think climate. think change.
Department of Climate Change
Australian Greenhouse Office, March 2005
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This Guide explains the legal issues that should be dealt with in agreements to sell carbon sequestration, and describes the different approaches State governments have taken in defining the right to own sequestered carbon. Taxation issues that apply to the purchase and sale of sequestered carbon are also discussed.
If parties enter into an agreement to sell sequestered carbon, the agreement becomes a legally binding document with associated legal ramifications. It is important for potential sellers and purchasers of sequestered carbon to fully understand the commodity they are selling/buying, and the conditions under which they are selling/buying it. This Guide provides a basis for understanding and discussing the legal issues involved.
Parties referring to this Guide and framework for a carbon sequestration sales contract (chapter 4) should obtain their own independent professional advice should they wish to prepare, or enter into, any sales agreement. Neither the AGO, its servants, agents or advisors accept any responsibility/ liability to any party by virtue of any loss suffered whether directly or indirectly as a result of reliance placed on this document. The contract framework is intended to serve only as a guide to some of the issues, which parties should consider when contemplating entering into an agreement of this nature. It is not intended to be a comprehensive summary of every issue, which may need to be considered.
As sequestered carbon is a relatively new commodity, with some unique characteristics, it has sometimes been difficult for buyers and sellers to access information on the legal issues to consider in drafting carbon sequestration sales contracts. Issues requiring consideration may include:
A key consideration for some purchasers will be the quality of the sequestration product (Kyoto consistent, long-term forest etc.). Sound legal arrangements can enhance the quality of the product and clearly establish ownership.
Purchasers who intend to use the sequestration as an emissions offset in a government program (eg. the Australian Government Greenhouse Friendly Certification Initiative or the, NSW Greenhouse Gas Abatement Scheme) may have particular interest in the quality of the sequestered carbon. Such programs have criteria, which may require participants to demonstrate their control and/or ownership of the sequestration offsets, and minimum quality standards for sequestration offsets.
Although Australia has chosen not to ratify the Kyoto Protocol, given the Australian Government's commitment to meeting the 108% Kyoto greenhouse gas emissions target, Kyoto consistency is still important in sequestered carbon projects. In assessing the eligibility of carbon sequestration projects for recognition as offsets in Australian programs, the Australian Government will apply Kyoto Protocol accounting methodologies and rules. State Government programs such as the NSW Greenhouse Gas Abatement Scheme use similar criteria to assess the eligibility of carbon sequestration projects. Further information on the international rules relevant to carbon sequestration projects is at Appendix A.
Trees and other plants take up carbon dioxide from the atmosphere as they grow. The carbon is stored in the leaves, branches, stem, bark and roots. This process is generally called carbon sequestration.
State governments have examined how to recognise the right to own sequestered carbon under Australia's property law. New South Wales, South Australia, Tasmania, Western Australia, and Victoria have introduced specific legislation recognising the right to own carbon sequestered from vegetation on a specific area of freehold land. Although the name of this right varies between the States, for convenience it is generally called a Carbon Sequestration Right (CSR) (see section 2.2).
Registering a CSR on the land title means it 'runs with the land' and can bind future landowners not to remove the forest. This provides legal protection to help ensure the longevity of the vegetation, particularly if the land is sold.
In the Australian Capital Territory and the Northern Territory, where there is no CSR specific legislation, or if State legislation does not apply (ie. on crown land in some States) it may only be possible to create a right to sequestered carbon as a personal right between two contracting parties. Such a right cannot be registered on the land title. It is also uncertain that such rights exist without supporting CSR specific legislation, as sequestered carbon is a unique form of property that does not fit neatly into Australia's general property law concepts. In these cases, alternative ways to establish ownership over sequestered carbon need to be explored. Section 2.3 discusses how sequestered carbon may be sold in such circumstances.
Legislation varies between States and only provides a basic framework for the creation and ownership of CSRs. This legislation recognises sequestered carbon as a property right that can be bought and sold, and that can be protected as an interest in land. However, State legislation does not deal with liability issues, the allocation of risk between the parties undertaking carbon sequestration activities, or the methodology to calculate or quantify the CSRs. These matters must all be dealt with in a contract between the parties.
The legal arrangements to establish ownership over sequestered carbon can be quite complex, particularly if State legislation does not exist, or it does not apply. These different factors should be taken into account in the drafting of individual CSR sales contracts.
CSR sales contracts may be directly between the landholder supplying sequestration and a purchaser, or between a landholder and a carbon pool manager1. Chapter four of this Guide gives a framework for a contract between a carbon supplier and carbon purchaser. This framework is loosely based on a contract style with the headings indicating the range of issues that should be considered in drafting an agreement to sell CSRs.
Issues range from those that are common to all contractual arrangements such as termination, dispute resolution, and warranties to those provisions specific to a CSR contract such as payment arrangements, establishment and management of vegetation, and carbon rights accounting.
CSRs have only recently emerged as a potential environmental service/commodity. It is expected that policies, regulations and legislation will be added to and changed over the next few years. If parties do enter into an agreement to sell CSRs, the agreement will be a legally binding document. All parties should seek legal advice before signing a CSR sales contract.
The tax implications of growing, and/or investing in carbon sinks vary depending on the nature of the investment, combined with individual circumstances. Chapter two outlines some of the federal taxation issues, in relation to the capital gains, income tax and goods and services provisions. This chapter provides examples of what tax treatment would apply in specific circumstances.
