Insights / February 28th, 2022

Carbon Farming. What is it and how can farmers benefit?

In 2015 the Australian Government established the Emissions Reduction Fund (“Fund”) in an effort to reduce Australia’s greenhouse gas emissions.

Greater technological advancements are now presenting opportunities for farmers and primary producers to engage in carbon farming projects and generate income streams through the Fund.

The Fund

The Fund is managed by the Commonwealth Government’s Clean Energy Regulator and is enacted through the Carbon Credits (Carbon Farming Initiative) Act 2011 (Cth), the Carbon Credits (Carbon Farming Initiative) Regulations 2011 (Cth) and the Carbon Credits (Carbon Farming Initiative) Rule 2015 (Cth) (“the legislation”).

The Fund is a voluntary scheme that incentivises farmers and businesses to reduce their carbon dioxide emissions and/or increase the storage of carbon in their soil/vegetation through the adoption of new practices and technologies, such as carbon sequestration projects (also known as “carbon farming”).

Carbon farming projects must meet certain eligibility criteria under the legislation and be registered with the Australian Clean Energy Regulator in order to participate in the Fund.

How it works

Primary producers who participate in the Fund earn 1 Australian Carbon Credit Unit (“Credit”) for every one tonne of carbon dioxide equivalent that is avoided or stored by their carbon farming project.

Participants can either sell their Credits to the Commonwealth by entering into a carbon abatement contract with the Clean Energy Regulator awarded via a ‘reverse auction’ process or sell their Credits privately to businesses/state governments.

Participants in the Fund can revoke their project from the Fund at any time, however any Credits issued in respect of the project must be returned before the project is revoked.

Carbon farming projects

Carbon farming projects can include the storage of carbon in soil (which is generally suitable for land used for grazing, cropping, horticulture or mixed enterprises) and the storage of carbon in native vegetation (generally used for larger areas of 5000 hectares and above).

Primary producers can either establish and deliver their carbon farming project themselves, or contract with a project developer (an expert who specialises in managing the lifecycle of a carbon farming project from establishment through to compliance and dealing with regulators) to assist in the establishment and delivery of their carbon farming project.

A carbon farming project can have a lifespan of anywhere between 10 and 100 years.

What are the legal implications?

There are a number of legal issues that primary producers may need to consider before participating in a carbon farming project, including:

  • The business model that will be used to facilitate the project (i.e. will the individual landowner establish and maintain the project themselves or will they work with a cooperative of landowners, agents or a project developer?);

  • The contractual arrangement behind the chosen business model to facilitate the project;

  • Whether the landowner holds an “eligible interest” in the land (this is particularly an issue for land subject to a pastoral lease or native title agreements);

  • Whether the land is subject to a mortgage, if it is then mortgagee consent is required for the project and is often contentious to obtain as the project can be at odds with the rights of the mortgagee;

  • The process of obtaining and establishing a carbon abatement contract with the Clean Energy Regulator if Credits will be sold to the Commonwealth;

  • The terms of the contract for sale if Credits will be sold to the private sector (i.e. directly to polluters);

  • Compliance with, and ongoing management of, the relevant contracts, including testing requirements, delivery, restrictive covenants, payment and make good obligations;

  • Compliance with ongoing reporting and auditing requirements.

Acquiring farming land

In conjunction with other due diligence processes, we recommend that purchasers of farming land enquire as to whether the land is subject to a carbon farming project. The costs and benefits of the project may need to be factored into the sale price.

As part of its due diligence a purchaser should also obtain:

  • details of the type of project;

  • supporting documentation showing compliance with the legislation (i.e. auditing and reporting requirements);

  • information on whether the land is subject to a carbon maintenance obligation;

  • the number of Credits issued and whether any Credits have been relinquished.

The purchaser’s financier may also take the carbon farming project into consideration when undertaking its valuation of the property and as such may also request this information.

When any farming land subject to a carbon farming project is sold the associated contracts will need to be assigned/novated to the purchaser. Accordingly, it is essential that primary producers who are participating in a carbon farming project consider whether the terms of their contracts are likely to be commercially acceptable to any prospective purchaser. If the assignment of these contracts is critical to the purchaser, then they may request the completion of the assignment to be a condition precedent to the sale of the land.

The purchaser may wish to negotiate appropriate clauses and warranties in the land sale contract to the effect that the vendor has complied with all contracts related to the carbon farming project, the requirements of the legislation, and the Fund.

Going forward

Technological advancements together with greater industry awareness and acceptance have resulted in a significant increase in the number of carbon farming projects in Australia over the last 12 months. This trend is expected to continue and ensure carbon farming is an increasingly important consideration for primary producers into the future.

Our Agribusiness team at Cowell Clarke can advise on the legal ramifications of potential or existing carbon farming agreements.

Please don’t hesitate to contact us if you require assistance.

This publication has been prepared for general guidance on matters of interest only and does not constitute professional legal advice. You should not act upon the information contained in this publication without obtaining specific professional legal advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication and to the extent permitted by law, Cowell Clarke does not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting or refraining to act in relation on the information contained in this publication or for any decision based on it.