Carbon Project Agreements: 6 Keys Risks & How to Mitigate

Earlier this week, we had the chance to sit down with Matt Egerton-Warburton to talk about carbon project agreements. Being a lawyer with plenty of experience navigating contracts and structuring the legal aspects of how a projects is designed, Matt brought a completely new perspective to round out our due-diligence series. 

In case you missed it, here are the key takeaways for landholders seeking to start a carbon project. Matt has put together the following tips, with selected edits and additions by CFF staff.

Step 1: Understand the Business Models 

There are a wide range of Carbon Service Providers (“CSPs” – over 25 and counting) and a wide range of Carbon Project Agreements with different and diverse business models.  There are no market standard contracts and contractual terms.

To avoid entering into a sub-optimal contract for 25 or 100 years, landholders need to make sure they choose the right CSP with the right contractual terms. 

There are three basic business models: 

1.     Fee for service – where landholders pay CSPs cash to conduct the service and landholders receive all ACCUs generated by the Carbon Project (with no obligation to provide any ACCUs to CSPs). The Carbon Farming Foundation operate under this model.  

2.     Income stream – where CSPs receive the ACCUs and agree to provide the landholder with a conditional income stream when the CSPs sell the ACCUs (the income may be an agreed fixed price per ACCU or an amount linked to the market value of ACCUs); and 

3.     ACCU sharing – where CSPs and the landholder share the ACCUs generated. Typically CSPs seek between 5% to 30% of ACCUs. 

There is no “right” model. Each appeals to different operations and capital considerations. Understanding your farming context, including cashflow, risks, the opportunity cost per hectare and succession planning will help to make the right decision for you. Engaging a lawyer, accountant or financial planner in your due diligence process will help you get the advice you need to make the right decision. 

Signing a sub-optimal Carbon Project Agreement can: 

1. lower the value of a property; 
2. cause excessive restrictions on how landholders manage their land; 
3. prevent landholders from being able to use ACCUs as security for loans; 
4. make it difficult for landholders to run a ‘carbon neutral’ farm; 
5. result in landholders having to buy ACCUs later for a much higher price; and 
6. lead to ACCU price upside going to a third party (and not the landowner who generated the ACCUs).  

Not ideal. So, what do you as a landowner need to consider in order to mitigate these risks? Let’s dig into the six things to consider before deciding on which route to go.  

Step 2: Understand the Key Issues and Risks in Carbon Project Agreements

1.     Who is the Project Proponent?  

The Project Proponent is the person (or company) that is responsible to the Regulator for carrying out the Carbon Project. The Project Proponent receives ACCUs in their name (in an Australian National Registry of Emissions Units (ANREU) account). The Project Proponent can be the landholder or the CSP. Landholders can appoint CSPs as their agents to act on their behalf to manage their Carbon Project with the Regulator while remaining the Project Proponent.   

2.     Who owns the ACCUs? 

Having legal ownership of ACCUs allows the owner of these ACCUs to use these assets as security for loans and to choose whether, to whom and when they sell their ACCUs and at what price. 

3.     Timing the Carbon Project  

Landholders can be strategic about when to conduct and submit their baseline survey.

4.     Land management conflict and restrictions  

If landholders cede a percentage of ACCUs to a CSP under a Carbon Project Agreement a conflict of interest develops between the landholder and the CSP. The CSP will want the landholder to manage their land to maximise the production of ACCUs whereas the landholder will want to manage their land for overall profit and long-term value (which may not prioritise ACCU generation). Carbon Project Agreements drafted by CSPs typically mandate that landholders are not allowed to change their land management methods without approval from the CSP. This can have serious implications over a long-term time horizon of 25 or 100 years in terms of a farm’s ability to pivot.  

5.     Selling Land and Novating the Carbon Project Agreement  

The existence of a sub-optimal Carbon Project Agreement detracts from the value of a property and may impact land sales. Under most Carbon Project Agreements drafted by CSPs in which ACCUs are shared, landholders are barred from selling their land until the purchaser agrees to accept the novation of the Carbon Project Agreement. 

6.     Who controls the future sale of ACCUs?  

Many Carbon Project Agreements include additional clauses that establish CSPs as the exclusive sales and trading agent for ACCUs produced by the Carbon Project.  These clauses provide CSPs with the exclusive right to sell ACCUs at a price and time controlled by the CSPs. Landholders should consider reserving the right to choose in the future other third parties to sell their ACCUs (if they want to sell them). 

Heavy. So how can these risks be mitigated when negotiating and drafting the initial contract? 

Step 3: Take These Steps to Mitigate

1. Get legal advice– these are 25-100 year contracts that affect how you manage your land and they can affect land value 

2. Flip the script – take control of the process 

3. Before you commence a project assess project viability and introduce forecast accountability 

4. Paying cash for services provides greater control and flexibility – if cash flow is an issue, consider “Green Loans” like Commbank’s Agri Green loan. 

5. Ownership of ACCUs provides options and control 

6. Minimise or eliminate land management and sale restrictions 

7. Consider separate contracts for separate tasks 

8. Anticipate that some CSPs will not perform and may go out of business.   

It’s a lot to digest and consider, but being realistic about the long-term time horizon and risks that could emerge throughout the project that require you to pivot is key. Retaining as much control over the project and autonomy over your land will allow you the greatest flexibility to react and remain agile over time. If you have any questions or comments, reach out to Matt or the CFF team, for an unbiased opinion. We act for landholders across Australia.