After years of 'direct action' rhetoric the first reverse auction (which is really just a fancy name for this particular tender process) was completed on April 15-16. The first Emissions Reduction Fund (ERF) auction resulted in a Government commitment to purchase a total of 47 million tonnes of carbon for $660 million, which equates to an average price of just under $14/t.
This benchmark value will be of great interest to Australian tree growers who many now be considering whether to register their own projects for subsequent ERF auctions. It also interests me, especially from the perspective of comparing options for registration of carbon from Australian afforestation projects - would it be better to submit a project for the next ERF auction assuming the same value of $14/t can be attained, or would it be better to target the voluntary market and Gold Standard certification?
The first important point of difference between the options is that Gold Standard carbon registration allows for revenues from ex-ante carbon (i.e. future carbon sequestration that can justifiably be expected throughout the entire project lifetime). This means that a single up-front payment can be expected from selling Gold Standard certified carbon rather than having to wait for biomass accumulation. How much is this worth in a financial analysis? To answer that question I modelled a hypothetical afforestation project. I assumed a reasonable biomass growth curve representing the accumulation of 100 t of carbon in a 25-year period (see the black line in Figure 1). The resulting payments from an ERF bid of $14/t are presented as the red line in Figure 1.
This benchmark value will be of great interest to Australian tree growers who many now be considering whether to register their own projects for subsequent ERF auctions. It also interests me, especially from the perspective of comparing options for registration of carbon from Australian afforestation projects - would it be better to submit a project for the next ERF auction assuming the same value of $14/t can be attained, or would it be better to target the voluntary market and Gold Standard certification?
The first important point of difference between the options is that Gold Standard carbon registration allows for revenues from ex-ante carbon (i.e. future carbon sequestration that can justifiably be expected throughout the entire project lifetime). This means that a single up-front payment can be expected from selling Gold Standard certified carbon rather than having to wait for biomass accumulation. How much is this worth in a financial analysis? To answer that question I modelled a hypothetical afforestation project. I assumed a reasonable biomass growth curve representing the accumulation of 100 t of carbon in a 25-year period (see the black line in Figure 1). The resulting payments from an ERF bid of $14/t are presented as the red line in Figure 1.
Figure 1. Cumulative carbon sequestration (black curve) and payments from an ERF auction price of $14/t (red line) over a hypothetical 25-year afforestation project
At a discount rate of 8%, the net present value (NPV) of the revenue stream from this ERF bid is $712. My next question was what is the ex-ante carbon sale price of Gold Standard certificates in year 2 that would match the NPV offered by the ERF bid? The answer... $7.69/tonne. Considering that the average price of Gold Standard carbon certificates in 2014 was US$8.50 (AU$10.60) and that carbon from afforestation projects reliably trades at above this average, the Gold Standard option clearly offers a better financial result than the ERF. In fact, if the average Gold Standard value of AU$10.60 is conservatively assumed, the NPV of selling ex-ante Gold Standard carbon credits is 38% greater than the NPV offered by an ERF revenue stream over 25 years (assuming an ERF bid price of $14/t).
There are obviously other points of difference between the ERF and Gold Standard options for Australian carbon and I have summarised these in the table below. The best option for an afforestation project will depend on its particular characteristics. The following advantages of carbon registration with The Gold Standard may apply to some projects:
The following advantages of project registration with the ERF may apply to other projects:
There are obviously other points of difference between the ERF and Gold Standard options for Australian carbon and I have summarised these in the table below. The best option for an afforestation project will depend on its particular characteristics. The following advantages of carbon registration with The Gold Standard may apply to some projects:
- Gold Standard certification is possible for rotational forestry;
- Gold Standard certification allows for projects of up to 50 years so the value of ex-ante carbon from slower-growing species can be maximised.
The following advantages of project registration with the ERF may apply to other projects:
- The project developer does not need to arrange the transaction of carbon credits with a buyer if registering for the ERF;
- Auditing under the ERF protocol does not include aspects of environmental and social impacts.
Carbon from afforestation projects could be worth substantially more if registered with The Gold Standard than with the next ERF auction. Contact us if you are interested in a comparison of options for your specific afforestation project. We can help you navigate the more stringent requirements of the Gold Standard and maximise the financial value of your carbon asset.
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