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Reef Credit market system may change the game

Carbon can be a source of income.

NATURAL Resource Management groups must adapt to keep pace in an ever-changing funding environment.

That’s the firm belief of NQ Dry Tropics CEO Dr Scott Crawford (pictured).

 He said government grants had been the primary funding source for NRM groups for at least the past two decades, but it was clear that was changing.

While Dr Crawford believes grants will remain a key part of any future investment mix, funding from other areas would be essential.

And he has private investors and philanthropists clearly in his sights.

Environmental markets are another potential source of revenue.

Those markets focus on valuable ‘ecosystem services’ – such as clean water, fresh air or healthy wetlands – and provide a benefit for which investors are prepared to pay.

The carbon market, already well established, places a value on projects that sequester carbon in trees or soil, or reduce the amount released through greenhouse gas emissions.

These projects typically have a 25 to 100 year lifespan, with payments reflecting the benefit, made to landholders.

Dr Crawford said NQ Dry Tropics was exploring a number of potential roles in the carbon market.

“To help build our understanding and capability in the carbon market, we are developing a partnership with an existing and well-established commercial carbon market company,” he said.

Reef water quality is another valuable ecosystem service.

In 2016, a Queensland Government Reef Water Quality Task Force-commissioned report put the cost of meeting 2050 water quality targets at approximately $8.2 billion.

With current levels of government funding falling well short of that, Dr Crawford hopes a new scheme designed to encourage landholder action to reduce pollutant runoff will attract significant additional investment.

“For the past two and a half years we have worked with environmental markets investor Green Collar, and Terrain NRM to develop the Reef Credit scheme,” he said.

“The idea is to create a market around preventing pollutants such as nitrogen and fine sediment from entering waterways and the Great Barrier Reef lagoon.

 “Landholders and farmers will be able to undertake projects that deliver a quantified reduction in pollutants, generating Reef Credits that can then be purchased by potential investors.

“A significant proportion of the dividends from the sale of the Reef Credits then goes back to the landholder, or farmer.

 “Qantas has come on board as a foundation corporate partner, and we hope to see the first Reef Credit project registered this year.

 “Other potential investors include the Queensland and Australian governments –  currently the primary purchasers of reef water quality outcomes – private companies through corporate social responsibility schemes – and philanthropists, in Australia and abroad.

“Reef Credits could potentially also be purchased by industry to offset emissions.”

Dr Crawford said Reef Credits would be operated by an independent not-for profit company.

NQ Dry Tropics would not be involved with governance, but would operate commercially in the scheme without any conflict of interest.

There are three distinct roles in the process of raising and selling a carbon or reef credit.

They are:

  • the landowner (the entity with legal title over the land on which the project takes place);
  • the project developer; and
  • the project proponent (the person or entity that sells the credits generated by the project).

They are separate roles, but it is quite common for a person or company to undertake more than one role in the same project.

 “In the carbon market, it’s common for an entity to be project developer and project proponent,” Dr Crawford said.

 Typically, the landholder interested in hosting a project would not want to deal with the planning, monitoring and auditing involved.

Nor would they want to run the risk of the project failing. That’s the risk the proponent accepts.

“Project development and delivery is our bread and butter – and we are very good at it – so there is scope for us to take advantage of the additional opportunities under Reef Credits to expand our work in this area,” Dr Crawford said.

“We also have close relationships with landholders in the region, developed during more than 15 years and built on a strong foundation of trust.

“This will help us introduce new earning opportunities through Reef Credits that could help them diversify and build resilience into their operations.”

Investors want tangible results, so accurate and reliable measurement is essential.

Project proponents need to be able to demonstrate with each project how many kilograms of Dissolved Inorganic Nitrogen (DIN) or how many tonnes of sediment has been prevented from reaching the Great Barrier Reef.

“Project sites, particularly gully remediation sites, will require ongoing management to ensure initial sediment loss reductions aren’t undone by land degradation,” Dr Crawford said.

“Payments will cease if an audit shows the benefit has gone.”

Dr Crawford said the system provided plenty of incentive to get landowners to take a long-term view.

“Expertise in monitoring and evaluation such as exists at NQ Dry Tropics will be essential to ensure value for money in investments in Reef Credits,” he said.

Dr Crawford said because of the risk involved, NQ Dry Tropics would be very unlikely to ever be a project proponent.

 “We’re cautious about taking on that risk, and we are also not planning to get involved with the trading side of the market for the same reason,” he said.

 “We are primarily looking at joint ventures with commercial organisations that need our skills and resourcing.

 “There are several carbon project developers operating in Australia, including in Northern Australia, and I expect many of them will become involved with Reef Credits.”

Dr Crawford said environmental markets, just like any market, would never generate income to fund less tangible – but no less important – projects such as capacity building, extension and education.

 “Reef Credits isn’t the silver bullet for every NRM problem or investment problem we have,” he said.

“Intangibles don’t deliver measurable reductions in nitrogen or sediment runoff, but the effectiveness of on-ground works relies on landholder education to effect long-term practice change.

“Our core business is around working with landowners and land managers to improve landscape sustainability and their resilience, and I believe governments will continue to play an important role funding this work.”

Dr Crawford said NQ Dry Tropics was also exploring other potential revenue streams including conservation finance and edutourism.

THE Reef Credit model is open source, meaning anybody can develop a project methodology.

All it needs is ratification from the Reef Credit secretariat.

NQ Dry Tropics CEO Dr Scott Crawford said the approval process was rigorous to ensure that the proposed methodology properly established a baseline measuring the amount of targeted pollutant – sediment or nutrient, for instance – and the amount by which the project has reduced the level of that pollutant.

Once approved, it would be added to the list of methodologies acknowledged by the Reef Credit Scheme and everybody could use it.

Three methodologies are under review:

  • nutrient reduction through fertiliser management;
  • wetlands nutrient reduction; and
  • gully remediation.

Dr Crawford said NQ Dry Tropics could be a neutral information broker, providing impartial advice to landholders around opportunities within the carbon market – but obviously not while operating commercially as, for example, a project developer.

“Until we get clarity on our role, we are looking at entering into a joint venture with a commercial carbon provider,” he said.

“We might organise information events, or provide project support services to graziers already participating in the scheme.

“This flexible fee-for-service arrangement would allow us to exit if we choose to go down a different path.”

Reef water quality is another valuable ecosystem service. In 2016, a Queensland Government Reef Water Quality Task Force-commissioned report put the cost of meeting 2050 water quality targets at approximately $8.2 billion.

With current levels of government funding falling well short of that, Dr Crawford hopes a new scheme designed to encourage landholder action to reduce pollutant runoff will attract significant additional investment.

“For the past two and a half years we have worked with environmental markets investor Green Collar, and Terrain NRM to develop the Reef Credit scheme,” he said.

“The idea is to create a market around preventing pollutants such as nitrogen and fine sediment from entering waterways and the Great Barrier Reef lagoon.

“Landholders and farmers will be able to undertake projects that deliver a quantified reduction in pollutants, generating Reef Credits that can then be purchased by potential investors.

“Qantas has come on board as a foundation corporate partner, and we hope to see the first Reef Credit project registered early next year.

“Other potential investors include the Queensland and Australian governments –  currently the primary purchasers of reef water quality outcomes – private companies through corporate social responsibility schemes, and philanthropists, in Australia and abroad.

“Reef Credits could also be purchased by industry to offset emissions.”

Dr Crawford said Reef Credits would be operated by an independent not-for profit company, but NQ Dry Tropics would not be involved with governance, allowing the organisation to operate commercially in the scheme without any conflict of interest.

Market-driven trading scheme

THERE are differences, but the basic architecture of the Reef Credit scheme is almost identical to carbon markets.

There is a standard setting out the rules and principles by which it operates.

Methodologies guide how projects are undertaken, and there’s a registry where Reef Credit transactions are recorded.

 The registry will be where potential buyers can explore the market, then deal directly with the project developer.

The value of a Reef Credit will be determined by the market.

Typically Reef Credit payments would be staged across 25 years and annual payments based on delivery of a pre-determined result.

Strathalbyn grazier Bristow Hughes looks at a water sample taken to test turbidity.

There are several opportunities for an NRM to be involved.

A key point to understand about carbon or reef credits, is that at the seller end there are three entities: the landowner, the project developer and the project proponent.

The proponent pays for any upfront project delivery costs, and also assumes the financial risk of ensuring the buyer gets the outcome for which they paid.

“In the carbon market, it’s common for an entity to be project developer and project proponent,” Dr Crawford said.

Typically, the landholder interested in hosting a project would not want to deal with the planning, monitoring and auditing involved.

Nor would they want to run the risk of the project failing. That’s the risk the proponent accepts.

“Project development and delivery is our bread and butter – and we are very good at it – so there is scope for us to take advantage of the additional opportunities under Reef Credits to expand our work in this area,” Dr Crawford said.

“We also have close relationship with landholders in the region, developed during more than 15 years and built on a strong foundation of trust.

“This will help us introduce new earning opportunities through Reef Credits that could help them diversify and build resilience into their operations.”

Investors want tangible results, so accurate and reliable measurement is essential. Project proponents need to be able to demonstrate with each project how many kilograms of Dissolved Inorganic Nitrogen or how many tonnes of sediment has been prevented from reaching the Great Barrier Reef.

“Project sites, particularly gully remediation sites, will require ongoing management to ensure that initial sediment loss reductions aren’t undone by land degradation,” Dr Crawford said.

“Payments will cease if an audit shows the benefit has gone.”

Dr Crawford said the system provided plenty of incentive to get landowners to take a long-term view.

“Expertise in monitoring and evaluation such as exists in NQ Dry Tropics will be essential to ensure value for money in investments in Reef Credits,” he said.

Dr Crawford said because of the risk involved, NQ Dry Tropics would be very unlikely to ever be a project proponent.

“We’re cautious about taking on that risk, and we are also not planning to get involved with the trading side of the market for the same reason,” he said.

“We are primarily looking at joint ventures with commercial organisations that need our skills and resourcing.

“There are several carbon project developers operating in Australia, including in Northern Australia, and I expect many of them will enter the Reef Credits space.”

Dr Crawford said environmental markets, just like any market, would never generate income to fund less tangible – but no less important – projects such as capacity building, extension and education.

“Reef Credits isn’t the silver bullet for every NRM problem or investment problem we have,” he said.

“Intangibles don’t deliver measurable reductions in nitrogen or sediment runoff, but the effectiveness of on-ground works relies on landholder education to effect long-term practice change.

“Our core business is around working with landowners and land managers to improve landscape sustainability and their resilience, and I believe governments will continue to play an important role funding this work.”

Dr Crawford said NQ Dry Tropics was also exploring other potential revenue streams including conservation finance and edutourism.

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