Carbon plan promises bonanza for Australia forestry
By David Fogarty, Climate Change Correspondent, Asia – Analysis, Reuters, Fri May 22, 2009 1:24pm IST
SINGAPORE (Reuters) - Australia's forestry firms are poised for major growth from emissions trading plans that could give the sector a multi-million dollar boost when it becomes the first to kick off a nationwide scheme to cut carbon pollution.
Big polluters such as power generators and smelters are keen to hedge future emissions liabilities, and forestry firms, as one of their best options, are already pulling investment ahead of the sector's inclusion in emissions trading from July 1, 2010.
Growing carbon-absorbing forests is seen an as alternative way to meet future emissions caps and that allure will only increase as governments restrain polluting industries, driving carbon costs higher.
But the Australian sector's early advantage rests on a hostile Senate passing emissions trading laws in coming weeks.
"Forestry's great attraction at the moment is that it's the only activity that can give an emitter price certainty," said Andrew Grant, chief executive of CO2 Australia, which grows forests purely to soak up carbon dioxide for many decades.
"If you're committing to a major project now and you're trying to hedge your carbon position, forestry plays a really important role," he told Reuters.
Domestic forestry offsets in the voluntary market are now worth around A$15 a tonne of carbon dioxide (CO2), less than the estimated A$20 to A$30 initial market price for domestic pollution permits under national emissions trading.
If lawmakers approve the laws, forestry will be the first sector to earn these potentially more valuable permits, or Australian Emissions Units. AEUs will represent a tonne of carbon dioxide and big polluters can use these to offset emissions.
"Companies with very large liabilities could put in place strategies to secure a long-term pipeline of credits from domestic forests," said Emma Herd, director, emissions and environment, for Westpac Banking Corp.
Can’t Afford to Wait
Grant, whose firm manages 12,000 hectares (30,000 acres) of eucalypt plantations to yield long-term carbon credits, said there had been an increase in business queries since the early start for forestry was confirmed this month.
"What we're finding is that there is an interim position that some companies are taking and that they can't afford to wait for certainty. They have to form a carbon view now because they are committing to major projects."
The government triggered alarm this month by pushing back the scheme a year, until July 2011, followed by 12 months of a fixed carbon permit price of A$10 to help businesses adjust.
But it allowed forestry to begin from July 1, 2010, effectively giving the sector a two-year head start.
The scheme sets emissions cuts of between 5 and 15 percent by 2020 from 2000 levels and up to 25 percent if other rich nations agree to ambitious CO2 cuts.
"We wouldn't leave our buying until the last minute because we have to build up a forward hedge-pool," said a source from a big emitting firm, who asked not to be identified.
"Forestry is definitely a source of offsets and we have been actively talking to a number of participants. It will be one of the first sectors to receive money to build this up."
Origin Energy Ltd, Australia's second largest power retailer, said forestry was part of a broader suite of options to generate carbon credits.
International consortium EITG said passage of the law could unlock an initial agro forestry investment by the group of A$100 million, and up to A$500 million in the longer term.
"Without doubt some certainty in the legislative background would change our attitude to writing the checks," said Richard Hayes of New Zealand-based EITG, which focuses on forest carbon sequestration and sustainable energy projects.
He said the group had calculated carbon credit income of around A$20 a tonne.
Rules
While it is unclear how many forestry firms will take part in the first year, the government has said they can voluntarily join from July 1 next year if they meet strict carbon accounting rules. Officials are still finalizing those regulations.
"It's very hard to know how many forestry companies will want to opt in until we know what the rules are," said Allan Hansard, chief executive of the National Association of Forest Industries.
"As long as the rules are right, it is quite an advantage for us to be one of the sectors that other sectors can use in relation to early action. That's definitely a benefit."
NAFI estimates plantations could deliver around 50 million tonnes of CO2 cuts annually by 2020 from about 20 million now, he said.
Long-term, though, the benefits could be greater.
A government study last year showed the amount of land economically suitable for afforestation between 2007-2050 was likely to reach 5.8 million ha, with nearly half set aside for CO2 sequestration. This is based on a carbon price starting at A$20.88 in 2010 and rising four percent a year until 2100.
If the carbon price started at $29.10 a tonne, the amount of area suitable for planting rose to 26 million ha, with 83 percent set aside for forests that soak up carbon.
Total CO2 removed in this way over the 2007-50 period would be 1.09 billion tonnes and 3.25 billion tonnes, respectively, pulling in billions of dollars in revenue for the sector.
Plantations now cover nearly two million hectares with about 800,000 hectares devoted to carbon removal.
The Forest Products Commission, an arm of the Western Australian government, had about 30,000 ha of plantations that could be included and could bring to market 700,000 tonnes of offsets each year, Tym Duncanson, its new-business manager, said.
"If the scheme does go through then we can look at trading on that carbon as of July next year," he said.
This year the body will plant a 5,000 ha carbon lockup project for the state's largest energy retailer, Synergy, worth an initial A$10 million, going by government estimates that such plantations cost $2,000 a hectare.
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