There are a number of critical decisions that owners of primary production land (“Landholder”) need to make when considering whether to undertake a carbon farming project on their land as part of the ACCU Scheme (“Carbon Project”). One of the most important decisions is who will be the project proponent of the Carbon Project? This article explores what Landholders should consider when deciding whether or not to be the project proponent.
It is possible for a Landholder to undertake a Carbon Project and participate in the ACCU Scheme without any assistance. However, due to the technical expertise required in developing, managing and delivering a Carbon Project, Landholders often undertake a Carbon Project in conjunction with, or engage carbon service providers or developers (“Service Providers”) to undertake a Carbon Project for them.
With over 30 Service Providers offering different models, services and degrees of assistance, Landholders have greater choice and flexibility than ever before in undertaking a Carbon Project. Whilst this is welcome news, it can also add to the confusion in how to best set up their Carbon Project.
Who is a Project Proponent?
The project proponent is the person (or company) that is responsible for, and has the legal right to carry out, the Carbon Project under the Carbon Credits (Carbon Farming Initiative) Act 2011 (Cth) (“CFI Act”) and the Carbon Credits (Carbon Farming Initiative) Rule 2015 (Cth) (“CFI Rule”) and is accountable to the Clean Energy Regulator (“CER”).
Landholder vs Service Provider as Project Proponent
One of the most critical decisions for a Landholder is to decide whether they or the Service Provider will be the project proponent of the Carbon Project.
A number of fundamental differences will arise under the legal agreement the Landholder enters into with the Service Provider (“Carbon Agreement”) depending on who the project proponent is. For example, with carbon sequestration projects, the project proponent holds the legal right to the carbon sequestered in the land. All ACCUs generated by the Carbon Project (“Carbon Project ACCUs”) are issued exclusively to the project proponent.
Below is a comparison of how the commercial arrangements between the Landholder and the Service Provider differ depending on who the project proponent is.
Landholder as project proponent
Service Provider as project proponent
Legal accountability to the CER for the proper performance of the Carbon Project
Risk of compliance with the ACCU Scheme’s requirements (as project proponent) from the perspective of the CFI Act and CFI Rule.
Ownership of the proprietary interest in the carbon stores in the land subject to the Carbon Project
Who undertakes the development, management and delivery of the Carbon Project (including compliance with testing, reporting and auditing requirements)
Landholder and Service Provider
Note: the Service Provider assists the Landholder to varying degrees (the Service Provider may undertake all or part(s) of the Carbon Project)
Note: the Landholder provides some assistance where necessary and has a more passive role in the Carbon Project. The Landholder still needs to provide the relevant consents and comply with various obligations under the Carbon Agreement and the carbon management plan relation to the Carbon Project
Control of the Carbon Project
ANREU account in which Carbon Project ACCUs are issued by the CER
Remuneration to the Service Provider
The Service Provider is remunerated for the provision of their services by either a fixed fee, a percentage share from the income of the sale of the Carbon Project ACCUs, or as a percentage share of the Carbon Project ACCUs
From what we have seen, where the Service Provider seeks payment in the form of a percentage share from the income of the sale of Carbon Project ACCUs, that percentage share is often significant – approximately 25%. However, the market is continuing to mature and there is increased competition amongst, and a greater number of, Service Providers. We therefore expect that in some instances Landholders will be able to negotiate a lower percentage share or a fixed fee model
How are the Carbon Project ACCUs dealt with?
Subject to paying the remuneration to the Service Provider and the terms of the Carbon Agreement, the Carbon Project ACCUs can be dealt with by the Landholder at their discretion
The Service Provider sells the Carbon Project ACCUs and pays a percentage share from the income of the sale of the Carbon Project ACCUs to the Landholder, or transfers a percentage share of the Carbon Project ACCUs to the Landholder’s ANREU Account
Why it matters – Risk and Reward
As noted above, whether the Landholder or the Service Provider is the project proponent of the Carbon Project will have a significant impact on the Landholder’s:
(1) degree of legal risk in relation to;
(2) level of control of; and
(3) Potential reward from,
the Carbon Project.
The appropriate level of risk that a Landholder wishes to take in carrying out a Carbon Project is ultimately a commercial call for the Landholder to make. This depends on a variety of factors including (to mention a few):
the Landholder’s commercial motivators and goals;
the Landholder’s capacity for involvement in the Carbon Project and their risk appetite;
whether the Landholder intends to continue their existing agricultural enterprise concurrently with the Carbon Project, and use the Carbon Project income as an ancillary income stream. In this case, it may be more appropriate for the Service Provider to be the project proponent due to the lower level of Landholder risk and involvement in the Carbon Project. Alternatively, if the Landholder intends to move away from their existing agricultural enterprise and transition to a full-time carbon farming enterprise, it may be more appropriate for the Landholder to be the project proponent as they would own and control the Carbon Project;
whether the Landholder wants to receive and control the Carbon Project ACCUs. This has significant benefits as the Landholder could use the Carbon Project ACCUs as security for loans, choose when to sell them and at what price, and/or choose to inset them to cover their own carbon emissions;
the Landholder’s succession planning strategy;
whether the Landholder intends to sell the land in the future.
The Importance of the Service Provider and the Carbon Agreement
Whenselecting a Service Provider to partner with to undertake a Carbon Project, it is important that Landholders select a Service Provider that aligns with the Landholder’s risk appetite and overall objectives. As is often the case, “one size does not fit all”, and selecting the right Service Provider could be the difference between a successful Carbon Project that adds value to the Landholder’s business operations and a Carbon Project that is a burden to the Landholder.
With this in mind, we recommend that Landholders conduct due diligence on Service Providers. This includes the number and type of Carbon Projects they have undertaken to ensure Landholders have a degree of confidence in the Service Provider to perform its role under the Carbon Project, whether that is as project proponent or not.
Furthermore, the Carbon Agreement needs to be carefully considered and accurately document the intent and agreement between the Landholder and the Service Provider.
The form and substance of the Carbon Agreement will depend on whether the Landholder or the Service Provider is the project proponent of the Carbon Project. For instance, if the Service Provider is not the project proponent, (ideally) the Landholder would contractually pass through its obligations as project proponent to the Service Provider and support this with an indemnity from the Service Provider. The aim is to ensure there is no gap between the obligations of the Landholder as project proponent under the CFI Act and CFI Rule, and the obligations of the Service Provider under the Carbon Agreement. This is often met with hesitation from the Service Provider, whose aim is to assume minimal risk.
Even if the Carbon Agreement is “watertight,” the Landholder, as project proponent, is still legally accountable to the CER. The CER will not have regard to the arrangement between the Landholder and the Service Provider when enforcing the provisions of the CFI Act and the CFI Rule against the project proponent (i.e. the Landholder). This risk needs to be carefully addressed in the Carbon Agreement.
Cowell Clarke’s Agribusiness team are carbon farming specialists, and assist Landholders in weighing up the commercial and legal risks associated with the various business models for Landholder to participate in a Carbon Project. Cowell Clarke’s Agribusiness team also assist Landholders with all aspects of reviewing, advising on and negotiating the terms of the Carbon Agreement.
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.