SINGAPORE (Reuters) - An Australian scheme to generate farm- and forest-linked carbon credits for sale to polluting firms will start slowly when it comes online later this year, as the government struggles to garner support for a national carbon price seen as crucial to the plan's long-term success.
The government aims for parliament to pass the Carbon Farming Initiative (CFI) in time for its expected start on July 1. Approval would usher in the world's first nationally legislated market for carbon credits from farm projects and be a boost for carbon forestry firms.
But for the scheme to succeed, analysts said, parliament would also have to pass matching laws that set a national price on carbon emissions from industry, to underpin demand from polluters.
"The government has not explicitly said this (the use of CFI offsets) will be included in any future carbon price. But the expectation is that it will," said Martijn Wilder, head of Baker & McKenzie's global environmental markets practice, who helped advise the government on the draft laws.
Big polluters could buy the offsets to meet mandatory emissions cuts, giving them another way to manage their carbon risks and drive investment in projects that cut greenhouse gas emissions.
Until that happens, the initiative will only serve a small voluntary market for offsets and limited international demand for offsets from forestry projects.
"While there's likely to be some demand from the voluntary market, I don't think we'll see large volumes of CFI offsets until we see carbon pricing legislation that confirms that they can be acquitted against mandatory carbon liabilities," Deutsche Bank carbon analyst Tim Jordan said.
A major risk is the struggle to win voter and industry support for laws that would usher in a fixed price on carbon emissions as early as July 2012. The fixed-price phase would last three to five years, before a switch to a floating price and emissions trading.
No price has been decided but the nation's top climate adviser suggests this could be between A$20 and A$30 a metric ton. A multi-party panel deciding the shape of the carbon pricing scheme has also not decided if CFI offsets could be included in the fixed-price phase.
Jordan expected that once Australia had a floating carbon price, CFI offsets would trade pretty close to the spot carbon price.
"Forest projects are likely to be the first to generate credits -- the methodologies are well established and there are several businesses ready to generate offsets as soon as the legislation is passed," he added.
The government sees the CFI as a crucial part of the fight against climate change. Agriculture, deforestation and burning emit more than 20 percent of Australia's greenhouse gases.
The scheme is also a way to reach out to the nation's influential farming community, which is strongly opposed to emissions trading and skeptical about climate change. CFI could become an important revenue stream for some farmers.
The potential volume of offsets is large, scientists say, if there's a high enough carbon price.
Projects backed by the CFI include tree plantations that soak up carbon dioxide as they grow, cutting methane emissions from burping livestock, reducing fertilizer use and boosting carbon in the soil through better cropping and grazing methods.
"Australia could be abating something in the order of 10 to 20 percent of its current emissions with a reasonably concerted effort," Michael Battaglia, of the state-funded research body the CSIRO, told Reuters.
"But there will be a lead-up period to achieve that, 5 to 20 years," said Battaglia, who leads a program studying how to cut greenhouse gas emissions from agriculture and use the land as a store for carbon.
Battaglia said reforestation could eventually generate significant numbers of offsets for A$10 to A$20 a metric ton.
That would make carbon plantation firms such as CO2 Group and Carbon Conscious potential winners.
"It elevates the role that carbon forestry can play as one of the legitimate options" to cut emissions and source offsets, said Andrew Grant, CEO of CO2 Group, the top carbon forestry player in Australia.
"Critically, we can attract offshore capital," he said. "For the first time for any investment in a carbon forest in Australia, the credits can be exported -- it's first time that as an Australian activity we can access international carbon markets."
The CFI allows projects covered under the U.N.'s Kyoto Protocol to be issued with Kyoto compliant credits that can be traded overseas. Buyers could include New Zealand and Japan.
The Greens, a political party that provides crucial support to the government, have called for a Senate Inquiry into the CFI, fearing that some types of projects could flood the market with offsets. The party, while not opposed to the scheme, wants a deeper analysis of the numbers.
The government says it is working on estimates on the potential flow of offsets but dismisses fears that some types of projects could flood the market.
"To actually do an offset project requires a significant amount of investment, it requires taking on legal liability, long-term monitoring," said Wilder. "It's not a simple thing, so there's very limited risk that the market will become flooded."
Farmers also need more time to be convinced. While forestry projects are well understood, steps that try to lock away more carbon in the soil are still being developed and there are no rules governing them under the CFI as yet.
Farmers are aware of the developing science of locking away more carbon in the soil but the methods and costs are still unclear, said farming consultant Sandy Biddulph from the New South Wales town of Cootamundra.
"No one is really paying close attention to it in the mainstream at this stage," he told Reuters during a recent visit to the fertile cropping and grazing town.
(Editing by Himani Sarkar)