Forest sinks should be a part of the mix of companies’ carbon abatement portfolios. However, until there is clarity around the Carbon Pollution Reduction Scheme (CPRS), and thus better estimates for local Australian carbon price paths, buyers for Australian Emissions Units (AEUs) for carbon reduction (including planting reforestation projects) will delay committing capital.
Though it takes 5-10 years for manufacturers to start delivering carbon sequestration through reforestation, tree based carbon suppliers are anticipating a surge in demand in the next 12-24 months, following greater clarity over carbon price paths from the Copenhagen climate conference in 2009.
In this article we look at the right hand side of the below forestry and agriculture abatement curve. That is, how planting new forest sinks will be a commercially justified part of the carbon abatement portfolio for large companies.
Forest sinks as carbon sequestrators
Forest sinks will never solve the world’s, or any large company’s carbon problem. However, forest sinks are a valuable contributor because they are a proven source for sequestration with a known cost structure:
- Forest sinks may contribute by sequestrating 10-15% of world carbon output
- Forest sinks can sequestrate at US$10-25/tonne CO2e
- Sequestration starts at 5-10 years of age
Price paths for tree based carbon
Carbon abatement markets are likely to remain local / regional for some time, driven by local regulations. Internationally, carbon cost estimates go as high as US$60-100 by 2020. For Australia, there is a wide range of estimates on what the local cost of carbon will do. Several large Australian companies seem to be evaluating capital projects at A$40/tonne CO2e.
The future carbon price path is obviously a big driver of tree carbon’s profitability. Carbon yields, land acquisition and establishment cost are the other main profit drivers.
Yield curves differ for various tree species and locations, however typical yield profiles are clear: they produce a long term revenue profile that is low in the first 10 years. On the other hand, land acquisition (or the opportunity costs of foregoing alternative crop value) and establishment costs require capital mostly upfront, in the first 2-5 years.
Land cost, tree establishment cost and sequestration yields can be forecast reasonably accurately, but as long as the revenue side of the carbon price path remains uncertain, most investors will prefer to wait.
The structure and caps around the Australian CPRS will set the local carbon prices. In the short term, when demand for local carbon offsets reflect toe-in-the-water purchases, tree carbon will likely remain at or slightly above its break-even. In 2 years or so, when it becomes clear that the cost of carbon may go to $A40/tonne CO2e or more, and the supply of tree carbon is actually limited, tree carbon may quickly jump in price. This makes locking in the price of tree carbon at approximately $A15-20/tonne CO2e (current price) an attractive hedge.
Future of tree carbon funding in Australia
Whatever the future demand profile for carbon credits in Australia, we can safely assume that tree sequestration will become viable. Potential buyers of AEUs are waiting for more CPRS carbon price path certainty. This clarity may come after the Copenhagen climate conference in December 2009. Australia may follow the US and the UK with big commitments to carbon reduction targets, but the devil lies in the CPRS detail. That is, what will the caps be, how big will the exemptions be, and how fast will the caps be enforced. We should know this in 12-24 months.