Carbon farming legalities - A guide for landholders

Solicitor Georgina Lamond has been working in the carbon farming space for the last few years. Her firm, Moin Morris Schaefer, based in Armidale, New South Wales, has advised on carbon farming agreements Australia-wide. They've seen a big increase in the number of people seeking legal advice for carbon farming projects, even within the past year. Ms Lamond says that while it's growing in popularity, due to the length of carbon projects and the system's newness, many of the legal concerns have yet to be tested.

If you're considering carbon farming as a method of diversification on your property, there are two ways to approach it.

The more common method is to go through a carbon service provider. Service providers enter into commercial agreements with landholders to carry out the project and split the ACCUs.

The alternative is to manage the project yourself, which does result in 100% ownership of the ACCUs, but Ms Lamond says it's a difficult undertaking to do alone.

'Doing it on your own, you basically need to have your head around the legislation and the regulations to know what your obligations are, and as I understand it, the reporting obligations can be quite onerous,' Ms Lamond said.

For more information on the steps to take before starting a carbon project, see the Clean Energy Regulator's information here. This article's advice assumes that landholders are working with a carbon service provider to undertake a project.

It's vital to start with due diligence and research on both the project and the provider, particularly considering the length of the projects.

'One of the very unique things in a legal context is that the relationships are quite long term,' Ms Lamond said. 'So your relationship with a service provider, if you choose to go down that path, can be anywhere from 5 to 25 years, and your relationship with the Clean Energy Regulator is 25 to 100 years.'

One of the very unique things in a legal context is that the relationships are quite long term. So your relationship with a service provider ... can be anywhere from 5 to 25 years.

Knowing that you have the same philosophy and approach as the service provider will help reduce any bumps down the road. 'Once you're locked in, you're locked in for a long time.'

Each service provider has a preferred way of operating, and their agreements might have different terms from those of another company. Ms Lamond says transparency and communication are vital prior to signing anything to help build a contract that works for both parties.

The contract will outline where responsibility lies, which varies between service providers. The goal for a contract is to make sure it's a fair agreement, to balance the risk and liability and to ensure the agreement is commercially viable for and appealing to each party.

One important component of these agreements is to identify which of these parties will take on the role of 'project proponent'. 'The project proponent is the one who bears the most of the risk. They have the legal relationship with the regulator,' Ms Lamond said.

The structure between the landholder and service provider, as outlined in the contract, typically impacts how the service fees are paid by the landholder to the service provider and the ratio of the ACCUs split between the two parties. 'The more risk [service providers] take on, the more ACCUs and more fees they want.'

The agreement with the service provider will set out the obligations the landholder has to them, while the Carbon Farming Initiative Act sets out the obligations the landholder has to the Clean Energy Regulator.

Ms Lamond also recommends landholders pay attention to Intellectual Property, data access and data ownership when establishing the relationship and signing an agreement.

'We try to make sure that's explicitly covered in the agreements, so that farmers can rest assured that they own and have agency over any of the data that's extracted from their property.' she said. Having access to the data collected can help landowners make decisions on how to most efficiently manage their land.

Once a project is registered with the Clean Energy Regulator, with or without a project service provider, landholders have a legal obligation to manage the land in a way that is described in the Carbon Credits (Carbon Farming Initiative) Act and related legislation.

The risk once you're signed on to a project is if you fail to meet the requirements laid out by the Act. If there is a reversal of carbon sequestration, and the project has already been granted ACCUs, you may have to give them back.

'There are various provisions in the legislation for [the Clean Energy Regulator] to take different action, and they might give you a little bit of time to recover,' Ms Lamond said. 'If the land doesn't recover, they might ask you to hand [ACCUs] back.'

This can cause issues if a landholder has already sold their ACCUs, as they will need to acquire ACCUs on the open market in order to meet their obligations to the Regulator.

'We always recommend that clients retain a buffer of ACCUs in their ANREU [Australian National Registry of Emissions Units] account, so that in the event of a relinquishment notice being issued by the regulator, they've got some to hand back.'

We always recommend that clients retain a buffer of ACCUs in their ANREU account, so that in the event of a relinquishment notice being issued by the regulator, they've got some to hand back.

The other potential risk comes down to how a relinquishment is treated in the contract with your service provider. In other words, whether a provision has been made to ensure both landholders and service providers are responsible for relinquishing ACCUs in the same proportion they received them in the first instance.

'If you [the landholder] are only taking 85% at the outset, you don't want to give back 100% of the ACCUs that you need to relinquish, especially where the relinquishment is required through no fault of either party,' Ms Lamond said. 'You want the agreement to say we each give back in the proportions that we take.'

The legislation also provides for the regulator to require the relinquishment of ACCUs if someone has provided false or misleading information to the regulator, for example in completing offsets reporting.

The other scenario in which landholders would need to return ACCUs is if landholders decide to revoke the project entirely.

'If you get 10 years in and decide "this is all too hard, I actually want to manage the land completely differently, I have no interest in doing this anymore," you can go to the regulator and say, "We're done,"' Ms Lamond said. 'But they'll ask you to hand back every single ACCU that's been issued because an ACCU is like a promise to maintain the target in the soil, for example.'

Given projects are generally set in 25 year terms, Australia is yet to see any project reach its conclusion. The lack of precedent means that a lot of the future legal challenges are unknown. 'We're still really in the infancy of the legislation playing out, so we don't actually know [how it will play out],' Ms Lamond said.

Projects can last from 25 to 100 years - but what happens if you want to get out early? Planning for all foreseeable possibilities is ideal when first setting up the contract between landholder and service providers.

It's possible to leave a relationship with a service provider, and we always advocate for as much flexibility around termination as possible.

'It's possible to leave a relationship with a service provider, and we always advocate for as much flexibility around termination as possible,' Ms Lamond said. Service providers often prefer for landholders to be locked into a contract for 5 to 10 years, to start with. '[Service providers] put a lot of work in from the outset, and that work is based on the promise of being paid ACCUs upon first issuance, and in a soil carbon project, that's typically not until year 5 of the project.'

However, Ms Lamond says landholders should have flexibility around extricating themselves from an agreement should they be unhappy with a service provider's level of service or expertise.

Ultimately, it can be easier to leave a project prior to receiving any ACCUs, as once landholders have been issued ACCUs, they must be returned if the project is cancelled early. 'So that can be prohibitively expensive for landowners,' Ms Lamond said.

But what if landholders want to sell their property?

'All the agreements that I've seen include a provision that if you intend to sell a property, you need to let the service provider know, and you need to use your best endeavours to get the new landowner to agree to take on the same agreement with the service provider,' Ms Lamond said.

'In any event, a new landowner will be bound to carry on the project with the regulator because the project is registered on the land and runs with the land, not the land owner.'

A new landowner will be bound to carry on the project with the regulator because the project is registered on the land and runs with the land, not the land owner.

But so far, there isn't much precedent in Australian carbon projects changing hands, as most people who commit to carbon projects are also committed to staying on the land long term.

There's also limited precedent as to whether carbon projects could be seen as an asset or depreciation when selling land. However, the longer a carbon project is on the land, the slower ACCUs are issued, which may lead to properties decreasing in value for potential new owners who can't change management strategies in project sites.

'The later on in the project that you are, the fewer ACCUs you're going to be issued, as the sequestration tends to slow down,' Ms Lamond said.

Many of the legalities around Australia's carbon farming projects are still untested, which makes forecasting potential challenges difficult. However, as the industry grows, so too do the options available for farmers who might be considering diversifying their incomes.

From what was a limited sphere for carbon service providers, Ms Lamond says the industry is now booming, with providers innovating to attract clients and giving landholders more opportunities than ever to find a project and structure that works for them.