usually, the first step would be look to the removals that are already occurring on your farm. And as to what happens after they're sold, this kind of touches on what we covered at the end. Usually, I would say this is, this is a sign of a good program from an integrity perspective. The program should ensure the durability of the carbon associated with the claims that are made.
And that durability basically amounts to, if you've sold carbon sequestered in the tree, There should be an obligation on the future owner of that tree to make sure the carbon is sequestered unless they buy their way out of it, like so. And this is very much the way the ETS works. If you have area registered in the ETS and you sell your farm, part of the sale process is that you either deregister from the ETS, which is usually enormously expensive or flat out impossible in some cases, in the case of permanent and forest, or you have to assign that registration to the new owner of the land.
There are penalties if you do not assign it within, I think it's 20 working days. So, it goes with the land. It's like an ongoing obligation in connection with the land.
Bex
Cool. This is a big one.
Linking biodiversity credits to carbon credits and regenerating native bush. Is it an option? How would it work? Planting natives will never take off large scale due to both initial and ongoing costs. Regeneration by stock exclusion will far outstrip plantings if incentives, especially in areas adjoining or close to native bush, as well as following first round exotic forestry rotations on hill country.
Is this an option and how would it work?
Nick
The first part of it, yes how it would work is really the really complicated bit and why I'd say it's still an early stage option. Some of the programs we're working with, like there's always, we're always finding a strong emphasis on all. preference for native carbon removals, if possible, and this, it's not a biodiversity credit, we're extremely cautious about biodiversity credits because the questions of quantification and equivalence of a whole bunch of other things are extremely unclear but it's, it would be more correct to describe it as a biodiversity co benefit.
So not only am I removing carbon, but in the process of my carbon removals, I am protecting and restoring indigenous forest and the habitats that are associated with that indigenous forest. That definitely leads to effectively a premium and either market access or price paid. It's somewhat orthogonal to whether you're planting natives or allowing natural regeneration.
I mean, I agree that those have two different cost profiles. Both of them could result in biodiversity credits like For all that it can be expensive, planting natives can be a really good way to establish natives on a new area of forest. But transitional forestry is another way that you can potentially get to native forest eventually depending on the situation in the management regime.
But sort of to the basic answer of the question, I would say biodiversity credits are still very tricky. and very illiquid, very unproven, very early stage, much more so than carbon. The simplest access to market that we see for incentivising biodiversity is through a premium being paid for carbon removals that are associated with biodiversity activity as kind of a side effect, but you're still quantifying the carbon.
Bex
I think one area that I'm really hopeful for in biodiversity credits is a way to incentivise the protection, restoration of mature native forests, where there isn't a carbon benefit or it's not such an obvious carbon benefit.
Nick
Yep.
Bex
Those areas are very important ecosystems and right now it's. It's almost impossible to describe a monetary value to them.
Nick
Yeah, I guess the question I have is how much a biodiversity credit will actually help with that, because like most of the biodiversity programs I've seen so far, they may create an instrument called a credit, but in practice they essentially amount to biodiversity sponsorship. Activities which I'm all in favor of, that's great, like, we need more money going towards preservation of biodiversity and pest control, etc, etc, and I mean, DOC spends a huge amount of money on pest control, and I wish they had more money because I think they're a very efficient user of that money in most respects but it's actually taking the next step to your credit has, or your money has created seven biodiversities and you should therefore feel free to destroy seven biodiversity somewhere else.
That is closer to a full on credit and exchange framework. And it's a much riskier kind of step, I'd say versus just something else, which might amount to half a percent of your profit is going towards a biodiversity initiative. And then like you could add credit on the end of it, but it doesn't really seem to change that much.
Bex
Yeah. Let's see what the submission proposals response.
Nick
Yeah, it'll be interesting to see. It's definitely a very high interest space and quite rapidly developing, so one to watch.
Bex
Yep.
Is Carbon Crop able to help landowners with indigenous vegetation set up a carbon credit system?
Nick
Very much so. I would say in the context of the ETS, that's what we've been doing to a large degree and a large scale already, like the carbon credit system that you're setting up is basically a way to be recognised for your carbon removals through NZUs under the ETS, which you can turn into money, or in some cases you may be able to form a partnership and sell them for extra money through some sort of voluntary program.
Outside the ETS, Yes, we are, but generally it's through working together with one of the primary sector supply chain processes that you are supplying to or could supply to, because we aren't able to unilaterally say, here's a system and we're going to pay you lots of money because we, we are a service provider, we're not a buyer of carbon units.
For the scheme to work, it needs a whole sort of downstream value chain to come into effect where you've got sort of, consumer facing brands who feel like they're able to charge a premium for their product or somehow realise the benefits of reduced carbon in their supply chain or they want to support supply chain action, they kind of have to be funnelling money back up the supply chain through the processor to an on farm initiative that can recognise carbon sequestration.
And there's great examples of that work being done in New Zealand at the moment and we are working with several.
Bex
Cool. When I sell my pre 90 units, am I still liable in respect to maintaining that forest area?
Nick
I just thought of one more thing on the previous question, actually, if you jump back, because I mean, what I said potentially doesn't help very much.
I would say, if you're a landholder, and you want to be recognised for the carbon sequestration in your indigenous vegetation, and you either don't want to register in the ETS, or it's not eligible for the ETS, the best thing to do is to make this, your interest, loudly known to your processor. Because a key question for them is, If I build this thing and it takes a lot of effort, is anyone going to care?
Do I have any farmers who are in my supply chain who want this opportunity? And if you say, where are you guys at with your voluntary, like, carbon neutralisation program? I want recognition for my forest, I'm preserving biodiversity, and I'm a net zero farm. Tell them, and they're going to be much more confident about spending the money to build a program because they know that at least one side of the market wants it.
Good point. Sorry, Bex.
Bex
We're good - I won't repeat the question.
Nick
Okay so yes, you are still liable for maintaining that forest area, and you are regardless of whether or not you sell your units. So you may have pre 90 units that you got in connection with a forest. Those units are largely independent of the forest itself, so the forest has obligations connected to it.
If you clear it and you don't re establish it, you're on the hook for deforestation liabilities, which results in both you have to declare it, if you don't, there's penalties, and you have to pay a quantity of units, which is usually astronomically large. If you keep your pre 1990 units, then you can use those 1990 units that you have in hand to meet some of your surrender obligations if you were to deforest it, but they don't have to be the same units.
You can, if you know you're not going to deforest the land and nobody else ever is going to, there's nothing to stop you selling the units. You can sell the units anyway, even if you do know that you're going to deforest the land, you just need to be conscious that later on you'll probably have to buy them back and the price might be higher, but the units and the obligations around the forest area are semi separate.
If you've got pre 90 forest, you definitely have obligations around that forest area, and restrictions on what you can do, and I guess the main thing is, if you do things, there can be commercial obligations to make sure you comply with the restrictions, and those can be very large. Cool. There are also options, like basically, if you're in this situation, before you cut the forest down, find out what you need to consider, because it can be very expensive afterwards.
Bex
I would like to learn more about carbon sequestration in wetlands and some thoughts on how we can get credits for the many wetlands in New Zealand.
Nick
It's a huge question I will qualify it all with up front, this is not an area that we have a lot of expertise and it's not something that we're actually actively working on. With wetlands a big part of the reason that they come up regularly in the carbon topic is that they have very high carbon stocks per square meter or per hectare.
And if you drain a wetland, it leads to enormous carbon loss. The metrics for quantifying that and the commitments and connection to that can be quite different. Like to my knowledge, there is no obligation under the ETS for carbon loss through draining wetlands. So there can be other restrictions on draining wetlands, quite rightly.
There's also, let's say you're trying to create a new wetland. Or to restore an area that had previously been wetland and was there drained and now you're trying to make it a wetland again. My understanding is that that can and probably does result in carbon sequestration over time. I don't actually have any idea how quickly it happens.
I am almost certain that there is no recognition for it under the ETS. And while there can be recognition for it under voluntary programs, the big question everyone's going to ask is how do we quantify it? And how do we guarantee it over time? Because it's like, it's hard enough with trees and at least trees, they're pretty well established processes for measuring them.
And you can see them and check that they're still there, in various ways and be confident the carbons stock. So it's, it's a tricky space and not one that we have a lot of expertise in.
Bex
Soil carbon and grassland. The Australian Carbon Credit Scheme allows for these sequestration categories, but this has been considered too complex to prioritise in the New Zealand ETS. Farmers ask me this often, but I do not have a good answer for them. Are the carbon sequestration dynamics of Australian agricultural soils, soils, really that much less complex than comparable processes in New Zealand soils?
Nick
Kind of the same answer as the previous one, not my area of expertise. So take everything that I say with a grain of salt. You know, soil carbon is a thing. It's one of the dominant sources of ACCUs within the Australian compliance scheme, I think. Certainly there's a lot of work that's being done over there for it.
There are some quite different. characteristics between the two countries that I'm probably going beyond my expertise as a non soil carbon specialist, but I, my understanding is that a lot of New Zealand soils are quite close to their maximum organic carbon carrying capacity and it's challenging to significantly increase it, whereas a lot of Australian soils especially because of the climate over there, they can be much lower and if you significantly change land use practices there can be larger potential to it.
Soil carbon in general, though, is a very controversial space, especially around durability, because you can be like steadily increasing your soil carbon for year after year after year, and then there's a drought, and you lose all of it. And it can be quite hard to even detect that you've lost all of it, because a lot of the practices for monitoring soil carbon involve things like observing your agricultural practices, and a drought doesn't necessarily have a clear signal that you've lost your soil carbon.
So, I think there's There are reasons to be cautious there. It's also a massive potential. kind of opportunity for additional carbon sequestration. There's a lot of issues with soil depletion. Organic carbon can massively improve soil quality in many respects. But yeah, I'm not sure if it's, that it's just too complex to prioritise in the ETS.
From the discussions I've seen, there's also a lot of questions around the New Zealand specific opportunity, given the current soil carbon levels. But there has been some great work that's being done at I think Massey University had a, a soil carbon research program, and that would be the place to look if you wanted some more background on the current status.
Well, one of several probably places to look.
Bex
Yeah.
Given the recent Climate Change Commission's recent criticism of the government's efforts to date, what does Carbon Crop and participants in the ETS in general think is going to happen to the trade in NZU's and pricing of these units going forward, especially taking into account the recent significant fall in pricing?
Question one, do you want to do them separately?
Nick
Yes, because they're quite separate and the second one's much easier. Although the trading part is a bit, yeah, I'll start with the first one. Usual qualifier, we don't know anything in particular that gives us special insight into the market, like we don't know where the price is going.
I will say that I'm surprised by and disappointed by the recent drop in NZU prices, especially given what seems to be the consensus on why it dropped, which is the recent consultation on the price settings, and specifically the last. question in that consultation, which was basically the question, what do you think, well paraphrasing, what do you think about reducing the auction floor price and the cost containment reserve price thresholds?
To which my answer would be, I think it's an absolutely terrible idea and goes directly against the goals of all of the proposed actions and the previous five questions in this very same consultation, so it's really not fair to me why you asked the question, and I think that asking the question spooked the market.
As did similar, in my view, poorly considered questions at various points last year. My hope is that the government remains and clearly signals its commitment to the effectiveness of the ETS as a way of achieving New Zealand's emissions reduction goals. As it's clearly indicated in the past several times it does remain committed to it, and it actually gives the market some confidence through, for example, saying, we were just kidding with that last question, lol, we're definitely not dropping the auction price, that would be crazy given all of our other goals around unit supply management.
But I, yeah, I'm a little suspicious of the possible motives behind the market's interpretation of that statement, like they're, Forestry owners within the market can often be price takers and relatively easy to be spooked. To the extent that I have the advice, it's try not to react too strongly to a price fall and try and understand what's happening before just panic selling because there are opportunistic traders in the market which can buy in response to a panic sell and potentially profit from it.
But I'm not saying that's what happened here. I think there is genuine frustration across the market with the government's lack of clear signalling around their intent. and their plans. And questions like that one, saying, what do you think about us dropping the price floor, where everything else in the consultation was talking about actions to reduce the unit supply to better support the effectiveness of the ETS.
It's just like, what are you thinking, why did you put this in, this makes no sense and it just confuses people. What that means for the price going forward, I hope that the price recovers because 45 will not effectively incentivise decarbonisation in New Zealand at the scale that we need it to. But, we shall see.
It's really, I'd say to a large degree in the government's hands how the price evolves there, and I'd hope for some clear signals for them, ideally ahead of the next auction, so that the auction actually succeeds. But if the next auction fails, in my view it's not the worst thing in the world, because it's going to actually help with reducing the stockpile of units within the secondary market, which is a good thing in terms of climate change targets, and ultimately unit prices.
Bet whoever asked that's sorry they asked, and everybody else on the call.
Bex
Can you explain what the difference between NZUs and permanent native forest NZUs are, is, and if, why, and how trading them may be different or not?
Nick
Yep. So there are, it's more than just NZU's and permanent native forest NZU's, there's several different classes of forestry NZU's including the standard forestry NZU's, pre 90 forestry NZU's, permanent forestry NZU's and then there's auction units and I think there's distinct classes also for the Industrial Allocation Units.
So, in a nutshell, NZUs are not all the same. Currently, in terms of surrender obligations, so like if you do something that means that you have to give the government an NZU to account for the thing that you did, like being a petrol refiner or whatever and needing to compensate for your petrol emissions or being a power plant operator and burning a lot of coal, you can give the government any kind of NZU, and they're treated equivalently. There is no firm guarantee that that will be the case in the future. It could be that some future change is introduced to make a distinction between the kinds of NZUs that can, for example, participate within certain markets or be used to meet surrender obligations. At the moment they are priced as though they're roughly equivalently like some, some prices like auction units.
I think at one point we're trading at a small premium to forestry units after largely the consultation last year on potential market reform. Permanent native forest units are units that come from forests registered in the permanent category in the ETS as opposed to standard forestry category. At the moment they are equivalent in sort of application to standard forestry units.
And they're, I would say, it's entirely possible, though, that at some point in the future, they're given some sort of privileged access of some sort. I don't know. We, we don't know, but I think if it did happen, then it would be a bit weird and somewhat inconsistent in terms of, like, the sort of consistency and reliability of the market, but there's, if you look at some of the Climate Change Commission's guidance over time, One possible interpretation of that might be that they're suggesting that only native forest should be allowed in the permanent category, and only forest in the permanent category should be able to access certain sections of the future ETS market.
Doing that would have a lot of implications, not all of them good by any means, and I'm not saying that it's a good idea at all. That could be a way that in the future the distinction between the unit types actually starts
to have some concrete impact, including on price.
Bex
Cool. Where are we at with long term native forest credits?
What associations do you have with the biodiversity credit, value maintenance, valuing maintenance of the taonga within, and where are we with validating science around podocarp native forests and long term carbon sequestration?
Nick
Long term native forest credits. There's two interpretations of that. I would say that for, or regenerating forest that's native and is intended to be long term forest, we are there. Which is great news, like you can be recognised for this in the ETS and in voluntary programs. For mature native forest that is saturated and isn't eligible for the ETS and isn't sequestering any net carbon.
We're sort of not really anywhere yet. Like, yes, you could arguably try to get recognition under some sort of avoided deforestation scheme with a voluntary program, but this isn't something that we do. I have a lot of reservations around it being done anywhere. I would say that in the New Zealand context, Good luck trying.
Even internationally, the attitude towards avoided forest loss credits is pretty bleak which is not necessarily a great thing because forest loss is a real problem and you want to find ways to disincentivize it, but carbon credits aren't necessarily the right way. The Biodiversity credits I kind of answered before I won't go through that again.
And in terms of the science around podocarp native forest, there's a lot of the, the default tables that exist within MPI for indigenous forest are informed by mixed species across multiple categories. I think some of the most interesting public work in this space though is the stuff that's being done by, on one hand, Manaaki Whenua, and on the other hand Tāne's Tree Trust who published some really interesting work in this Though I would note that the Tāne's Trees Trust work was at the arguably optimistic long term end of the spectrum, assuming that the forest was being established under kind of a plantation, native forestry model, you won't necessarily get that just out of natural regeneration, by the rates that they're talking about.
And I should also mention that Scion, the New Zealand Zealand Forest Service, and Te Uru Rakau do quite a lot of work in this space with varying levels of publicly available information. I'd say it's an area of active research which is great because there's a lot of potential to it and it needs to be properly recognised.
Bex
One more?
Nick
Last one, yeah, okay, let's make this the last one.
It's already, it's after 1. 30. Thanks to those who have been interested enough to stay on and, and no offence taken to those of you who've had to drop off. I'll let you read a Bex, I'll try and understand it while you do.
Bex
When would carbon start to become available on land that has been deforested pre 31st of December 2022, if replanted next year?
I know many smaller woodlots have been harvested this year to take advantage of an NZU price differential, and in some cases this land is being sold as bare land. What is its status?
Nick
So firstly, everything I'm about to say is general statements that might not even be consistent between each other because there are, there are a lot of like interlocking technical constraints on this point. If you're looking at buying land that's in this condition, you really need advice from an expert to tell you what you might be able to be eligible for there.
There's a couple of critical dates to keep in mind. One is around the thresholds for eligibility for the averaging category versus the permanent category in forestry based on the timing of deforestation, and I think it might be the end of December 2022. I can't remember. I would check before I gave anybody any advice on this, but basically, if your forest was cleared after the end of next year, that date, then the amount of time that it has to be cleared for before it's considered first rotation forest it's able to be registered under averaging and received units again for is I think 14 years whereas if you cleared before that I think it's only four years for it to be considered first rotation again.
Irrespective of when it was cleared though, there's also basically when you cut down trees, Regardless of whether they were previously registered in the ETS or not they have kind of a carbon shadow of residual emissions, which extends 10 years into the future from the date of harvest. It doesn't mean you necessarily have to wait 10 years before you can start getting carbon again from it, because at a certain point, the rate of carbon increase exceeds the rate of carbon loss but it does have basically a 10 year shadow from the date of harvest.
So if you've got particular forest land, you need to provide the particulars and then run it through those various tests. And another question of is, if it was deforested I mean here it says deforested as opposed to simply cleared, but probably the, under the ETS, deforested is a very different thing from harvested.
Like deforested triggers deforestation liabilities, harvested just means you cut the trees down and you may be replanting them. The implications depend on the situation. But another question would be, is it, was it registered in the ETS in the past? Is it still registered in the ETS? And if so, under what scheme?
So, lots to look into if you're in this situation and you're thinking about buying and you definitely want to figure it out before you buy it because it can massively change the value of the land or even create a liability in connection with the land.
Bex
Cool.
Well, yeah, that's, that's enough. Thank you for those who stuck with us to the end and I'm sorry we didn't get to everyone's questions.
We'll try to answer them when we post the webinar. We'll try to answer them there. Thanks everyone, and if anyone has any questions, follow up questions, feel free to drop us a line via the website. And until next Carbon Curious, I guess.
Nick
Thanks all. Enjoy the rest of your afternoon. Cheers Bex.
Bex
Bye.
Comments