Matt was inundated with questions on our last Q&A webinar. He sat down with us to chat through a few more of your questions in detail here.
As you may remember, a few months back we had the chance to sit down with Matt Egerton-Warburton to discuss carbon project agreements from a legal perspective. You can rewatch the popular webinar on our YouTube channel or read the blog post recap of how to mitigate risk when engaging a Carbon Service Provider. We ran out of time during the webinar to answer all of your questions, but Matt has been kind enough to revisit them in this bonus Q&A article.
From the legal requirements to inset, to determining ACCU value and who keeps Carbon Service Providers accountable, there’s a lot of valuable information spelled out in the questions below. With carbon projects, there is the opportunity to be rewarded for good land management practices that also deliver overall improvements to your farm’s productivity and profitability. However, it’s always worthwhile to be aware of the risks and do your due diligence. Below are his insights into your wide-ranging questions about the legal considerations surrounding carbon projects.
Have any more questions? Reach out and one of our team will be happy to chat.
Let’s Dive In
Will farmers need to do a carbon project under a legislated method to show they are carbon neutral? Is it possible to use a tool like a Greenhouse Accounting Framework calculator and not sign a carbon project contract?
Large corporates in Australia currently have to account for the amount of greenhouse gas (GHG) emissions they emit (Scope 1 emissions) and the amount of GHG emissions resulting from purchased energy used in their business (Scope 2 emissions). Soon they will have to account for all emissions in their supply/value chain (Scope 3 emissions).
This means buyers of agricultural products will soon be asking farmers to provide them with data on the amount of GHG emissions they emit so corporates can report accurately on their Scope 3 Emissions. In the first instance farmers will need to understand their emissions (by conducting a baseline carbon account) and provide this data to buyers. They can do this by using GAF calculators – there is no need to conduct a Carbon Project.
Soon, though, we expect buyers will want to not just measure emissions but lower emissions, so they will begin to favour producers with lower emissions (so they can lower their Scope 3 emissions). This is where it will be useful for farmers to have ACCUs from Carbon Projects – so they can lower their emissions. Because of the amount of GHG emitted by fertilisers, animals, farm machinery, etc, it will be difficult for many farmers to be carbon neutral. To be carbon neutral many farmers will need to offset their emissions, so it will be useful to have ACCUs available to offset emissions.
How do variable environmental conditions impact the number of ACCUs an enterprise is able to hold? Is there any protection for land holders?
In a 25 year Carbon Project (they are either 25 years or 100 years), 25% of ACCUs generated go to the Government. This is the “buffer” that accounts for most climate variables. If there is a catastrophic event (ie a significant bushfire) the current regime allows for the land to regenerate and re-establish its carbon sequestering capability. We are not aware of any time where the regulator has required a landholder to buy ACCUs to replace those lost in badly managed carbon projects.
So, landholders are protected from variable environmental conditions by both the buffer and regulator policy not to prosecute landholders for excessive loss of carbon (but to allow land to regenerate and sequester carbon over the remaining life of the project).
Who keeps Service Providers accountable?
Service providers are accountable by 3rd party audits that will show whether their submissions to the Regulator as to the amount of ACCUs to be issued were reasonable or not. We are unaware of any cases in Australia of fraud and the recent Chubb review stated the ACCUs scheme arrangements are essentially sound. If a Carbon Service Provider dramatically overstated the amount of ACCUs generated, the audit will calculate the excess and the amount of ACCUs issued going forward will be adjusted accordingly. Also, a bad faith CSP may no longer be deemed a “fit and proper” person and they will be unable to be scheme participants.
Can you please explain the thinking behind the ATO’s decision to not accept on-farm carbon project expenditure (such as new fencing as a required eligible activity) as tax deductible expenditure?
It seems the ATO views farm expenditure whose sole purpose is carbon sequestration activities as not a general tax deduction and expenses associated with establishing a carbon project are treated like the acquisition of a capital item for tax purposes, and not like normal farm operating expenses. We are unsure why the ATO has this view.
If you can prove the expenditure is not for the sole purpose of a carbon project this may be helpful when seeking deductions but you should seek advice from an accountant or tax lawyer on this issue. *Author’s note: You may remember we sat down with Rohan Dunsdon, a Tax Accountant from Bentleys Queensland specialising in agribusiness and carbon projects who you can get hold of here. You can also watch the webinar recording on our YouTube channel for more information on taxation for a carbon farming project.
What happens to permanence obligations if the carbon reversal event occurs in the last year or two of the 25 year issuance period?
We are not aware whether this scenario has occurred. In this scenario, we would advise the landholder to continue to act in accordance with the obligation and see how the regulator reacts.
If you are insetting to achieve your own carbon neutrality, do you still have to register the projects as ACCUs or you just account for them as Carbon sequestration projects?
If you have not registered a project you don’t generate ACCUs. ACCUs are a security and an asset granted by the government to compliant project proponents – they are not a “natural right” that just appears if you sequester or emit less carbon.
What happens to existing projects if the methodologies change after a project is registered? Can they apply the new methodology?
Anything can happen but we expect that any changes in methodology will only apply to new Projects, not Projects commenced. It would be problematic (from a legal perspective) for the Government to change methodologies mid-Project as persons had spent funds based on the original methodology – government would open themselves up to promissory estoppel and reliance challenges if they sought to apply changes to methodologies on Projects that had commenced.
What happens if a property is sold with a carbon project, and the project then goes backwards (ie trees burn down, soil carbon falls, etc.). Is the incoming purchaser responsible for buying credits in the market and extinguishing them?
Under Carbon Project Agreements, a landholder cannot sell their land until they have novated their obligations under the Carbon Project Agreement to the new owners of their land. If the incoming purchaser has signed the novation agreement when they purchased the land, they take on these obligations.
This is why we advise purchasers of land to seek legal advice before they sign any novation agreements – if you don’t like the Carbon Project Agreement, don’t agree to the novation. These should all form part of the property purchase process and valuation.
Saying that, we are not aware of any instances where a landowner has been forced by the regulator to purchase credits as a result of a natural catastrophe. It is more likely the landowner will need to take steps to ensure the land sequesters carbon over time to replace carbon lost.
When a carbon project agreement includes the option for ACCUs to be transferred as a form of payment, how can you define the future values of ACCUs in the contract (ie spot price or CAC) is it on the day, or an average?
If your carbon project agreement involves such a transaction, there should be a clear, subjective method for valuing ACCUs to avoid disputes and litigation. There are third party ACCU price figures published and these could be used as a subjective marker.
How can landowners retain flexibility in using ACCUs for future insetting requirements if they aren’t the Project Proponent?
To be able to inset ACCUs, the landowner must own, or have the right to own ACCUs, so they can use them when needed to offset their carbon emission. A landowner could agree to a situation in which a Carbon Service Provider is the Project Proponent and this CSP agrees to transfer ACCUs to the landowner upon those ACCUs being issued to the CSP. In which case the landowner would need to set up an ANREU account to receive these ACCUs.
Agency arrangements are very common in Carbon Project Agreements. It is common for landowners to appoint CSPs to act as their agent, so the landholder remains the Project Proponent while the CSP has authority to interact with the regulator on their behalf. There is no prohibition on a Project Proponent passing on their obligations to third parties (but they will remain liable to the regulator).
What are the liabilities and obligation of mortgage holders through the lifecycle of a project, during repossession and realisation of the security?
The Carbon Project Agreement obligations are contractual obligations between the landholders and the Carbon Service Providers – unless the mortgage holder has agreed to step into the shoes of the landholder under a novation, if the mortgage holder repossesses a property we do not see where they have contractual arrangements with the CSP, so these obligations may fall away. Mortgage arrangements will likely have to be amended over time so this issue is fixed. If the landholder is the Project Proponent and a permanence obligation has been placed over the land it would be difficult for the mortgage holder who repossess the land to argue the obligations of the landholder as Project Proponent to the regulator does not apply to them (but we are not aware of this issue being tested by the courts – it would be an interesting case).
Is there any way to create value on the land post permanence period?
The permanence obligation will match the duration of the Project. Once the Project completes, the landholder will be free to commence a new Project. So, depending on the attractiveness of the Carbon Project to the landholder at the end of the Project the land may appreciate or depreciate in value. For example, if there was an onerous Carbon Project and all ACCUs went to a 3rd party, the end of this Project would likely increase the land value.
A big thank you to Matt for all his time answering your questions. If you are going through the due diligence process for your own carbon farming project, and need a legal perspective you can reach out to Matt and his team on Linkedin. This is not legal advice to any person but is general commentary for non-reliance purposes. If you need specific legal advice, please engage a lawyer.
Ready to find out more?
Explore our range of educational resources in our Carbon Farming Education Hub where we frequently publish educational articles, webinars, and guidebooks.
When you’re ready to explore the feasibility of undertaking a carbon project on your property, email us at hello@carbonfarming.org.au or give us a bell at (08) 6835 1140 to be connected with one of our project facilitators.
