By Roger Frost
I am a landowner in Murchison with 140 hectares of reverting native forest who has participated in the Permanent Forest Sink Initiative (PFSI) and want to share my thoughts regarding insurance. This has been prompted after MAF published the recommendation after reviewing the PFSI of forming either a Government or private group carbon pooling insurance scheme.
Our experience as the owners of 140 hectares of regenerating indigenous forest under the PFSI, is that without a self-insurance scheme the benefits of entering into PFSI are largely illusory.
When we began selling carbon credits in 2005 (pre Kyoto) some 90% were traded. The remaining 10% of the credits were put aside for a EBEX21 group insurance purposes to cover the event that a participating forest owner's forest was destroyed (for example by fire) and it was necessary to repay the units that had been sold. This seemed eminently sensible.
In 2008 (start of Kyoto) we choose to enter the PFSI. By doing so it was brought to our attention the fact that the responsibility for insurance was now ours, there being no comparable scheme to that which covered the period pre-Kyoto.
When we began to explore commercial cover, three things became obvious: annual premiums were costly (2% of accumulated carbon liability), they would increase annually as liability accumulated and they would be needed in perpetuity.
When projected graphically, the line for increasing premiums intersected the curve for revenue from AAU's (using MAF's look-up tables for indigenous sequestration) after just 18 years or less. In the very long term, of course the accumulated costs of insurance would inevitable exceed the total revenue generated - and would impose an ongoing annual liability, yet with no further revenue.
Once we grasped the full implications of the situation we became seriously concerned.
With or without insurance cover, any AAU's we sell create a growing actual or potential liability, which will surely come back to claim its repayment when we sell the property.
Roger and his reverting native forest
But if we do not sell units then no one benefits at all.
Of course insurance is only one of the expenses that need to be provided for from the sale of units. Another is the cost of monitoring sequestration under the new MAF Field Measurement Approach for forests over 100ha.
MAF specialists tell us that in the event of a fire we would need to pay back the net loss of carbon, which excludes the approximately 40% below ground. This represents then perhaps the maximum amount of sequestration that one could afford to sell. What this amounts to in units, will only become clear once we have a site-specific sequestration table from the Field Measurement Approach. Needless to say the fluctuating price of Carbon units only adds additional uncertainty to any of the prospects.
For commercial forests in the PFSI the situation is somewhat different in that a stage is reached when harvesting that removes no more than 20% of the canopy cover is permitted. So ongoing revenue is available to meet ongoing liabilities and hopefully generate a profit. This is not an option for us, as it is prohibited by our QEII covenant.
So all in all we are left wondering what we are doing generating AAU's of which we may eventually be able to sell confidently very few. Self-insurance again seems eminently sensible and hence we would strongly recommend that the Government take urgent action to implement the recommendation of the MAF report. |
