Hold, Retire or Trade: An Informed Strategy For Your Credits

Before we get started:

First things first, we want to emphasize that the purpose of this article is education. We’re here to equip our readers with knowledge about the possible decisions they have as a holder of ACCUs. This is so they can take meaningful steps towards profiting from carbon farming investments, successfully achieving net-zero targets, or getting organized to make a profitable and strategic decision in the future.

The right decision is different for everyone. After reading this article, we encourage you to do more research and seek out independent guidance from ESG industry experts including tax and legal advisors, to make sure you’ve done all the necessary due diligence to make the best decision for you and your farming operation. Now that we’ve got that out of the way, let’s dive in!

The Big Decision – Hold, Trade, or Retire?

Whether you’re in the early stages of thinking through a possible carbon farming project, or your project has already received ACCUs, there’s a huge decision to be made: what should I do with my carbon credits? 

Deciding whether to hold, sell, or retire your carbon credits can be daunting, and there are pros and cons for each. There are also important tax and cashflow considerations for each option that are beyond the scope of this article, so please discuss these with your independent professional advisors before making any decisions. Sometimes the best strategy can be a mix of all three. That’s why we’ve put together this blog post to guide you through the process. We’ll dive into the realities of farmers using their carbon credits for different objectives and explore what companies and landowners should keep in mind when it comes to maximizing value from a carbon farming investment.

Hold – a resource for when it is needed most.

Case study: James is a farmer who has been generating ACCUs for the past seven years. Prices have increased in 2023 and these credits could be traded now for a profit.

But James has been thinking about whether they might commit to producing a carbon-neutral food or fibre product in the future. Getting to net-zero will be complicated – while there are plans in the works that will reduce their on-farm emissions, it’s clear that they’ll still need to use credits to get there.

There’s also the risk of extreme weather in the future that could impact the business. After many wet years, James is aware that another drought is very likely in the coming seasons. More and more, the potential income of the ACCUs that he has banked could come in handy in a growing season sometime soon. With never knowing what’s around the corner, and its impacts on both carbon and farm-wide projects, holding onto (at least some) credits as an insurance policy against a potential carbon reversal event makes sense. 

While it has already been a bumper year in the Australian carbon market, credit owners on the farm may still want to hold onto their ACCUs for two reasons:

Longer-term net-zero goals:

While farmers like Eve Kantor and Mark Wootton have been fetching premiums for carbon neutral meat and fibre for years now, the broader market is only just starting to catch up. Consumer demand is shifting toward products with a verified sustainability claim, and the infrastructure needed for producers to be recognized and compensated for their production strategies is growing. As farmers plan for their entry into these growing markets, their strategies for reaching net-zero on-farm might need the use of offsets to be successful. In this case, it makes plenty of sense for farmers to hold onto their credits for use in the future.

Risk-management:

Farming is a risky business. ACCUs in hand could be cash in the bank for farmers when they most need the injection of funds. Now that there is more political and investor certainty in the Australian carbon market, it’s fair to say that demand for credits should grow or at least remain steady into the future. This means that farmers hanging onto their ACCUs can rest assured that they have an alternative source of revenue if farm production takes a hit during drought, flood, or bushfire. However, farmers will also need to be conscious of the impact events such as drought or bushfire may have on their carbon stocks before selling for a revenue boost. We recommend strategically holding onto some of your carbon credits as security for this, rather than possibly having to purchase expensive credits on the open market if a carbon reversal event is to occur.   

Holding onto credits for use in a carbon-neutral production system also makes sense according to the Jigsaw Farms example mentioned above, where Mark and Eve claim:

“The market premiums accessible from carbon neutral branded products and pathways are far more attractive than the returns offered for offsets.”

Trade – profit now and prepare for the future.

Case study: A few years ago, John, a Wheatbelt farmer in Western Australia decided to sell his carbon credits. The deal enabled him to earn a tidy profit as an additional revenue stream whilst regenerating his land by changing grazing practices and undertaking a reforestation project to establish shelterbelts across the farm. The decision has made the farm sustainable and viable long-term, with a healthy cashflow from carbon credits able to be traded.

When the time is right, trading carbon credits can be a windfall for farmers. The above example shows there are many key factors at play that led to this being the right time for John :

• The ROI made sense – Examining the cost of initiating the project, opportunity cost of other activities on the land and potential profits on the table from selling credits in this situation made sense. It may have involved some upfront and ongoing expenditure but came in exchange for longer term steady cash-flow and an overall improvement to farm health. For farmers transitioning land use to benefit from ACCU revenue, it’s essential to know whether the numbers will add up in the short, medium, and long term.
• Financial and land management outcomes – the farmer in this example has a clearly articulated vision for how his farm business and landscape will benefit from the ACCU-generating activities.
• The deal was right – working with the right combination of project developers, brokers, and customers is essential if farmers are going to trade their credits. Even longer-term considerations such as the use of the land after the term of the agreement might all come down to who is involved, and the terms and conditions of the agreement. 

While trading credits might look good on paper, it is also essential that ACCU-owners understand the tax implications of their decisions as well. The Australian government is currently in consultation about its proposal to provide concessional tax treatment to producers that generate revenue from selling carbon credits. We advise checking with your accountant or other financial consultant before going down this route. The CFF have produced an in-depth guide for landowners on the tax implications of a carbon farming project. If you are interested in obtaining a copy, please get in touch. 

Retire – reap the benefits of using your own offsets.

Case study: Jane is a farmer who has been earning revenue from selling her carbon credits as offsets for other industries. More recently, Jane has become aware of the pressure both she and her supply chain partners are under to reduce their own emissions.

While Jane has no immediate plans to become a completely carbon-neutral operation, industry activity like the red meat sector’s net-zero emissions by 2030 pledge have led to her realisation that she should think about using her own ACCUs to balance her emissions.

The rallying cry across every industry is to decarbonize everything, and landowners that are currently producing carbon credits are not immune to the pressure. Some producers are facing substantial pressure to decarbonize from partners upstream in their supply chain and may want to take a closer look at how they could use their own carbon credits generated on-farm to do so. Trading these ACCUs might be a valuable new source of income, but there are genuine, long-term implications of doing so.

Getting to net-zero emissions takes a whole-of-farm effort – the above example of Jigsaw Farms showed us that reducing emissions demanded change in animal fertility and performance, investment in revegetation, pasture system and grazing management, and experimentation with feed additives. It is illustrative to know that, even despite such a huge and lengthy investment, Mark and Eve are keeping their credits on-farm. 

With the possibility of a national climate change strategy for agriculture on the horizon, and sustainability reporting frameworks maturing, farmers should be mindful of selling credits to other parties or sectors when they may need them in future for whole-of-farm carbon accounting on their own land.

There is no right answer for everyone when it comes to holding, trading, or retiring ACCUs.

Deciding whether to use, hold onto, or trade the carbon credits that you produce is complicated. The situation for every landowner and credit-holder is different and will require a tailored approach. It may be that a combination of all three options provides the best overall benefits across the lifetime of a project. The best place to start is to gain an understanding of your operation’s carbon footprint. This can help you understand how many ACCUs would be required to get to net-zero if that is a goal. From there, you can make an informed decision as to how many credits you may wish to hold onto as an insurance policy (or as a long-term asset) and how many you can sell as an additional revenue stream.  There is plenty to think about, and we hope that the above examples help to make the impacts of different decisions more concrete. From there you can have more informed discussions with your own independent professional advisors to make the best decisions for your individual circumstances.