INTERVIEW: Australia's voluntary carbon buyers more interested in reforestation credits, says fund manager

Australia's voluntary carbon market participants are more interested in buying costlier and high integrity environmental planting credits compared with companies covered by the country's compliance scheme, said Izzy Jensen, founder and chief investment officer at Kakariki Capital.

"The corporates who are ready to buy offtake contracts but are voluntary are corporates who have been burnt in the past," Jensen said, regarding companies which had set abatements targets earlier and saw offset costs increase significantly.

The Australian carbon credit units, or ACCUs, generated by such projects are considered of high integrity and therefore one of the costliest credits in the country.

"Corporates really didn’t tend to pay a lot of attention to it before and then a lot of them were slammed in the media for buying low quality credits, and those corporates have kind of taken a step back and now they are reviewing their processes," Jensen said.

Some of the companies covered under the Safeguard Mechanism may not focus on the type of ACCUs for offsetting, while others are starting to conduct due diligence around the methodologies due to the increasing scrutiny, she said.

Under the new rules of the scheme, companies will have to provide explanations if they offset more than 30% of their emissions along with a breakdown of the methodology of retired ACCUs.

Project development

Kakariki Capital is planning to invest A$100 million ($64 million) over the next three years to set up 10-15 EP projects through its Land Generation Fund, Jensen said.

The company has already bought two properties in New South Wales to set up projects and is looking to register them with Clean Energy Regulator early next year, she said.

Only 246 projects have been registered in Australia under reforestation and EP method, which have been issued about 140,000 ACCUs, or 1% of total ACCUs issued in fiscal year 2022-2023 (July-June), CER data showed.

Other major ACCU project methods like Human-Induced Regeneration, or HIR, and avoided deforestation are light on expenditure and do not require a huge amount of upfront capital due to which very few developers have invested in EP projects, Jensen said.

Oil and gas giant Woodside Energy is one of the early movers in the EP project development, with the company teaming up with project developer Greening Australia to set up large projects at several of its properties.

Woodside began planting activities on about 5,600 hectares of its land during the first half of 2023, the company said in its latest half-year results released Aug. 22.

A lot of the registered projects were able to get off the ground only after they had offtake contracts in place, Jensen said.

Price and liquidity

"For a lot of projects we are looking at, to generate our base case return, we need the carbon price to be at A$50," Jensen said.

Platts, part of S&P Global, assessed the Generic ACCU price at A$31.25/mtCO2e Aug. 24, and the HIR ACCU price at A$35/mtCO2e, both down 25 cents on the day.

"We are talking to some corporates and they will write offtake contracts with us at A$50 plus price point but not every corporate is willing to do that and the longest offtake contract we can get is between seven and 10 years and these projects credit for 25 years," Jensen said.

EP ACCUs are priced at a premium to the rest of the credits, with the latest spot trade reported by brokerage Jarden at A$60/mtCO2e for 19,000 mt.

However, the spot market for EP ACCUs is expected to be limited due to the constrained supply.

"I think liquidity will improve over time but I think in the next year or two, you are not going to get liquidity like you get in the ACCU spot market," Jensen said.

As more EP projects come online and spot carbon prices increase, it will reduce the need to have initial offtake contracts for the credits, she added.

Scope for soil

The company is also exploring developing soil sequestration carbon projects in the future at some of its properties.

"We see additional upside from the idea of method stacking, so we could put soil carbon on a piece of land on the project," Jensen said, adding that the focus will continue to be EP projects.

Soil carbon projects have seen rising interest, with two developers latest-news/energy-transition/080423-australias-soil-carbon-developers-see-more-issuance-high-premium-for-credit nearly 155,000 ACCUs in first half of 2023.

However, Jensen cautioned that the project methodology was low yielding and hard to implement as it involves changing the management practice of the farmers on the land.

"It's definitely going to play a role, but I think it's going to be hard to scale," Jensen said.

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