The Due Diligence Framework to De-Risk Your Carbon Project

As Australia steadily progresses towards our 2030 and 2050 environmental targets, the agricultural land sector remains as one of the very few scalable opportunities for genuine carbon offsetting. Farmers are exploring the opportunities presented by carbon farming projects on their land, and whilst many of the “carbon avoidance” methods relate to best practice or common-sense approaches, the big-ticket projects generally involve sequestering carbon emissions through various land management changes on a permanent or near permanent basis. If done right, the potential benefits of a well designed and developed carbon farming project are significant. However, it remains crucial for landowners to approach these projects with careful consideration of the associated risks.

What is Carbon Farming?

Carbon farming in a very basic sense, is the granting of a 25- or 100-year interest in your land, your biggest asset.

In this article, we delve into the importance of asset value protection, managing the loss of land rights, and analysing some of the risks and opportunities of carbon farming in Australia.

Asset Value Protection

The biggest concern for landowners who are considering carbon farming projects is protecting their asset value. For most farming families, the farm represents not only their largest asset but also their main source of wealth. The value of the land is intricately linked to the business that operates on it and the flexibility to adapt the business to suit market trends, seasonal changes, and financial opportunities.

The key to success for many farmers has been their ability to evolve and transform their business to meet changing demands. This could involve transitioning from one livestock to another, switching from grazing to farming, upgrading from native to improved pastures, or even moving from dryland to irrigated farming and eventually establishing permanent crops. Some farmers have found success by splitting or selling parts of their large farms to maximise profits from a sale.
The presence of a carbon farming project may limit the future development options for the land, potentially restricting the ability to pivot to different agricultural activities. It is also extremely difficult for piecemeal land titles to be “split out” of a registered carbon project.

Additionally, farmers need to take a long-term view of current or potential future family structures, estate plans, and retirement goals when engaging in carbon farming. While selling the farm might not be on their minds now, circumstances can change over time. It’s crucial to anticipate the potential impacts of a carbon farming project on these plans, as it could affect the ability to execute these plans when desired and on your terms.

Retaining Land Rights

While engaging in carbon farming projects, landowners should prioritise the retention of land and vegetation rights wherever possible. While carbon farming can provide a new revenue stream, it’s essential to strike a balance between the project’s benefits and the long-term land ownership and usage of land and resources. We are seeing examples of this in the “mulga belts” of Australia, where farmers wanting to use the high protein mulga leaf as a fodder source, are finding their rights as graziers are placed second to their rights as a carbon farmer. Once a carbon project is in place, the carbon is the priority and all other enterprises must come second. Further, once carbon is sequestered, it must be stored/maintained for the “permanence period” – this is 25 or 100 years. If a farmer had wanted to undertake a management practice that resulted in that stored carbon being released (ie. Clearing trees for land development, felling trees for fodder, deep ripping a paddock etc), that management practice would not be permitted by law.

Tax Structures, Cashflow & Diversification

When embarking on a carbon farming project, landowners should carefully assess tax structures and strategies, cash flow possibilities and the risks vs opportunities in both. Carbon farming projects vary in terms of the carbon credits they generate, and its impact on the supporting land. Some projects may increase cash flow but could erode the land’s value, while others have the potential to boost both eg. soil carbon and strategic plantings that have the potential to increase the value of the land.

Whilst we are yet to see clear examples of “encumbered land” (land supporting a carbon farming project and its associated performance obligations, without the benefit of the ACCU generated income) in the market, it is important that you seek appropriate advice from both your trusted accountant and valuer to ensure that appropriate consideration is given to these items.

Borrowing & Financing Carbon Farming

If you’re considering carbon farming on your land, keep in mind that getting consent from your financier is a requirement for the project. Australia’s major lenders have specific policies and procedures regarding the treatment of carbon farming projects when it comes to mortgages. Some lenders even offer loans tailored for “green” initiatives, including carbon farming projects. However, it’s essential for farmers to consult with their current or potential lender before committing to a carbon project. Understanding the perspective of lenders and their criteria for lending to producers engaged in carbon farming will help in securing necessary funding and managing financial risks effectively.

Analysing Risks & Opportunities

While exploring the opportunities of carbon farming, landowners must also consider worst-case scenarios and potential future changes. Conducting a comprehensive risk analysis is crucial. The risks associated with carbon farming projects should not deter landowners but inform their decision-making process. By understanding challenges, landowners can adopt strategies to minimise risks and maximise benefits.

Carbon farming project can unlock opportunities for landowners in Australia. Diversified cash flows, through generating commercially tradable Australian Carbon Credit Units, and added value to land (in some circumstances) while building resilience in agribusinesses.

Farmers, at heart are environmentalists. The multigenerational farming families would not still be on the land if they were not deeply aligned with the health of their land. Best practice agriculture generally results in the enhancement of soil health, water quality, and biodiversity. These environmental benefits which are not a factor of a carbon farming project, not only align with the broader goal of addressing climate change but also add value to the land itself.

It’s essential for landowners to recognise and understand that the market’s (buyers) perception of a carbon farming project may not always align with their own. What landholders see as valuable aspects of their carbon project, such as sustainable practices, carbon credit generation, conservative or tailored management, or other environmental benefits, may not be fully recognised or appreciated by potential buyers in the market. In my opinion, any carbon farming project is always of most value to the farmer that implemented it in the first instance. The reason they did implement it is because it was of value to them. The market of buyers for a property like yours, may simply not want a carbon project on it. Unfortunately for them, and you as the seller, at that stage it’s probably too late. Understanding the drivers of value in your property market is crucial, and we advise landholders to continually monitor and assess market trends to ensure they are aware of the appetite for carbon projects like their own.

Seeking guidance from trusted advisors who possess sufficient knowledge of agriculture, rural land, and the emerging carbon farming sector is highly recommended. These advisors should offer objective and critical analysis of land assets and business operations, helping landowners make informed decisions that align with their goals and maximize the potential value of their land, and their carbon farming projects.