Why renting, rather than buying, carbon might help mitigate climate change
OUR vast Australian landscape has significant potential to contribute to climate change mitigation efforts by sequestering carbon in vegetation and soils. To date, this potential remains largely untapped, in large part due to the cost and complexity of demonstrating sequestration is permanent.
To unlock Australia’s potential to mitigate climate change we might have to re-examine the rules which define carbon credit-worthy sequestration actions – that might include renting, rather than buying.
Making a carbon credit
Carbon credits are a mechanism allowing those who sequester additional carbon from the atmosphere to be rewarded for doing so. Credits can be used to offset greenhouse gas emissions from elsewhere, or just to reduce the overall level of greenhouse gases in the atmosphere. In Australia, the Government issues carbon credits known as Australian Carbon Credit Units (ACCUs). Each ACCU represents one tonne of carbon dioxide equivalent sequestered or abated by a carbon offset project. These projects must follow a prescribed methodology, which defines what actions must be taken and how many ACCUs can be issued. Current methods cover activities in agriculture, energy efficiency, transport, vegetation management, waste and mining.
In Australia and elsewhere, the rules of carbon sequestration schemes typically require that credit-worthy sequestration actions are (1) additional to what would have occurred anyway, (2) permanent to ensure that carbon is not returned to the atmosphere for a defined period, (3) not subject to leakage, which occurs when sequestration actions in one area lead to an increase in carbon emissions elsewhere, and (4) measurable and verifiable, often by the relevant carbon credit issuing agency.
Most of these rules make sense. Collectively, they acknowledge that to mitigate atmospheric greenhouse gases through sequestration meaningfully, any credit-worthy action has to be new and lead to a net reduction in atmospheric carbon. It is also useful to measure and verify the extent to which reductions have occurred so that credit-worthy actions can be rewarded. However, there is a problem with the way permanence periods are defined in sequestration schemes.
The problem of ‘permanence’
Sequestration schemes typically require stored carbon to be maintained for a permanence period, usually defined as 100 years. In some cases permanence periods are shorter; for example, the Australian Emissions Reduction Fund offers a 25-year option for sequestration projects, with a 20 per cent discount applied to the number of carbon credits issued.
Of course a 25, or even 100, year period is not actually permanent, and even enforcing such ‘permanence’ is reliant on future governance arrangements. Moreover, it is an all-or-nothing arrangement; there is no value placed on carbon sequestered for even slightly shorter periods. However, every year that carbon is not in the atmosphere has a value, even if stored for only relatively short periods, such as ten years. Also, this value increases as we approach major atmospheric thresholds.
While such arbitrary thresholds for defining permanence may be administratively expedient, they also represent a significant participation barrier to landholders. The ability to change land management (for example switching between different crops in response to changes in the market or environmental conditions) is a significant source of value for landholders. We call these option values. From the landholder’s perspective, entering into a 25-year agreement incurs a significant loss of option value, which can adversely impact the value of their land.
These option values mean that the financial returns from carbon sequestration projects need to be much higher than current agricultural returns for participation to occur. The consequence is that landholders with all but the most marginal agricultural land are unlikely to participate and rates of carbon sequestration will be slow.
Renting for keeps (aka. rent money isn’t dead money)
An alternative approach to strictly defined permanence is to recognise and reward carbon sequestration while it is ongoing. Sequestered carbon has value in reducing the effects of climate change while it remains sequestered, so landholders providing this service to the atmosphere could be rewarded on a periodic basis. For example, a landholder may agree to receive a payment to exclude livestock from a portion of their land for a period of five years. During this time, grasses and other shrubs grow, sequestering carbon both above and below the ground. At the end of the five years, the landholder could enter into a further five-year agreement, or do something else. This arrangement effectively represents renting, rather than buying, carbon offsets.
Renting carbon avoids the all-or-nothing nature of arbitrary permanence periods and allows landholders to retain the flexibility to change their land management. Renting carbon recognises that biological carbon sequestration is inherently uncertain, but has value even if stored only temporarily. It also limits the downside if sequestered carbon is accidentally lost, for example in a drought or bushfire. The landholder may forego future rent, but no one is left with paper offsets representing non-existent ‘permanent’ carbon sequestration. Nor does it leave future generations with yet another liability in having to re-negotiate to maintain permanent carbon stocks at the 25 or 100 year mark.
Temporary sequestration of this form has less value to the atmosphere than a truly permanent arrangement, but the cost barriers to landholder participation are also significantly reduced. It makes it easier for a landholder to trial a carbon sequestration project without having to lock up a portion of the farm for the long term. It also better matches ongoing payments for carbon sequestration with its ongoing value to the atmosphere. And of course increasing landholder participation could also bring broader environmental benefits beyond carbon sequestration, such as biodiversity or improved water quality.
Taking a temporary approach to sequestration would greatly reduce the risks of carbon projects to landholders, and make carbon more like other agricultural commodities. While some landholders would likely reverse their projects, others may find the costs lower than anticipated (for example, if there are productivity benefits) and be willing to continue at a lower cost. Where a project is reversed the funds can simply be invested in alternative carbon rental projects. Compliance and enforcement costs would be greatly reduced.
At a large enough scale, a rental portfolio of carbon sequestration projects could achieve genuine permanence. An aggregator could manage a portfolio of rental carbon, entering and exiting individual projects to maintain an ongoing flow of carbon sequestration services. This practice could be maintained indefinitely, changing in scale to reflect society’s needs to mitigate climate change. An aggregator might be a private company active in carbon markets, an environmental charity or a public agency charged with reducing atmospheric carbon dioxide. Through better aligning incentives with values of sequestration, carbon renting could unleash sustainable and profitable land sector participation in carbon markets.
Renting carbon could be just what we need to unlock Australia’s carbon sequestration potential. Far more sequestration could be achieved, and quickly if the right arrangements were in place.
Dr Todd Sanderson is a Research Scientist in Digital Economics and Dr Andrew Reeson an economist, both with CSIRO’s Data 61 and part of CSIRO’s Future Science Platform Digiscape.