The price of Australian carbon credits sold by farmers has more than doubled this year, bringing deep-pocketed investors into the agricultural sector amid expectations that it will play a pivotal role in Australia’s ambitions to reach net zero by 2050.
As world leaders gather in Glasgow for COP26, data compiled by advisory house Jarden shows the spot price of Australian Carbon Credit Units (ACCUs) – offsets sold mostly to corporate emitters – has risen from just under $17 a unit to more than $35.
It’s a reflection of a global trend – the price of carbon hit €50 ($77) a metric tonne in Europe this year, up from €20 before the pandemic – and the renewed focus on reducing the impacts of climate change.
Jarden’s head of institutional commodities Michael Peters attributed some of the growth in ACCUs to the “Biden effect”.
“The US administration focusing on emissions, which is driving up demand is positive for carbon markets and overall a high price on emission reductions,” he said.
It’s this global shift that has caught the attention of sophisticated investors, according to veteran fund manager Tim Samway. In July, he closed the first raising for his $1.5 billion Packhorse Pastoral cattle station and carbon fund, which is backed by Rich Lister Terry Snow.
“When we do our investor presentations [for Packhorse Pastoral] all the questions they ask now are about carbon,” he told The Australian Financial Review.
“Before it was individual investors, now its family offices and high-end wealth management firms looking for non-correlated asset classes to invest in,” Mr Samway said.
Solid returns plus feel-good factor
“It’s much easier for family offices to get their heads around the investment and the good, solid long-term returns that will come from sustainable farming and through carbon credits [than institutional investors]. And they also get to feel good about how they are investing,” he said.
Mr Samway, chairman of $10 billion global equities fund manager Hyperion Asset Management, and Tom Strachan, founder of labour hire company AWX Group, launched Packhorse Pastoral in May with the goal of creating a two million-hectare cattle grazing “motel” that will also be one of the country’s biggest carbon farms through regenerative soil sequestration.
Mr Samway hopes to raise $1.5 billion over the next five years to fund acquisitions and investments in land regeneration and sustainable farming practices.
He said the federal government’s plan for achieving net zero by 2050 would push a lot of the heavy lifting to soil carbon sequestration, creating a “very substantial responsibility for businesses like Packhorse to deliver it in the millions of ACCUs”.
Soil carbon projects, which typically capture carbon through the planting of legumes in grazing paddocks, are one of six priority low-emissions technologies identified in the federal government’s long-term emissions reduction plan.
These projects are forecast to deliver 17 million tonnes of carbon offsets by 2050, generating $400 million in additional revenue for farmland owners. (Research house Fortune Insights forecasts the global carbon capture and sequestration market to almost quadruple to US$6.13 billion by 2027).
While the federal government still purchases more than 90 per cent of ACCUs issued through its Emissions Reduction Fund – it paid just $17 per unit, $116 million in total, at the latest October auction – growing demand from large corporate emitters has sent the spot price of ACCUs in the secondary market surging.
Accelerating global momentum
James Schulz, CEO of private equity-backed GreenCollar,which partners with farmers on developing and monetising carbon offsets and other environmental projects, said the rising price of carbon credits was due not just to constraints on supply but to a “huge amount of momentum accelerating globally to act on climate change”.
“If you look at any carbon market, demand is not just short term. It’s being driven by corporates looking to manage their medium to long-term position to meet their net zero targets, and even [in some cases] more ambitious negative zero targets.”
“It’s pretty unambiguous – there is no way of achieving that target without the involvement of the agricultural sector. It also spells enormous opportunities for the sector,” added Mr Schultz.
For farmers, he said it was no longer about debating whether climate change was real, but understanding the “enormous” value” in participating in carbon sequestration and other green initiatives around water quality and biodiversity.
“We know they are enormously valuable … now that we can price that value, we are getting real change in the way people think about investment in land.”
While the secondary “spot” market for carbon credits is still nascent, Mr Samway believes it will deepen and mature over time as momentum shifts to achieving net zero by 2050.
At the same time, rising demand from corporate emitters will lift ACCU prices even higher and bring big institutional investors into projects such as Packhorse, which aimsto deliver offsets at a scale not yet seen in Australia.
The fund’s first capital raising brought in $62.5 million to help acquire Stuart’s Creek, an 8360-hectare cattle station near Roma in south-western Queensland.
Based on carbon sequestration forecasts by land management specialists Carbon Link, Stuart Creek could generate $1.6 million in additional revenue across about 4000 hectares once the ACCU spot price hits $150.
“We want to get to 1 million hectares [undertaking sequestration], then we will be the largest organic soil project in the country,” Mr Samway said.
Even then, he reckons it will take 28 “Packhorses” to meet the government’s 2050 targets.