Problem: Soil Carbons are not by their nature low cost. The term “low cost abatement” has been the touchstone of the Government’s campaign for a Direct Action Carbon Farming Initiative. At times it was expressed as “Lowest Cost Abatement”. The Government has flagged that it will be the sole purchaser and that it will achieve this by conducting “reverse auctions”. The Government’s “Low cost” is read by farmers as “Low price” to them. Farmers are traditionally price-takers, not price-makers. Farmers suffer from poor terms of trade. They are given to cutting each others’ throats in a race to the bottom. The incentive to invest is not a simple matter of price. The decision to seek Australian Carbon Credit Units is a complex trade-off of risks vs rewards. Farmer engagement will be determined by three elements: Price, Costs, Risk. (See Appendix F below) Practical solution 1: To convince a farmer to take a low price for a crop (eg. soil carbons) we would need to offer low costs (eg. Green Army help to plant; low cost measurement - see below) and low risks. (eg. 100 Year solution).
APPENDIX F: Low cost abatement
The term “low cost abatement” has been the touchstone of the Government’s campaign for a Direct Action Carbon Farming Initiative. At times it was expressed as “Lowest Cost Abatement”. The Government has flagged that it will be the sole purchaser and that it will achieve this by conducting “reverse auctions”.“In a reverse auction, the sellers compete to obtain business from the buyer and prices will typically decrease as the sellers undercut each other.” (Wikipedia) Farmers are traditionally price-takers, not price-makers. Farmers suffer from poor terms of trade. They are given to cutting each others’ throats in a race to the bottom. The incentive to invest is not a simple matter of price. The decision to seek Australian Carbon Credit Units is a complex trade-off of risks vs rewards. Farmer engagement will be determined by three elements: Price, Costs, Risk.
1. Price: The land sector is often characterised as a source of ‘low cost abatement’. This implies that the cost of abatement activities is low in that sector and that farmers will be willing to take low prices for abatement. Both assumptions are questionable. The farmer is an entrepreneur. They will invest only if it makes financial sense - that after all costs have been covered, there is sufficient profit to make it a better use of the capital invested. Abatement activities must compete with other investments. DAFF in conjunction with the Australian Bureau of Agricultural and Resource Economics and Sciences (ABARES), recently produced a study entitled “Costs and potential of agricultural emissions abatement in Australia – a quantitative assessment of livestock abatement under the CFI.” ABARES concluded that the effect of the CFI on agricultural emissions is highly sensitive to the carbon price and will be modest at low to medium carbon prices. In addition, ABARES concluded that under current carbon prices in Australia, farmers would not adopt many of the known emissions abatement technologies for livestock, without a significant reduction in their cost.
2. Costs: Abatement activities entail costs: eg., fencing, site presentation, seed or stems, and planting for revegetation can cost more than $3000/ha; biochar suppliers are aspiring to get prices of the char itself down to $150/tonne, applied at up to 10-20 tonnes/ha, repeated every 3 to 5 years; wire and water for grazing management can cost $50,000+ for an average-size grazing enterprise. The notion that ACCUs are simply “icing on the cake” assumes that the changes are so patently good for the soil (eg. fertility and soil health) or animals (methane conversion to meat) that they will be taken up by farmers upon hearing of them… Farmers, naturally, are comfortable with their current practices. Anything new entails risk.
3. Risk: There is a direct relationship between risk and reward: Risk costs money. The more risk in an investment the more time and resources required to obtain information about it and monitor it. The importance of a loss of $X is greater than the importance of a gain of $X, so a riskier investment will attract a higher risk premium. Risk is therefore something that must be compensated for, and the more risk the more compensation required… the higher the price expectation of the seller.
The Carbon Farming Initiative is a high-risk activity for farmers simply because few understand it. It is a complex program; it cannot be taught in a 2-day workshop. The CFI Integrity Standards are structured so that farmers are exposed to high levels of perceived risk. Eg., The 100 Years Rule requires that the farmer guarantee sequestered carbon levels for a period of three generations, with the project period (when obligations apply) lasting at least 5 times longer than the crediting period (when revenue flows). This is a significant risk and a major barrier to engagement.
Further adding to the risk for farmers/investors is the sudden linking of Australian and European prices from 2015 onwards when EU units can be imported into Australia, Australian carbon units cannot be exported to Europe until July 2018. EU prices have been subject to a long decline due to the on-going financial crisis and an oversupply of 1.2 billion permits. There are proposals to retire these units en masse from Phase 3 of the EU ETS, which starts in 2013. This may lead to European allowance prices recovering from below €7 to €19 (AU$23) in 2015. The ease with which units can be rendered valueless by government decree is further evidence of risk and uncertainty. Building links with a financially-troubled Europe to share its carbon finance system is difficult to understand. Risks facing farmers in this new market include those that are known, understood and manageable and those that are not. Market-driven risks are known, understood and, to some degree, manageable. Risks arising from shifts driven by politics are not. The uncertainty is greater and risk is higher with policy shifts, which are less predictable and complicate an Initiative already poorly understood by farmers. Risk will drive price expectations and price will drive take-up.
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