Carbon farming: the economics

Page last updated: Monday, 12 November 2018 - 8:28am

Carbon farming activities can achieve multiple economic and environmental co-benefits in addition to, in some cases, emissions avoidance offset income.

We provide this economic analysis to support farm business managers in their response to a changing climate in Western Australia.

Economic analysis summary

This analysis provides estimates of the carbon sequestration – expressed as tonnes of carbon dioxide equivalents (tCO2-e) – and potential annual value of carbon offsets for a range of carbon farming activities. We used a range of prices per tonne of carbon dioxide to account for the uncertainties surrounding offset price.

Only returns from the sale of carbon offsets are considered: the value of any additional environmental, productivity or other benefits are not shown. The analysis assumes that carbon farming methodologies will be developed and approved, although in reality it may be years before some methodologies are developed and there may be costs for project proponents wanting to develop and use project-specific methodologies.

Where there is a substantial establishment cost for a carbon farming project, we recommend an investment or cost-benefit analysis to determine the profitability of the project.

Gross margin analysis, used in annual agriculture, is not suited to long-term carbon farming projects. Gross margins are the cash inflow minus cash outflow. Carbon farming project costs will vary by project type and size, and the level of annual costs and income may be inconsistent.

Because some of the costs associated with project registration and set-up are 'fixed' (Table 6.3), it makes financial sense to aggregate projects to share costs. The high cost of physically measuring carbon stores or emissions also makes it likely that methodologies will use modelling rather than direct measurement where possible.

See Tables 6.1 and 6.2, Chapter 6 Economic analysis in Carbon farming in relation to Western Australian agriculture for information on:

  • the mean annual value ($/ha/y) of carbon offsets generated from sequestration activities over the period from establishment until equilibrium is reached
  • the mean annual value ($/y) of carbon offsets generated from emissions avoidance activities.

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Table 6.3 Carbon market participation costs

Project type

Establishment Annual Audit Brokerage ($/tCO2-e)

General

$1 500–50 000/project

0

0

2

Cattle

(500 head)

$6 500/project

$2 500/project

$2 500/project

0

Revegetation

$100/ha

0

$10/ha

1

tCO2-e = tonne of carbon dioxide equivalents
Source: Carbon farming in relation to Western Australian agriculture - Bulletin 4856 (PDF 1.4MB).

Information is available for some activities relating to the capital cost ('sunk cost') of establishing the activity and ongoing operating costs. Available costs are in Table 6.1 and Table 6.2. These capital costs need to be included when estimating the return or profitability of investing in various activities.

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There are economic and other risks in carbon farming

We recommend that anyone considering a carbon farming project seeks independent financial and legal advice about the particular circumstances of the project. Investors and advisers need to assess the risk/return trade-off of the project before investing.

Risk factors include:

  • sequestration and mitigation rates
  • offset price trajectory
  • cost of sequestration
  • permanence, in the case of sequestration projects
  • additionality
  • lack of experience and knowledge of carbon farming.

Additionality is a risk to methodology developers or those planning to use a particular methodology in future: if an activity is widely adopted and deemed to become 'common practice' then that activity and related methodologies will no longer be eligible to generate offsets for new projects.

Permanence risks and requirements include:

  • having to sequester carbon for 25 or 100 years:
    • natural events such as drought, fire and disease may destroy the plantation
    • projected climate change may reduce sequestration rates
  • the opportunity cost of a permanent land-use change may be negative:
    • technology and market changes may mean that other opportunities become much more profitable
    • effect on capital gains
  • offset income is only generated for 30–50 years: when equilibrium is reached there will be no further income
  • permanence obligation rests with landowner if the sequestration company is wound-up.

Landowners wanting to participate in carbon farming could reduce risk by engaging third-party managers to provide knowledge, business acumen and managerial capacity, ability to pool carbon projects and capital investment.

For more information

Download the Carbon farming in relation to Western Australian agriculture - Bulletin 4856 (PDF 1.4MB)

Contact information

Rob Sudmeyer
+61 (0)8 9083 1129