Independent Review of Australian Carbon Credit Units: Call for submissions

Submission coversheet
Feedback: ACCU Review - 3 October 2022

Contact details
Name of organisation The Pew Charitable Trusts

Contact person Jen Barwick

Phone number O413 512 745

Email jbarwick@pewtrusts.org

Do you want this submission to be treated as confidential? Yes No X

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3 October 2022

ACCU Review Secretariat
Department of Climate Change, Energy, the Environment and Water
By email: ACCUReview@dcceew.gov.au

To whom it may concern,

RE: Feedback on Review of Australian Carbon Credit Units

Thank you for the opportunity to provide comments as part of the Independent Review of Australian
Carbon Credit Units.

The Pew Charitable Trusts is a global non-partisan research and public policy organisation, dedicated to serving the public through evidence-based advocacy. In Australia, we work with Traditional
Owners, local communities, landholders, industry, and policy makers to promote conservation and sustainable management of our landscapes and the marine environment.

Pew is a member of the Carbon Market Institute, and our efforts to engage with and support the growth of a carbon market – as a wholly independent and non-commercial actor – is based on the belief that some carbon farming activities will deliver increased land restoration and conservation, as well as help generate improved economic, cultural and social benefits across regional Australia.

As part of our response, we are including a new paper we have supported that explores the sequestration potential and broader benefits of expanding carbon into Australia’s Outback regions.
We also outline other core issues in the following summary that we believe are critical to ensure integrity and build trust in a carbon market, expand genuine conservation outcomes and grow uptake of carbon farming.

Finally, The Pew Charitable Trusts believes carbon credits are no substitute for cutting emissions directly. In all possible ways, the Australian Government should be creating policies and directing public funding to projects that use carbon credits as a last resort, and only after credible evidence that every effort is made to reduce direct emissions and mitigate future emissions.

We look forward to further contributing and engaging with the Government as the Australian carbon market matures and evolves.

Yours sincerely,

Tim Nicol Jennifer Barwick
Deputy Director - Terrestrial and Rivers National Nature and Climate Co-ordinator
The Pew Charitable Trusts The Pew Charitable Trusts

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The Pew Charitable Trusts feedback
Introduction

In 2011, Ross Garnaut, as part of the Garnaut Review, acknowledged the importance of the
Rangelands in Australia’s response to climate change.

He cited CSIRO figures which estimated that rehabilitating 200 million hectares of overgrazed rangelands could have a technical potential to sequester 100 million tonnes per year of carbon dioxide equivalent between 2010 and 2050.

Garnaut believed: “The most likely way in which rangelands will be rehabilitated is through reducing grazing intensity. Other possible ways to rehabilitate rangelands and increase carbon levels include introducing or re-establishing shrubs such as saltbush, tagasaste or other perennial shrubs, and fire management.”

Over the past 18 months, The Pew Charitable Trusts has supported the University of South Australia to undertake research to investigate the potential of carbon farming, if method/s were expanded to better target the restoration and protection of the vast savannas, sparse forest, and perennial shrub landscapes of Outback Australia.

The subsequent report, Carbon emissions abatement as an opportunity for outback land conservation and regional development, (the report) is attached as part of this submission.

The report solidifies the substantial potential for additional and economically viable C02 abatement that could result from increased carbon farming and improved land conservation within Outback
Australia. Better enabling the carbon farming potential for this unique region will also deliver considerable co-benefits above and beyond the value of emissions abatement.

Summary of Carbon in the Outback report
The key findings of the report are:
● There is an estimated economically viable carbon sequestration potential – under the
current Human Induced Regeneration method – to sequester 377.2 million tonnes of
CO2e over 25 years – purely in the Outback region of Australia, at the most recent ERF
auction price of $17/tonne CO2e.
● Expanding the sequestration potential to sub-forest landscapes in the Outback
(currently proposed under the Integrated Farm Management method, though not
currently eligible) would provide the potential for an additional 129.5 Mt CO2e
sequestration over 25 years at $17/tonne CO2e.

● This combined and conservative estimated potential of forest and sub-forest areas in
Outback Australia is more than 3 times the 179 Mt CO2e expected over the life of
already contracted ERF vegetation method projects.

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● By enabling the carbon sequestration of forest and sub-forest areas of Outback
Australia, there is potential for large scale restoration and revegetation of unique
Outback ecosystems and the delivery of multiple environmental, cultural and economic
co-benefits to regional and rural Australian communities.
Based on these findings, and to help unlock this potential, the paper has identified the following recommendations:

 Support the inclusion of: (a) project stacking, (b) expanding to include the broader
canopy approach to include sub-forest vegetation, (c) development of additional
environmental benefit measures, and (d) reference sites for monitoring in transition to
new Integrated Farm Management Method
 Establish a formal Outback Carbon Network to support state and stakeholder
development of innovation and best practice in land sector carbon and environmental
service markets.
 Support an Outback carbon and environmental services pilot to develop and test
protocols for equitable high integrity carbon, environmental and social co-benefits.

These recommendations are explained further in the attached paper. In addition to the paper, we make further recommendations that will ensure integrity, build trust, expand genuine conservation outcomes and grow uptake of carbon farming.

Improved Transparency
Transparency of data and decision-making is crucial. We believe efforts to increase transparency and data sharing will improve confidence in the integrity of carbon farming projects, build trust and improve the ability of all interested players to participate.

There are multiple actions related to transparency that should be considered. They include:

 Ensure access to data on carbon projects and methods, in a way that still protects the
privacy of individual land managers, for the public, NGOs and academics. Also, the
disclosure provisions under the Clean Energy Regulator Act should be reviewed.
 There should be clear reporting and access to data where public money is used to
purchase carbon credits, or when ACCUs are used by businesses to make public claims
around carbon neutrality.

Independent Governance
There are significant improvements that need to be made to the current governance arrangements and administration of the Clean Energy Regulator (CER) and the related Carbon Credits (Carbon
Farming Initiative) Act 2011 (CFI).

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This includes:
 Clear structural independence between the administration of the scheme and the
method development, project accreditation and auditing and market functions.
 A review of the current membership of the Emissions Reduction Assurance Committee
(ERAC), to ensure it is independent. This means creating safeguards against actual or
perceived political stacking of committee appointments. Also ensuring better use of
experts of academia, industry and NGOs.
 Limiting ministerial discretion in decision making.

Improved Capacity Building and Access to Independent Advice
The provision of and access to independent, informed and professional advice and services needs significant investment and resourcing. In particular, the limited ability to source independent advice or resources is impeding equitable access, particularly for small to medium land-owners or managers, as well as Indigenous land owners and managers.

It is also undermining carbon farming processes, such as Eligible Interest Holder consent. Based on discussions with project owners and developers, it seems there are several registered carbon projects at risk of being revoked, particularly in Western Australia, as a result of failing to obtain
Native Title Holder consent.

Ongoing concerns and barriers for EIH consent have significant ramifications for an industry already addressing concerns related to integrity. The revoking of these projects due to failure to achieve consent will cost project holders, see significant loss of carbon sequestration opportunities and further undermine relationships between landholders, native title bodies and the carbon industry. It will also continue to significantly delay and add further risk to the national uptake of carbon farming across the Rangelands, if not addressed.

There are multiple actions related to capacity building and independent advice that should be considered. They include:

 Standardised templates should be developed by the CER, in consultation with key
stakeholders, and made available to all parties – outlining key best-practice standards,
consent and contract examples/arrangements.
 An independent service that offers contract advice and reviews and contract
mediation for all land-owners or managers should be funded and staffed, under the
Australian Government’s Carbon Farming Initiative.
o An example, of a similar service (though with a different focus) worth
considering is the South Australian Farm Debt Mediation service. This service
provides an important safety-net for farmers and a source of informed and
independent advice, often during periods of high stress or financial difficulties.
o In South Australia, Farm Debt Mediation provides obligations for creditors and
rights for farmers under the Farm Debt Mediation Act 2018 (the Act). Mediation

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is provided through the Office of the South Australian Small Business
Commissioner, for a small fee.
o There are two types of mediation available under the Act:
▪ Farmer initiated mediation - where a farmer takes the initiative to
request mediation with their creditor, whether the farmer is in default
or not.
▪ Creditor initiated mediation - where a creditor who wishes to enforce a
farm mortgage in default, must issue a notice as required by section 8 of
the Farm Debt Mediation Act 2018, advising the farmer that the farmer
is entitled to request mediation within 21 days.

Cross-Jurisdiction discussions and consistency
Around 55 per cent of Outback Australia is classified as Pastoral Leasehold and often subject to different state-based legislative and regulatory requirements, which limit the length of the lease period and types of activities allowed under the lease agreement.

Some states have developed specific policies and processes to enable carbon farming on pastoral leases. Western Australia currently limits carbon farming activities on their pastoral leases to
Human Induced Regeneration (HIR) carbon method.

Other states, like South Australia and Northern Territory, are yet to clearly define how carbon projects can be undertaken on pastoral leases in their states. Until these policy constraints are addressed, pastoral leaseholders in these states face additional and significant barriers that add time, cost and risk to any carbon project consideration.

Pew believes improved cross-jurisdiction consultation and communication, led by the Australian
Government, would help to drive consistency across policy processes and encourage shared learnings; and greater exploration and uptake of carbon farming across Australia.

To achieve this, we recommends that.

 A national Climate Change Ministerial Forum be established, similar to the
Environment Ministers’ or Agriculture Ministers’ Meetings. Reducing barriers for
carbon farming, as well as other critical climate change policies, could become key
agenda items for the forum.

Expanded Insetting of ACCUs
Expanding opportunities to measure and account for (or inset) farm-based emission reduction and carbon sequestration activities against a farm’s emissions could increase carbon farming participation and support long-term genuine emission reduction across the agriculture sector.
Insetting emissions will be a critical and increasingly important option for those land-owners, managers and farming businesses needing to demonstrate their emission reduction efforts to access future markets or even finance. To unlock this opportunity, the farming sector needs access to independent information and resources to calculate and baseline farm emissions.
It also needs a way to measure and demonstrate emission reduction or sequestration activities occurring on farms that will deliver certified carbon neutrality. Currently, there is no carbon neutral standard in Australia – including the Australian Government’s carbon neutral certification standard,

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Climate Active, that allows land managers to “inset” their carbon i.e. to account the sequestration that occurs on their lands (i.e. internally offset against their own operational emissions). It does, however, allow other companies to count carbon offsets.
The World Resources Institute (WRI) and the World Business Council for Sustainable Development
(WBCSD), as part of its Greenhouse Gas Protocol Initiative, is in the process of piloting new Land Sector and Removals Guidance, which sets the requirements for companies to account for and report GHG emissions and removals from land management, land use change, biogenic products, carbon dioxide removal technologies, and related activities in GHG inventories.
To unlock this opportunity we recommend that:
• The farming sector is given access to independent information, resources and support to
calculate and baseline emissions on farms.
• The Australian Government or Climate Active consult with the Australian organisations
helping pilot this protocol – including Bush Heritage Australia and the Mullion Group - in an
effort to identify options that will allow land owners or managers to account both
organisational emissions and sequestration and where evident claim “neutrality”. We
believe this could incentivise conservation and restoration of remnant vegetation across
private and public lands. Some tenure protection of these sequestration areas may be
warranted (like carbon projects).

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Carbon emissions abatement as an opportunity for outback land conservation
and regional development
Research report prepared for
The Pew Charitable Trusts
7/241 Adelaide St
Brisbane Club Tower
Brisbane
QLD, 4000, Australia

Authors
Jeffery D. Connor, Ph.D
Professor, UniSA Business
Jeff.Connor@unisa.edu.au
David M. Summers, Ph.D.
Research Fellow, UniSA Business
David.Summers@unisa.edu.au

Courtney M. Regan, Ph.D.
Research Fellow, UniSA Business
Courtney.Regan@unisa.edu.au

Yuan Gao
PhD Candidate, UniSA Business

Jennifer Barwick,
Nature and Climate Coordinator,
Pew Charitable Trusts jbarwick@pewtrusts.org
Contents
List of Figures 5

Executive Summary 7

Introduction 7

Key findings 8

Challenges to realising latent potentials 9

1. Introduction 10

Outback Australia 10

Outback latent land sector abatement potential 14

Report objectives and structure 15

Report content overview 16

2. Background 16

Land sector carbon abatement globally 16

Land sector carbon abatement in Australia 16

ERF Methodology Rules 18

Permanence 18

Provisions for reversal of sequestration 19

Forest and eligible areas 19

Crediting period 20

Prospects for More Outback Land Sector Carbon Abatement 20

3. Assessment of potential for Outback carbon emissions abatement 22

Background to assessment 22

Methods and data 23

Assessing eligibility 23

Carbon estimates 25
Economic modelling 26

Results 26

Eligible areas 26

Total carbon 26

Economics of carbon sequestration 27

Forest HIR 28

Sub-Forest HIR 31

4. Environmental, social and economic benefits from Outback carbon and conservation investment 33

HIR Outback carbon storage and investment potential by State 33

Regional economic benefits 35

Environmental and natural capital co-benefits 36

Summary, Conclusions and Recommendations 37

Report motivation 37

Key findings 38

Human-induced regeneration 38

Interpretation of findings 38

Recommendations 39

1. Support the inclusion of: (a) project stacking, (b) the canopy approach, (c) development of
additional environmental benefit measures, and (d) reference sites for monitoring in transition to
new Integrated Farm Management Method 39

2. Establish a formal Outback Carbon Network to support state and stakeholder development of
innovation and best practice in land sector carbon and environmental service markets. 41

3. Support an Outback carbon and environmental services pilot to develop and test protocols for
equitable high integrity carbon, environmental and social co-benefits. 42

Appendix 44

Eligible areas 44
Forest HIR eligibility 44

Sub-forest HIR eligibility 44

Economic Model 45

Opportunity Costs 46

Costs Associated With HIR 47

Spatial analysis 47

References 48

List of Figures
Figure 1: Outback Australia study area showing mean average annual rainfall (BoM, 2020).................... 12

Figure 2: Percentage of all Australian Commonwealth Emissions Reduction Fund Carbon Credits issued, to September 2022 by method – source: Clean Energy Regulator (2022d) ............................................... 17

Figure 3: locations of Australian Commonwealth Emissions Reduction Projects by Method .................... 18

Figure 4: Spot price trends for Australian Carbon Credit Units ((Clean Energy Regulator, 2022b; Jarden,
2022)) .......................................................................................................................................................... 21

Figure 5: Eligible areas under the Forest HIR and Sub-forest HIR suitability classification across the
Outback Carbon study area. ....................................................................................................................... 25

Figure 6: Total abatement available over the 25-year crediting period under Forest HIR and Sub-forest
HIR modelled using FullCAM over 25-year and 100-year permanence periods. ........................................ 27

Figure 7: Marginal abatement cost curve for carbon sequestration under the 25-year permanence period for areas that are eligible under the current HIR eligibility criteria. ........................................................... 29

Figure 8: Marginal abatement cost curve for carbon sequestration under the 100-year permanence period for areas that are eligible under the current HIR eligibility criteria. ............................................... 29

Figure 9: Map of Outback Carbon study area showing forest HIR eligible areas and the minimum carbon price ($/tCO2e) at which the carbon becomes commercially viable under 25-year permanence............. 30

Figure 10: Map of Outback Carbon study area showing forest HIR eligible areas and the minimum carbon price ($/tCO2e) at which the carbon becomes economically viable under 100-year permanence. .......... 31
Figure 11: Marginal abatement cost curve for carbon sequestration under the 25-year permanence period for Sub-forest HIR areas (i.e., areas that are not likely to achieve 20% canopy cover). ................. 31

Figure 12: Marginal abatement cost curve for carbon sequestration under the 100-year permanence period for Sub-forest HIR areas (i.e., areas that are not likely to achieve 20% canopy cover). ................. 32

Figure 13: Map of Outback Carbon study area showing sub-forest HIR eligible areas and the minimum carbon price ($/tCO2e) at which the abatement becomes economically viable under 25-year permanence. ............................................................................................................................................... 33

Figure 14: Map of Outback Carbon study site showing sub-forest HIR eligible areas and the minimum carbon price ($/tCO2e) at which the abatement becomes economically viable under 100-year permanence. ............................................................................................................................................... 33

Figure 15: Carbon abatement potential across Outback Australia by state for three carbon price points under the current HIR eligibility criteria (NSW not shown due to small totals, less than 10 Mt CO2e at all price points) ................................................................................................................................................ 34

Figure 16: Potential annual investment in carbon emissions offsets across Outback Australia by state for three carbon price points (NSW not shown due to small totals, less than AUD 30 million/year at all price points) ......................................................................................................................................................... 35
Executive Summary
Introduction
There are many potential benefits from renewed effort to restore and protect the vast savannas, sparse forests, and perennial shrub landscapes of Outback Australia. The most immediate opportunity arises from the substantial potential for additional and economically viable C02 abatement that would result from increased land conservation within Outback Australia. Increased land conservation within Outback
Australia also has the potential to produce considerable natural capital and environmental co-benefits above and beyond the value of emissions abatement. Potential co-benefits of conservation, in addition to carbon abatement, include improvements in biodiversity, soil fertility, water quality, biological pest protection, pollination, flood control, reduced salinity and erosion damages, to name a few. A key economic co-benefit for participating landholders producing carbon credits is the financial resilience that carbon markets allow. Income diversification and reinvestment can improve economic resilience to climate change, as well as other market and environmental fluctuations. Furthermore, social benefits can also be realised with opportunities for Indigenous participation and management. Participation can be highly aligned with cultural and social goals to preserve and improve country and can provide employment, training and income benefits for Aboriginal people. This is a particularly salient point given that most of the land in the Outback Australia is under some form of native title.

Land management actions that sequester carbon and reduce emissions have played a key role in
Australian climate policy, to date, especially through the Commonwealth Government’s Emissions
Reduction Fund (ERF). The ERF is designed to incentivise carbon abatement by issuing and buying carbon credits in auctions in an effort to meet Australian emissions reductions targets and supply voluntary and compliance carbon markets. While the scheme operates across many sectors including: transport, building energy efficiency, and landfill emissions, 82% of all contracted abatement from the ERF to date has been from methods related to land sector carbon storage, namely vegetation (69%), agriculture (7%) and savanna burning (6%). To date, most vegetation projects have been undertaken in areas that border the extensively modified agricultural lands of the eastern seaboard and the south-west of the country. In contrast, there are extensive areas of Outback Australia, defined here as the relatively intact bioregions of northern, central and western Australia, excluding the more intensively modified bioregions of the south-east and far south-west, where there has been minimal uptake.

This report challenges the common perception that because little land sector carbon abatement is likely on a per hectare basis from Outback Australia, these landscapes are poor candidates for inclusion in ERF
land sector carbon offset schemes. Original research is presented that estimates total abatement potential, and economically feasible potential, at recent carbon market prices. We focus on the one land sector method that has been the source of most carbon credits in Outback Australia, to date, namely the
Human-Induced Regeneration (HIR) ERF method. We estimate latent and economic potential within current definitions of the HIR method that regenerated vegetation must meet a minimum technical definition of forest. Specifically, that all vegetation has the potential to achieve at least 20% forest crown cover and a mature height of two metres. However, with the adoption of the Paris Agreement by
Australia, the national reporting requirements for woody vegetation have been expanded to include areas previously excluded under the Kyoto Protocol. Therefore, we also examine the same latent and economic potential under expanded eligibility assumptions to include areas that do not meet these minimum forest definitions but may still provide considerable abatement potential. For example, vegetation types such as open woodlands and shrubland that do not meet the technical definition of forest but would still provide considerable carbon abatement potential, albeit less carbon per hectare.
This expanded eligibility criteria is currently being considered by the Commonwealth Government’s
Clean Energy Regulator as part of a proposed new whole-of-farm carbon abatement method, called the
Integrated Farm Management method.

Key findings
We estimate that there is a total potential for 377 million tonnes of additional carbon sequestration (Mt
CO2e) over 25 years at the most recent ERF auction price of $17/tonne CO2e for areas of Outback
Australia currently eligible to participate in the HIR method. This is more than six times the amount of sequestration expected to result from all Australian vegetation projects approved under the ERF HIR method to date.

Substantially more potential for Outback land sector carbon abatement would be possible if HIR applicable activities could be implemented in areas that do not have the potential to meet the current minimum crown cover and mature height restrictions under the forest definition. We estimate that expanding eligibility to include these additional areas could increase total viable abatement potential for regeneration projects by up to 129.5 Mt CO2e at the recent ERF auction price $17/tonne, assuming a 25- year permanence period. This means that estimated additional carbon storage potential for all Outback
Australia (including areas with potential for less than 20% forest cover potential) that could be economically viable at $17/tonne CO2e is almost three times the 179 Mt CO2e expected over the life of all land sector ERF HIR carbon abatement contracted at the time that this report was drafted.
Realising more Outback Australian carbon abatement potential can produce considerable co-benefits above and beyond the value of emissions abatement including improvement in biodiversity, soil fertility, water quality, biological pest protection, pollination, and reduced salinity and erosion damages, to name a few. Renumeration from carbon market can also be a key economic co-benefit for participating landholders who can benefit from the financial resilience carbon payments can provide to climate vulnerable farm operations. When management is by Aboriginal operated entities, participation can be highly aligned with cultural and social goals to preserve and improve country and to produce particularly significant employment, training and income and regional development benefits.

Challenges to realising latent potentials
Not all latent potential identified in these estimates is likely to be realised given some significant barriers to participation in land sector abatement projects. One barrier is that many areas of Outback Australia that are eligible for ERF participation are pastoral leaseholds subject to additional, and often different, state legislative and regulatory requirements which limit the length of the lease period and types of activities allowed under the lease agreement. Some states have developed specific policies and processes to enable HIR carbon farming on pastoral leases, such as Western Australia. Other states like
South Australia and Northern Territory are yet to clearly define how carbon projects can be undertaken on pastoral leases in their states. Until these policy constraints are addressed, pastoral leaseholders face additional and significant barriers that add time, cost and risk to any carbon project consideration.

Another key determinant for growing more Outback land sector carbon projects in the future is the market price for carbon credits. Prices in both the Australian compliance (ERF) and voluntary carbon credit markets vary over time (Figure 4). A gradual upward trend to the end of 2022 was partially the result of greater emissions reductions commitments globally leading to increasingly binding constraints in compliance and voluntary markets. However, significant ups and downs, are evident in Australia and most global carbon markets primarily influenced by ongoing regulatory changes which remain likely and a risk for investors in offset projects.

Other barriers identified in a landholder survey as significant impediments to uptake include: risk of rule changes, future carbon price uncertainty, third party consents, permanence requirements, poor understanding of carbon market opportunities, the scope and complexity of methods, and lack of trust in information providers (MacIntosh et al., 2020).
Finally concerns about how insufficient integrity protection with potential for over-crediting could impede market development have been expressed by former scheme integrity assurance commissioner and ANU Professor Andrew MacIntosh (MacIntosh et al., 2022) and a number of academic experts. In response to these concerns, the Australian Government has now established an independent expert panel led by former Chief Scientist, Professor Ian Chubb AC (the Chubb review). Terms of reference focus on the integrity of ACCUs, including governance arrangements, and the broader impacts of activities incentivised under the ACCU arrangements.

The quality and pace of improvements to the governance, technical assessment and risk management, and outreach efforts that underpin the ERF, that hopefully take place in response to Chubb review, will be another important determinant of practice uptake, credit market value and integrity of credits. This report provides insights that could be valuable to the Chubb review. These recommendations include options to update and improve ERF governance and the technical measurement rules in ways that strengthen robustness and transparency of abatement risk assessment and management. Ultimately, the Chubb review and the development of a new Integrated Farm Management method represent key opportunities to improve integrity, expand supply, realise more landholder and regional economic benefit and realise more complementary environmental and social benefits.

1. Introduction
Outback Australia
Outback Australia covers an extensive area incorporating a range of climates and biomes ranging from tropical grasslands, savanna and shrublands in the north to deserts and arid shrublands in the south
(Department of Agriculture, 2021). Often called the Australian Rangelands, the area is defined here as the relatively intact bioregions of north, central and west Australia, excluding the more intensively modified bioregions of the south-east and far south-west, the area covers approximately 72% of the
Australian continent (approximately 5.55 million km2). Despite their extensive geographic area, the rangelands account for less than two per cent of the total national population of Australia. In contrast,
Indigenous people make up more than 27% of the population within the rangelands despite accounting for just under three per cent of the national population (Foran et al., 2019).

Outback Australia can be divided into the northern rangelands which is characterised by a monsoonal climate and tropical savanna, and southern rangelands which is characterised by arid and semi-arid
climates with much more sparse vegetation types (open woodlands, shrublands, grasslands) and deserts. The border between the two regions can be loosely defined as the 600 mm isohyet (Figure 1).

The climate in the northern region is monsoonal with mean average rainfall as high as 2000 mm along some coastal areas and declining steadily inland (Figure 1). Vegetation across the tropical north comprises open woodlands (<10% cover) dominated by eucalyptus in the lower rainfall areas giving over to woodlands (10-30% cover) and open forests (30-70% cover) in the higher rainfall areas. The landscape is also comprised of lesser components of the savanna matrix including grasslands, shrublands and closed canopy rainforests and dense riparian vegetation boarded by open floodplains (Fox et al., 2001;
Russell-Smith and Sangha, 2018).

Australia’s northern rangelands are of international and national significance. They represent the largest remaining expanse of tropical savanna in the world (~25%) and the most pristine in terms of biodiversity and ecological condition with the most intact expanse. These biomes once covered about 12% of the earth’s terrestrial surface but have been in decline since the early to mid 20th century due to clearing, grazing and cultivation, with fragmentation of habitat and loss of biodiversity particularly pronounced
(Woinarski et al., 2020). Furthermore, compared to the other more highly cultivated and developed regions of Australia, these northern savannas are little modified. Nonetheless, significant problems in terms of degraded vegetation communities, loss of ecological function and invasive species are persistent problems (Russell-Smith and Sangha, 2018; Woinarski et al., 2020).

The southern region is characterised by semi-arid and arid conditions with highly variable rainfall ranging from 500 mm around the outer areas to less than 200 mm in the central south-east (Figure 1).
Vegetation communities across this the southern rangelands are dominated by woodlands (10-30% cover), open woodlands (<10% cover) and shrublands of mostly acacia, and to a lesser extent, eucalyptus species. There are also large areas of chenopod and samphire shrublands, hummock and tussock grasslands and limited areas of Mallee woodlands, open woodlands and shrublands (Hacker and
McDonald, 2021).
Figure 1: Outback Australia study area showing mean average annual rainfall (BoM, 2020)

There is significant heterogeneity across the region with respect to soils, vegetation and climate which drives productivity and pastoral activity. Across the more productive areas, pastoralism has been practiced for more than 100 years (Hacker and McDonald, 2021). Similarly, the ecological condition across the southern rangelands is highly variable and heavily influenced by landscape alteration from the impacts of pastoralism due to grazing by domestic stock, weed infestations and feral animal grazing.
Nonetheless, there is considerable biodiversity value in the region and conservation areas (national parks and managed or protected areas ) account for 29% of the current land use (Foran et al., 2019).

Across much of the southern parts of outback Australia the combination of very low rainfall and typically shallow poor-quality soils mean that these areas are unlikely to be able to support vegetation that meets the definition of forest cover that is currently required under any of the ERF vegetation methodologies (Hacker and McDonald, 2021; Regan et al., 2020; World Bank, 2021). Indeed, current vegetation types across these areas are dominated by open grasslands, open woodlands and open shrubland which do not meet the current definition of forest meeting a minimum 20% cover but have critical ecological roles in the landscape and can benefit from restoration activities.
Land use across Outback Australia is dominated by pastoralism with approximately half the area (55%) held in long term pastoral leases of various types and used to graze animals on native vegetation. For comparison, land uses including conservation, mining and defence make up just over 10% of the total land area (Foran et al., 2019). However, despite the extensive land areas involved in pastoralism, the economies of rangeland communities have become increasingly reliant on other industries, particularly mining, tourism, defence and communications (Fargher et al., 2003). Indeed, within the rangelands, pastoralism ($5 bn) generates approximately 2% of the economic activity compared to mining (between
$172 and 268 bn) (Foran et al., 2019).

Persistent challenges in financial and environmental sustainability of pastoral production have led to calls for fundamental land sector change over the last several decades (Commonwealth of Australia,
1999; Fargher et al., 2003; Foran et al., 2019; Russell-Smith and Sangha, 2018). The suitability of much of the rangelands for pastoral production has been questioned for some time. Low soil fertility and sparse vegetation in combination with relatively high stocking rates have resulted in persistent land degradation including six major degradation events over the last century (McKeon et al., 2004).
Numerous recent assessments question the financial performance of pastoral enterprises and highlight the relatively low resilience of existing production systems. High exposure to climate and market variability are particularly important and land managers often have little capacity to respond within the physical and financial limits of pastoral enterprises (Baumber et al., 2020; Hacker and McDonald, 2021;
Stafford Smith et al., 2007). Furthermore, extensive and prolonged pastoral activity has seen extensive environmental damage including loss of biodiversity and habitat, and extensive land degradation such as soil erosion and reduced water quality (Hacker and McDonald, 2021).

In the face of these challenges, a number of regional assessments suggest the need for conservation land uses and improved land care to provide climate change mitigation, biodiversity, and cultural heritage conservation in ways that improve economic, social, cultural and environmental sustainability
(Foran et al., 2019; Hacker and McDonald, 2021; Russell-Smith et al., 2018). Carbon farming has been highlighted as one option that has the potential to provide triple bottom line outcomes that address these issues. The economic benefits of carbon farming are focused on increased and more diverse income streams providing more capital for further investment, labour hire and flow-on benefits for surrounding communities (Baumber et al., 2020; Cowie et al., 2019; Crossman et al., 2011a; Evans et al.,
2015). Carbon farming is also seen as providing cultural and social benefits ranging from improved mental health and community resilience, greater social licence to operate and enhanced cultural
connection to land with improved community development opportunities for Indigenous communities
(Baumber et al., 2020; Foran et al., 2019; Jackson et al., 2017). The potential environmental benefits include ecological enhancements such as improved biodiversity and habitat provision as well as reduced land degradation through improved soil health (e.g. better structure and water holding capacity, and reduced erosion) and improved water quality (Baumber et al., 2019; Baumber et al., 2020; Cross et al.,
2019). All of these benefits will improve resilience of the landscape to environmental disturbances and the impacts of climate change.

The rangelands are very important for Indigenous people in Australia who have long traditions of deep connection to the land. The proportionally large Indigenous population within the rangelands is significant relative to other parts of the country and many communities retain significant cultural and spiritual connection to the land and the environment. Over recent decades, Indigenous communities have progressively gained different forms of tenure over their lands which now account for more than
50% of the total rangeland area, in many cases overlapping with pastoral, conservation and mining tenures, but also including significant areas under exclusive native title (Foran et al., 2019). These changes have substantially increased the area of land that Indigenous people have responsibility for, either sole or shared, although non-Indigenous pastoral interests still control and use the majority of productive rangeland with regard to livestock grazing and management (Foran et al., 2019; Russell-
Smith and Sangha, 2019). A shift to regeneration and reforestation has the potential to provide opportunities for Indigenous communities and provide greater resilience and improved land stewardship. Combining traditional ecological knowledge with western scientific knowledge have been shown to improve ecological and land stewardship outcomes while also providing employment opportunities. For example, Indigenous ranger groups contribute to reducing threats from fire, weeds and feral animals while also providing additional income from ecological and Indigenous and focused tourism (Baumber et al., 2019; Foran et al., 2019; Ridges et al., 2020).

Outback latent land sector abatement potential
Vegetation based carbon abatement has already been adopted across some areas of Outback Australia with much of the region particularly well suited to low cost assisted natural regeneration (Evans et al.,
2015) (Section 2). This existing carbon abatement has been established around the edges of the rangelands where the climate is less arid and the land more fertile than the relatively sandy shallow soils of the interior (Figure 3) (Hacker and McDonald, 2021). With more palatable vegetation and a long history of mechanical disturbance, these areas have also been subjected to more extensive vegetation
suppression, a requirement of the HIR methodology. In contrast, the carbon abatement potential in some of the less fertile and more arid areas of the rangelands is poorly researched and relatively unknown (Garnaut, 2019). While annual per hectare carbon abatement potential is very low compared to higher rainfall and more fertile regions, over the vast areas in questions, there is potential for total carbon abatement to be considerable. Furthermore, as with existing areas of carbon abatement throughout the rangelands, opportunity costs from existing land uses are low making the economic viability of carbon farming more likely (Anderson et al., 2015). The potential is significant for regional development given carbon farming has been highlighted as one option that has the potential to provide triple bottom line outcomes that are more economically, socially, culturally and environmentally sustainable (Baumber et al., 2019; Cowie et al., 2019; Crossman et al., 2011a; Evans et al., 2015; Foran et al., 2019; Jackson et al., 2017).

Report objectives and structure
This report focuses on additional latent potential for vegetation-based carbon abatement across
Outback Australia. Specifically, we focus on the approved ERF abatement method called Human Induced
Regeneration (HIR). While this is only one of several approved vegetation-based abatement methods within the ERF, it is the most widely implemented and accounts for most of the ERF approved and contracted ACCUs. Furthermore, the landscapes of Outback Australia are particularly applicable for this type of vegetation regeneration due to their relatively limited development and cultivation.

The objectives are to:

1. Provide estimates of additional abatement that may be possible for Human-Induced
Regeneration in Outback Australia including assessment of spatial and market price variability in
economics of supply across the study region.
2. Describe the scope of co-benefits in addition to carbon abatement value from large scale
Outback land conservation.
3. Describe key impediments to realising the latent potential identified.
4. Recommend changes to policies that can reduce impediments and increase high integrity
Outback land sector carbon abatement and co-benefits.
Report content overview
Section 2 provides background to the report describing land sector carbon abatement in Australia and globally. This section provides a discussion of prospects for and impediments to more land sector carbon abatement and describes relevant ERF key policy.

Section 3 describes the methods and presents results from an original analysis evaluating the potential additional carbon abatement from HIR methodologies across Outback Australia. This includes reporting on how estimates of potential abatement were computed, and the presentation of results quantifying the potential for additional abatement likely to be economically viable across a range of carbon market prices.

Section 4 describes the potential to realise additional environmental, social and economic benefits from
Outback carbon and conservation investment.

Section 5 is a discussion of recommendations to reduce impediments and increase Outback land sector carbon abatement whilst maintaining scheme integrity.

2. Background
Land sector carbon abatement globally
Land sector carbon abatement and vegetation-based carbon farming are increasingly recognised as important components of global efforts to mitigate the impacts of climate change. This is clearly evident in the 2015 Paris Climate Agreement. While reducing emissions is the core ambition of the Agreement, it also emphasises the role of land sector abatement including activities such as reforestation and avoided deforestation activities that sequester carbon (UNFCCC, 2015). Furthermore, credits for land sector abatement that reduce emissions or sequester carbon featured in the climate change policies of 57 national and subnational jurisdictions in 2019 (World Bank, 2019). More than USD 1 billion were committed to vegetation methods to offset emission globally in 2015 and 2016 (Hamrick and Gallant,
2017) and 42% of all credits issued in global markets between 2015 and 2020 were from land sector methods (World Bank, 2020).

Land sector carbon abatement in Australia
Land sector abatement plays a central role in Australia’s national economy-wide carbon abatement scheme known as the Emissions Reductions Fund (ERF). The ERF operates as both a carbon credit certification scheme and as an auction. The ERF assesses applications for emissions reductions or offset
projects from several sectors including energy efficiency, landfill emissions reductions, transport, and the land sector. Approved projects create certified Australian Carbon Credit Units, or ACCUs (1 ACCU = 1 tonne of CO2 equivalent emissions (CO2-e) reduction or sequestration, minus a Government buffer deductions is removed). ACCUs are tradeable and can be sold into ERF auctions which involve ranking bids received in each auction round and contracting projects that offer abatement at least cost per
ACCU. At the time of writing this report 14 ERF auctions have been held. The ACCUs generated by ERF certified projects can also be sold into the Australian secondary market for carbon credits. This market is where companies can cover liabilities to meet voluntary emissions reductions targets.

Across the first 14 ERF auctions, a total of AUD 2.7 billion has been committed to achieve 217 Mt CO2-e abatement over the lifetime of contracted projects at an average price of AUD 13.98/t CO2e. Eighty-two per cent (179.4 Mt CO2-e) of the total abatement in these auction rounds was secured through land sector methods (vegetation (69%), agriculture (7%) and savanna burning (6%)) (Clean Energy Regulator,
2022c). Of the ACCUs that have been issued to date (as of September 2022) 55% are for vegetation methods that involve afforestation, revegetation and avoided clearing, 10% are for the savanna fire management methods that involve fire management to reduce savanna fire emissions, and 1% are for agricultural activities (Figure 2) (Clean Energy Regulator, 2022d). Locations of current land sector ERF projects are shown in Figure 3.

Figure 2: Percentage of all Australian Commonwealth Emissions Reduction Fund Carbon Credits issued, to September 2022 by
method – source: Clean Energy Regulator (2022d)
Figure 3: locations of Australian Commonwealth Emissions Reduction Projects by Method

ERF Methodology Rules
All approved ERF methodologies are defined using legislative instruments created under the Carbon
Farming Initiative (CFI). These instruments outline the requirements for initiating ERF projects and establish the rules and processes that are required to ensure scheme integrity. Below we describe some of the most significant rules applicable to HIR relating to definitions and eligible areas, requirements for a permanent change in land use and liabilities that can arise if projects don’t maintain sequestered carbon.

Permanence

The carbon that is stored in vegetation and soils can be released into the atmosphere through disturbance driven by natural or human-induced events. When this happens, (part of) the sequestration benefit achieved through a project is reversed. To ensure long-term climate impact from sequestration, projects are subject to permanence obligations to maintain carbon stores for which Australian carbon credit units (ACCUs) have been issued (Clean Energy Regulator, 2020).
Permanence periods of either 25 or 100 years are available for most ERF sequestration projects. Under either option, carbon stored by a project needs to be maintained for the chosen permanence period.
Both permanence periods are subject to a 5 per cent risk of reversal buffer that acts as an insurance mechanism against loss of sequestration that has already been credited. For the 25-year permanence, there is an additional 20% buffer reduction taking the total crediting reduction to 25%. Thus, a total reduction in credited ACCUs of 5% and 25% for 100 year and 25-year permanence periods respectively.
Such buffers are a common design feature in carbon credit markets to deal with the risk of reversals in carbon storage, for example due to natural disturbance. In the case of the 25-year buffer, it is applied based on the Government’s assessed risk of replacing credits if the project ceases all storage after 25 years (Macintosh et al., 2020). These buffers are applied to all ACCUs contracted through the ERF or purchased on secondary markets.

Provisions for reversal of sequestration

If a fire or other disturbance occurs in the area during the project, causing a decline in the amount of carbon stored, regrowth must be managed to allow the carbon stock to return to previously reported values. In reality, because most reversals of carbon stocks affect a very small area relative to the total size of the Carbon Estimation Areas (CEA), ACCUs equivalent to the loss of carbon caused by the disturbance are effectively ‘made good’ or deducted in the year of disturbance, via sequestration occurring elsewhere in the Project Area. In the case of a disturbance affecting all or most of the Project
Area, ACCUs equivalent to the loss can be required to be returned, or relinquished, to the Clean Energy
Regulator, fines can be applied or so-called “carbon maintenance obligations” can be applied.

Forest and eligible areas

Under the current HIR methodology (Commonwealth of Australia, 2013) projects must be in areas where native forest has been suppressed for a period of 10 years through activities including grazing and mechanical or chemical destruction. The projects must be in areas that can reasonably be expected to achieve a threshold definition of forest cover which is defined as vegetation with a minimum 20 per cent canopy cover, a minimum height of two metres and a minimum stand size of 0.2 ha.

This forest cover threshold originates from the Kyoto Protocol national reporting requirements
(UNFCCC, 2002) which limited reporting to a subset of land management specifically relating to forestry
(e.g. afforestation, reforestation, deforestation). However, under the Paris Agreement (UNFCCC, 2015) reporting requirements have been expanded to include all land management activities, removing the
requirement that vegetation meet the previous threshold definition of forest cover. While this change has not yet been implemented in ERF methodologies, expanded eligibility criteria are being considered by the ERF as part of a proposed new whole-of-farm carbon abatement method, called the Integrated
Farm Management method.

Crediting period

Irrespective of the chosen permanence period, land sector crediting periods are currently maximum 25 years.

Prospects for More Outback Land Sector Carbon Abatement
One key determinant of potential for more Outback land sector carbon projects in the future is the prices in markets for carbon credits. Prices in both ERF and voluntary carbon credit markets vary over time (Figure 4) partially as a result of supply such as exhaustion of some of the lowest cost abatement opportunities but especially from regulatory changes which remain a risk for investors in offset projects.

Historically carbon credit prices have varied both upward and downward. For example, the price of an
ACCU in ERF auctions dropped from nearly $14 to around $10 between 2016 and 2017. More recently regulatory changes in the ERF, announced in early 2022, led to a large drop in secondary market spot prices for carbon credits, from around $50 / ACCU to around $30, (Figure 4). This occurred after a period of steeply rising prices in the secondary market over late 2021 and into the beginning of 2022. On balance, long run trends of increasing demand seem likely though uncertainty, especially from regulatory changes remain a risk.
Australian Emissions Reduction Fund Auction Price Trend

Australian Secondary Carbon Market Price Trend

Figure 4: Spot price trends for Australian Carbon Credit Units ((Clean Energy Regulator, 2022b; Jarden, 2022))

A good sense of the most important impediments other than carbon market price was revealed through a recent survey of potential ERF SFM and vegetation project participants (Macintosh et al., 2020). The survey involved rating the importance of 17 factors previously identified as undermining confidence or desire to undertake ERF projects on a scale from 1 (not important) to 5 (very important). Eight factors were rated as consistently highly important (average importance rating across the sample between 3.8 and 4.3): Low carbon price, risk of rule changes, future carbon price uncertainty, third party consents, permanence requirements, awareness of carbon market opportunities, the scope of methods, and lack of trust in information providers.

Integrity of ERF credits in providing abatement that is credited and the perception of integrity will also be an important determinant of future demand for and value of ACCUs. Recent critique raises concerns over the potential for over crediting in Australia’s HIR method.
Improving confidence in the effectiveness of Australia’s carbon offset market would require:

• addressing integrity of methods and governance
• improving risk management supported by dialogue about market expectations
• better incorporating the role of technology
• considering the role and risks of global offset programs.
Another potential impediment is 2022 Commonwealth provision for the Federal Agriculture Minister to veto native forest regeneration projects covering more than 15 hectares and more than one third of a farm if considered to have an adverse impact on agricultural production or regional communities.
Uncertainty that this introduces to project proponents could be reduced with more clarity around minister’s interpretation of adverse impact on agricultural production or regional communities (Carbon
Market Institute, 2022).

The significance of these impediments means that there is likely to be a considerable gap between what is identified in our assessment as “latent potential” and what might realistically be expected to get implemented in the future. In the final section of the report, we discuss some of the approaches that have been identified to reduce the impediments to land sector carbon abatement and whilst ensuring integrity and improving environmental benefit realised.

3. Assessment of potential for Outback carbon emissions abatement
Background to assessment
The focus of original analysis carried out for this report is a forest regeneration method known as the
ERF Human Induced Regeneration of Permanent Even-aged Native Forest (HIR) method. The method supports a class of activities that provides an important source of carbon sequestration and climate change mitigation by allowing vegetation to regenerate naturally from residual propagules within the soil (e.g., seedbanks, rootstock and lignotubers). The benefits of natural regeneration include lower establishment costs, as it does not require active planting, and higher biodiversity outcomes, as residual propagules which provide the source of revegetation typically constitute a larger mix of species that are endemic to the site (Summers et al., 2021).

There are extensive areas of Australia where low-intensity agricultural practices have resulted in the landscape retaining sufficient residual propagules in the soil and remnant vegetation that natural regeneration can take place. Human-induced regeneration is an ERF methodology that provides a mechanism to assign carbon credits to landholders for carbon sequestration as a result of undertaking
management changes that allow for the natural regeneration of forests in eligible areas. These management activities typically involve a reduction or modification in livestock grazing pressure through fencing and stocking rate management and stopping other activities that disturb vegetation such as mechanical clearing and burning as well as impacts caused by feral animals or invasive weeds and pests.

There has already been extensive uptake of the HIR method in some parts of Outback Australia under the ERF. Amongst other vegetation-based methods within the ERF, HIR is by far the most widely adopted. Another advantage of HIR methods is that they can provide considerable environmental benefits in addition to those arising from carbon abatement, such as improved biodiversity, soil fertility, water quality, and reduced salinity, and erosion (Baumber et al., 2019; Summers et al., 2021). Land- based offsets can also improve landholder financial resilience by providing a remuneration diversification opportunity with less risk than crop or livestock income in some climate-vulnerable settings (Baumber et al., 2020).

Methods and data
Assessing eligibility

The current Human Induced Regeneration methodology is limited to areas where native forest has been suppressed either continuously or intermittently over a period of at least 10 years and where management changes will result in the previously suppressed native vegetation regenerating naturally.
Project areas need to be stratified so that existing forested areas are delineated as exclusion areas, and
ACCUs are only awarded for regeneration of vegetation in areas where it has been suppressed. A further key requirement under the current method is that vegetation that regenerates across the project area has the potential to achieve forest cover if allowed to regenerate.

Under the current HIR methodology (Commonwealth of Australia, 2013), native regrowth at the proposed location must have the potential to achieve forest cover, currently defined as vegetation that has 20% canopy cover and an average height of a least two metres. However, given the prospect of removing this restriction under the ERF, here we also considered areas that do not have the potential to achieve ‘forest’ cover. Specifically, we also considered land that will only achieve vegetation cover between 0 and 20% canopy cover. From here, we call the currently approved HIR methodology ‘Forest
HIR’ and the non-forest variation ‘Sub-forest HIR’.

Eligible areas for the Forest HIR and Sub-forest HIR scenarios applied in this study were defined using a series of spatial datasets relating to forest cover, land use and vegetation type. These were:
● National Carbon Accounting System (NCAS) mapping data (DISER, 2021; Furby, 2002),
● Australian Land Use and Management (ALUM) data (ABARES, 2016)
● National Vegetation Information System (NVIS) major vegetation groups (MVG) data (NVIS,
2017).

These datasets were resampled to 0.05 degrees and classified as follows to identify eligible areas: For
Forest HIR areas that were classified as forest in the NCAS data were excluded from further analysis.
Using the NVIS data, areas that had MVGs that can achieve forest cover (e.g., forest, closed woodlands, tall closed shrublands) were included in the analysis for Forest HIR. In contrast, for the Sub-forest HIR, areas that were classified as forest or woody vegetation in the NCAS data were excluded, and only MVGs that are capable of achieving zero to twenty per cent canopy cover were included (e.g., open woodland).
For both Forest and Sub-forest, the ALUM data was used to identify areas that are currently under native vegetation grazing. Finally, all areas identified as currently under contract within the Area-based
Emissions ERF registry (Clean Energy Regulator, 2022a) were excluded from further analysis.

The logic behind this classification was to identify areas where Forest or Sub-forest vegetation can be achieved based on the NVIS MVGs but where the relevant vegetation groups were not present based on the NCAS data. For example, areas where forest vegetation groups were present in the NVIS data, but forest was not present in the NCAS data was assumed to be areas where the forest was suppressed and was classified as potentially eligible for Forest HIR projects. Similarly, Sub-forest vegetation was assumed to be suppressed where vegetation groups capable of achieving less than twenty percent canopy cover were present in the NVIS data but no sparse woody vegetation was present in the NCAS data.

While this classification of eligible areas makes use of the best available data, we acknowledge the analysis has limitations. It is very difficult to assess aspects of vegetation suppression or specific vegetation communities at a national scale. Here we make use of national scale datasets at a relatively coarse spatial resolution (0.05 degrees) and their limited accuracy at finer scales should be considered.
As a result, the assumption of vegetation suppression during the baseline period based on the combined classification of the NVIS and NCAS data should be considered indicative. Eligible HIR projects would not be undertaken at these scales and local assessment of proposed project areas would be required to assess vegetation suppression across the baseline and suitable management activities before project adoption.

A detailed description of the classification of these datasets for each of the approaches (Forest HIR vs
Sub-forest HIR) is described in the Appendix. The resulting suitable areas are presented in Figure 5.
Figure 5: Eligible areas under the Forest HIR and Sub-forest HIR suitability classification across the Outback Carbon study area.

Carbon estimates
Carbon sequestration estimates for the HIR methodology were quantified using the FullCAM (Full
Carbon Accounting Model) 2020 (DISER, 2020a). FullCAM is the primary model used in Australia’s
National Greenhouse Gas Accounts for the land sector. It provides integrated greenhouse gas emissions and abatement estimates for different carbon pools across forest and agricultural systems. Under the
ERF, FullCAM is the established method to develop carbon abatement estimates for a range of ERF land- based methods including HIR (Commonwealth of Australia, 2013; DISER, 2020b).

We used FullCAM to model Forest HIR and Sub-forest HIR carbon sequestration over 25-years and 100- year permanence periods starting in 2020. All FullCAM modelling was carried out in line with the legislation and the FullCAM Guidelines for the ERF HIR method (DISER, 2020b). The same FullCAM model settings were used for both the Forest HIR and Sub-forest HIR scenarios. The FullCAM model was run on centroids of the 0.05 degree eligible areas classification layer.
Economic modelling

The NPV of each regeneration scenario (Forest HIR vs Sub-forest HIR) was calculated taking into account project establishment costs including the opportunity of lost agriculture, fencing costs, brokerage costs and maintenance costs. See the appendix for details.

Under the method, a 25-year crediting period applies to all HIR projects (Clean Energy Regulator, 2020).
This means that carbon credits are only issued for 25-years irrespective of the 25-year or 100-year permanence periods. The 25-year crediting period was used to calculate the net present value across both permanence periods. This means that under the 100-year permanence period income from carbon credits is only available for the first 25 years while opportunity cost due to lost agriculture is accrued for the full 100 years. However, due to the reduced carbon sequestration under a 25-year permanence period, a 20% reduction in ACCUs issued applies to these projects. This is in addition to the 5% ‘risk of reversal buffer’ that applies to both 25-year and 100-year projects. These reductions were applied to the
NPV calculations where applicable for each permanence period.

Results
Eligible areas

Using Forest HIR suitability criteria, 512,089 km2 were identified as eligible for ERF projects, while under the Sub-forest HIR suitability criteria, an additional 354,770 km2 were identified as eligible (Figure 5).

While the Sub-forest HIR suitability areas cover an area 64% the size of the Forest HIR suitability areas, the majority of this occurs in semi-arid and arid parts of the country. Given the reduced canopy cover requirement under the Sub-forest HIR suitability criteria, this is not unexpected with lower canopy cover vegetation types more common in the arid zone.

Total carbon

Under the Forest HIR scenario, the FullCAM model estimates a total of 933.7 MtCO2e and 1294.0
MtCO2e of potential additional abatement available over the 25-year and 100-year permanence periods respectively (Figure 6). To get some perspective of the magnitude of this opportunity, consider that under either permanence period the potential additional abatement is many multiples of the total expected abatement (145 MtCO2e) for all ERF land sector abatement contracted to the end of 2022. The longer growth time of the 100-year permanence results in higher carbon abatement, however, most of the carbon accumulation occurs in the first 25-years. Under the Sub-forest HIR scenario, there are a total
of 429.7 MtCO2e for the 25-year permanence period and 593.3 MtCO2e for the 100-year permanence period.

Under each of these permanence scenarios, the pattern of marginally higher carbon sequestration over the longer permanence period is the same. However, the overall carbon sequestration amount is substantially lower for the Sub-forest HIR scenario. This is due to the lower vegetation growth that would be expected in semi-arid and arid landscapes that dominate the eligible areas under these assumptions, as well as the smaller extent of eligible areas.

Figure 6: Total abatement available over the 25-year crediting period under Forest HIR and Sub-forest HIR modelled using
FullCAM over 25-year and 100-year permanence periods.

Economics of carbon sequestration

While it is possible to sequester substantial amounts of carbon under both the Forest HIR and Sub-forest
HIR scenarios, enacting land-use change will depend on the economic viability of carbon farming which is largely dependent on the price of carbon. The NPV analysis provides an estimate of the economic viability of the carbon sequestration for a given carbon price.

To understand the economic viability of abatement from the HIR method, NPV estimates were calculated for carbon prices ranging between $1 and $100/t CO2e. The results reported below indicate the price at which the NPV is first greater than zero and therefore deemed economically viable.
The results below are presented in the context of both the secondary market price at the time the modelling was conducted ($32/t CO2e) and the last ERF auction price ($17/t CO2e). Available supply at higher secondary market prices is easily estimated from the marginal abatement cost curves.

Forest HIR
Under the 25-year permanence period, the amount of economically viable additional abatement increases from 1.5 to 932.0 MtCO2e over a price range of $3 to $100/t CO2e (Figure 7). The small amount of carbon that is available at very low prices (e.g., $3/t CO2e) is due to the low cost involved in establishing HIR projects and particularly the low opportunity cost from agriculture in some areas. No carbon is economically viable below $3/t CO2e. The low prices at which some carbon abatement becomes economically viable are some indication of why HIR projects dominate the ERF register.

At the ERF auction price, there are 377.2 MtCO2e available while at the voluntary market price there are
701.4 MtCO2e available under the 25-year permanence period. These carbon sequestration amounts account for approximately 40% and 75% respectively of the total latent abatement potential under this scenario.

The geographic distribution of this abatement can be seen in Figure 9 which shows the price at which carbon becomes economically viable across the country. This map indicates that there is a relatively even spread of economically viable abatement across eligible areas around the study area. However, there are considerable areas, particularly in the north and northeast of the study site where higher prices are required to make carbon farming under the Forest HIR method economically viable. This is due to the higher agricultural opportunity costs (Appendix) compared to southern areas which are dominated by semi-arid and arid climatic conditions.

Under the 100-year permanence period, total amounts of carbon sequestered are greater, but overall, we can see a similar pattern. As with the 25-year permanence period, abatement is available at very low prices (3.4 MtCO2e at $3/t CO2e) and total sequestration increases accordingly with higher prices (Figure
8). Furthermore, the relative amounts of abatement available at the ERF auction price and voluntary market price are similar, 38% (493.6 MtCO2e) and 71% (920.7 MtCO2e) respectively. The geographic distribution of prices at which carbon becomes available (Figure 10) also mirrors that of the 25-year permanence period.
Figure 7: Marginal abatement cost curve for carbon sequestration under the 25-year permanence period for areas that are
eligible under the current HIR eligibility criteria.

Figure 8: Marginal abatement cost curve for carbon sequestration under the 100-year permanence period for areas that are
eligible under the current HIR eligibility criteria.
Figure 9: Map of Outback Carbon study area showing forest HIR eligible areas and the minimum carbon price ($/tCO2e) at which
the carbon becomes commercially viable under 25-year permanence.
Figure 10: Map of Outback Carbon study area showing forest HIR eligible areas and the minimum carbon price ($/tCO2e) at
which the carbon becomes economically viable under 100-year permanence.

Sub-Forest HIR
Under the Sub-forest HIR scenario, lower total carbon sequestration potential than for forest HIR is evident. However, opportunities for sequestration are still considerable. As seen in the other scenarios, limited carbon abatement potential is available at very low prices. For example, under the 25-year permanence scenario, there are 0.5 MtCO2e of potential additional abatement available at $3/t CO2e and this increases considerably at the ERF auction price and voluntary market price (Figure 11). At the
ERF auction price, there are 129.5 MtCO2e available and at the secondary market price, there are 287.1
MtCO2e, 30% and 67% of total abatement potential respectively. Similar patterns are seen under the
100-year permanence period (Figure 12).

Under the Sub-forest HIR scenario, areas that are economically viable at lower carbon prices are predominantly in the central arid region of the study area (Figure 13 and Figure 14). In contrast, areas around the edge of the study site, particularly in the east, require a considerably higher carbon price before they become economically viable. As with Forest HIR, these patterns are driven by higher agricultural opportunity costs in the relatively high rainfall areas of the study site (Appendix).

Figure 11: Marginal abatement cost curve for carbon sequestration under the 25-year permanence period for Sub-forest HIR
areas (i.e., areas that are not likely to achieve 20% canopy cover).
Figure 12: Marginal abatement cost curve for carbon sequestration under the 100-year permanence period for Sub-forest HIR
areas (i.e., areas that are not likely to achieve 20% canopy cover).
Figure 13: Map of Outback Carbon study area showing sub-forest HIR eligible areas and the minimum carbon price ($/tCO2e) at
which the abatement becomes economically viable under 25-year permanence.

Figure 14: Map of Outback Carbon study site showing sub-forest HIR eligible areas and the minimum carbon price ($/tCO2e) at
which the abatement becomes economically viable under 100-year permanence.

4. Environmental, social and economic benefits from Outback
carbon and conservation investment
HIR Outback carbon storage and investment potential by State
The potential for economically viable HIR method CO2 abatement identified in this study varied considerably by state and carbon credit price. Figure 15 provides a breakdown of estimated cumulative carbon storage potential over 25-years by State at three carbon price points under the current ERF HIR eligibility requirements. This shows considerable differences in the Outback carbon abatement potential for the individual states both in terms of physical and economic supply. Some states have considerably lower total Outback carbon abatement potential (e.g. South Australia and NSW (not shown due to small geographic area, see Figure 3)) relative to other states, however, most of the abatement that is present is available at lower carbon prices. For example, the Northern Territory and Queensland have considerably higher total carbon abatement potential than the other states shown. However, for both of these states, only a fraction of the total abatement potential is available at the average ERF auction
price ($17 tCO2e) compared to the higher voluntary market prices ($50 tCO2e and $30 tCO2e). In contrast, South Australia and Western Australia show considerably higher amount of carbon available at the lower auction price compared to the higher voluntary market prices. This difference between the states is primarily due to higher opportunity costs from agriculture in the Northern Territory and
Queensland compared to the other states.

Figure 15: Carbon abatement potential across Outback Australia by state for three carbon price points under the current HIR
eligibility criteria (NSW not shown due to small totals, less than 10 Mt CO2e at all price points)

Figure 16 is a state by state break down of the potential for regional investment in outback Australia for the HIR method for a scenario where just 1/25th of all identified economically profitable credits are contracted. This shows how the differences in carbon abatement will potentially impact on regional investment across the different states.
Figure 16: Potential annual investment in carbon emissions offsets across Outback Australia by state for three carbon price
points (NSW not shown due to small totals, less than AUD 30 million/year at all price points)

Regional economic benefits
Ultimately, it’s difficult to know how much investment will be made in Outback carbon projects.
However, given that in the order of $AU2 billion have been invested to date in HIR projects and demand for carbon abatement is growing, the potential for much more is significant. These results indicate that, if creditable protocols to ensure high integrity outback offsets and enable land holders to participate in the market can be developed, there is potential regional economies in the most remote parts of
Australia to receive for hundreds of millions, even billions of dollars in investments.

How any investment in land sector carbon abatement will influence regional economic development has been a topic of considerable discussion, especially in the context of wide scale HIR uptake in high concentration in parts of NSW and Queensland. For example Cockfield et al. (2019) assessed farm re- investment of carbon credit income and found potential for farm/landholding productivity and income resilience improvement. Baumber et al. (2020) also found that land-based offsets tend to improve landholder financial resilience by providing a remuneration diversification opportunity with less risk than crop or livestock income especially in climate-vulnerable settings.

An additional co-benefit from conservation investments is that they tend to be catalysts for remote region development. The labour intensive nature of conservation activities creates direct employment
opportunities which will often stimulate secondary demand leading to other government and service sector investment (Jarvis et al., 2018). Furthermore, Aboriginal labour-intensive service sector activities create much greater job numbers per dollar investment. For example, evaluation of recent Aboriginal
Land and Sea Ranger programs, show that 51% of all expenditures were for wages and 75% of wages were paid to local Aboriginal people (Jarvis et al., 2018).

Whilst pessimism is sometimes expressed regarding the enduring benefit of this type of government expenditure driven employment, the evidence shows that such programs have created sustained growth when the source of government investment is well targeted, done in partnership with local people, and of a sufficient timescale to build enduring human capital outcomes. For example Jarvis et al. (2018) show that significant time-lagged private Aboriginal-led entrepreneurial business creation followed
Indigenous land and sea management expenditures. Notably, growth in numbers of enterprise and enterprise income could be explained by two and three year lagged Indigenous land and sea management expenditure. The Aboriginal-led business growth in sectors directly supporting land care activities and other less-related sectors are evidence of self-sustaining regional growth and Aboriginal economy growth benefits that can come from Outback land conservation investments that also store carbon.

There is related evidence from Indigenous Land and Sea Management Programs that this type of investment can also enable the preservation of culture identity and thus offer the opportunity to improve the well-being of Indigenous people substantially (Altman and Whitehead, 2004; Greiner and
Stanley, 2013). Notably, Aboriginal community benefit can be especially significant when investments incorporate training and develop capacity in management, coordination and cross-sector partnerships, such as those developed under Indigenous ranger programs. (SVA, 2016). Best practice Outback land conservation investment can be successful because Aboriginal entrepreneurs embedded in remote communities understand, appreciate, and innovate new approaches that reconcile economic activity with traditional ways of life (Dana and Light, 2011), providing opportunity for community-based economic activity (Ratten and Dana, 2015). The opportunities for new and better recognition of
Traditional Ecological Knowledge and Indigenous participation as project owners or partners under improved carbon methods, like IFM, could help deliver new evidence of these benefits.

Environmental and natural capital co-benefits
As discussed in the introduction there are considerable environmental sustainability issues around pastoralism in Outback Australia. Extensive land degradation (e.g. soil erosion, reduced water quality)
and biodiversity loss have resulted from historical land clearing and overstocking. Some of the advantages of carbon farming, and the HIR method in particular, is that it can provide considerable environmental benefits in addition to those arising from carbon abatement. The specific nature of the potential co-benefits varies with landscape and surrounding environment but there is considerable literature on potential benefits such as improved biodiversity and habitat provision, soil quality and fertility, water quality, reduced salinity and nutrient cycling (Baumber et al., 2019; Crossman et al.,
2011b; Lin et al., 2013; Muenzel and Martino, 2018; Tang et al., 2016).

There is increased global awareness and effort being undertaken to identify and quantify these co- benefits (e.g. Bryan et al., 2014; Cowie et al., 2019; Hong-Mei et al., 2017; Summers et al., 2021).
Furthermore, there is a growing demand for regulated and voluntary markets, payment schemes and other market-based instruments that can provide payments for environmental and natural capital co- benefits, collectively known as payments for ecosystem services (PES). Globally there are now more than 550 active PES schemes with estimated annual transactions in the order of US$36-42 billion
(Salzman et al., 2018). There is also a growing trend towards consideration of multiple benefits within
PES schemes. For example, there are numerous organisations that have developed benchmarks and indicators that can be used to certify co-benefits achieved in addition to carbon abatement actions and earn carbon credits that pay a premium (Baumber et al., 2019). Participation in these voluntary schemes has the potential to significantly increase the financial viability of carbon farming and deliver on going environmental ecosystem benefits.

Summary, Conclusions and Recommendations
Report motivation
This report presents an evaluation of the potential for greater abatement from land management methods relevant to Outback Australia defined here as the relatively intact bioregions of northern, central and western Australia, excluding the more intensively modified bioregions of the south-east and far south-west (Figure 3). A common perception is that, given the aridity of much of the region and poor soils in the northern most tropical part of the region, little carbon sequestration is possible in the region.

One objective of this report is to assess the quantum of latent abatement potential from the current HIR method and what could be achieved with a whole of canopy approach in outback Australia. Other objectives are to outline key impediments to realising the latent potential identified and to make
recommendations to overcome impediments while simultaneously ensuring carbon abatement integrity.

Key findings
Human-induced regeneration
● We estimate that there is scope for economically viable human-induced regeneration
projects to produce 377.2 million tonnes of additional carbon sequestration over 25 years
with a 25-year permanence period, at the most recent ERF auction price of $17/tonne CO2e.
● This is more than 6 times the 56.7 million ACCUs expected over the life of already
contracted ERF vegetation method projects.
● Allowing the HIR method to be implemented in landscapes that are currently ineligible
because mature perennial vegetation would not be expected to achieve 20% canopy cover
(e.g. open woodland settings), would provide the potential for an additional 129.5 Mt CO2e
sequestration over 25 years at $17/tonne assuming a 25-year permanence period.

Interpretation of findings
For this study, we judged projects to be economically viable if computed net present value of switching to the carbon abatement activity from current land management was positive. This approach is the standard practice in economics and finance and is the basis of economic viability assessment in nearly all related peer reviewed journal literature (Bryan et al., 2014; Cockfield et al., 2019; Kingwell, 2021).
Nonetheless, there are good reasons to believe that the estimates represent an optimistic view of actual future uptake.

One reason that these numbers may be overestimates is that many areas assessed to be eligible for ERF participation in Outback Australia are pastoral leasehold. Changing land use in these areas requires government consents: a number of conditions limiting consents means consent may or may not be granted on particular parcels (ICIN, 2020). For example, South Australia’s pastoral rangelands is managed under the Pastoral Land Management and Conservation Act 1989 (Pastoral Act), and therefore adds a second regulatory consent process, in addition to the State’s Eligible Interest Holder consent required by the Emission Reduction Fund. South Australia is yet to clearly articulate what policies or process are available to enable regulatory consent process. There are similar policy barriers to consents for carbon projects in the Northern Territory. In addition, all state and territory governments will likely need to do additional policy work to consider how (or if) they will support the new proposed Integrated
Farm Method on pastoral leaseholds. This could also add further delays, increased risks for those considering HIR on pastoral leases.

A further reason is that many landholders may require higher rates of return and/or shorter break-even periods to switch from current to novel land management, such as for carbon abatement. The extent to which such factors may change the availability of land or the trigger price for a switch to carbon abatement projects will vary by property and landholder, land tenure type and other factors. This makes it difficult to quantify the constraining effects of multiple impediments on aggregate abatement supply.

It is also important to recognise the impact of scale in analysis such as these. The datasets and modelling undertaken for this report were undertaken at regional extents and are therefore significantly less granular and precise than what would be needed to implement actual HIR projects. Examples include evidence of clearing over suitable periods and local scale assessments of endemic vegetation in identifying suitable areas under ERF current and proposed rules for HIR. For this analysis we have used regional data sets for these assessments whereas any project within the ERF would have to address these requirements at a local scale.

Still, we remain confident that very significant investment in abatement from Outback Australia land conservation is a realistic expectation. Fundamental confidence is driven by two factors. First, the latent and economically viable potential identified in the analysis is many times that which has already been contracted. Secondly, the expanding demand globally for quality carbon abatement credits at current carbon market prices. If adequate protocols are established to ensure integrity of abatement and management of abatement risks, this demand is likely to increase.

Recommendations
1. Support the inclusion of: (a) project stacking, (b) the canopy approach, (c)
development of additional environmental benefit measures, and (d)
reference sites for monitoring in transition to new Integrated Farm
Management Method

In October 2021, the Commonwealth identified development of an Integrated Farm Management method (IFM Method), as a priority for further consideration by the Clean Energy Regulator (CER) in
2022. This method could facilitate separate ERF land-based activities that lead to carbon sequestration or reduced emissions to be combined or ‘stacked’ on a single ERF project. In March 2022, the CER commenced its IFM method co-design process. In May 2022, the CER released the first draft of its
proposed IFM method for technical expert feedback. It is now considering this feedback before it starts public consultation, proposed for October 2022. This is also happening in the context of strong commitment from the current Commonwealth Government to expand opportunities for recognition of environmental service provision, in addition to carbon.

In the process of designing and implementing IFM we recommend high priority be given to:

(a) development of stacking approaches allowing the combination of multiple activities relevant to
outback properties such as: vegetation regeneration, fire management and soil carbon
management in a whole-of-property carbon abatement project.
(b) A ‘canopy approach’, which would allow project owners to expand beyond areas that are
currently eligible under the HIR method (i.e. areas with <20% forest cover and the potential to
reach >20%), to include areas whose potential canopy cover is less than 20% forest cover.

These changes are consistent with the recommendations of a 2018 review by the Emissions Reduction
Assurance Committee. This would allow a far wider range of land managers to participate in carbon projects that regenerate or protect woodlands, savannas, forests and other ecosystems through improved land, agricultural and fire management practices.

Our evaluation showed that including areas now classified as sub-forest areas (with potential for less than 20% forest crown cover) in the IFM would increase opportunity to realise latent abatement potential across Outback Australia.

We further recommend, that as part of the development of the IFM, that priority be given to the:

(c) development of additional environmental benefit measures for practices that produce
significant rehabilitation and protection of high ecological and cultural value assets not currently
eligible for ERF HIR participation.
(d) Development of a series of shared ‘reference sites’ (i.e. relatively undisturbed sites, disturbed
sites with and without management treatments that generate credits) that could be used to
assess, compare and verify carbon and other environmental service stock changes in
participating projects.

Recent high-profile reviews of the ERF have suggested that an approach to combining multiple carbon abatement activities at a property level could improve the economics of carbon projects in otherwise marginal locations (King et al., 2020; Macintosh et al., 2020).
In early 2022, several critiques questioned details of measurement, modelling, validation and governance protocols in HIR crediting and called for improvements (Australia Institute, 2022; Macintosh et al., 2022).

The development of the Integrated Farm Management Method affords an opportunity to reconsider how improved technologies, science, risk assessment, and governance can be incorporated into
Emission Reduction Fund method assessment, measurement, modelling, reporting or audit requirements to address integrity, efficiency and equity concerns.

2. Establish a formal Outback Carbon Network to support state and
stakeholder development of innovation and best practice in land sector
carbon and environmental service markets.
We recommend formation of a funded and staff resourced collaboration of parties with interest in advancing innovation, and transparency, efficiency, equity and integrity best practice in carbon and environmental land services markets in and for Outback Australia. It could also help to implement or advance relevant and supported outcomes of the Chubb Review.

This can advance shared learnings and consistency of policies and approaches, improve trust and integrity in method application and outcomes, as well as enable greater uptake of responsible and appropriate practices that meet the unique requirements, capacity and cultural needs of Outback environments and communities.

The recommendation that capacity to support Outback Australia carbon and environmental service be enhanced is appropriate because in these unique regions:

• projects generally create positive net employment, economic activity and social benefits
• there are very large potential environmental benefits across huge areas
• much of the dialogue and research suggests that carbon abatement projects and related land
care investments have been an effective strategy for growing Aboriginal employment, training
and business in Outback Australia (ICIN, 2020; Jarvis et al., 2018; KLC, 2021).
• In much, but not all of Outback Australia, carbon abatement projects have generally seen high
levels of social acceptance.

Special efforts in science, policy, and extension development for carbon and environmental services markets for the Outback region will be required given:
• the unique physical and social context: e.g. less dense stocking or no pastoral land use, more
native title, more cultural focus on land care, remoteness, aridity, and
• generally less developed science, monitoring, policy and outreach networks across the region.

As part of this Outback Network, we further recommend:

• development of a national database used to inform ongoing: policy development, monitoring
and crediting protocols, research and academic review and to inform national extension efforts.
• An improved approach to capturing and sharing data used and captured through the ERF could
increase transparency, improve confidence in the integrity of carbon farming projects, and
reduce method compliance costs through appropriate data sharing frameworks, while still
protecting privacy of individual land managers. More research-validated and trusted
information and resources could improve confident assessment of potential, benefits, costs,
and risks of carbon abatement projects (Macintosh et al., 2020).
• This data could also be used to inform and share through a national extension program, which
could address significant knowledge gaps and facilitate sharing of independent and practical
information for landholders. Farming related Research and Development Corporations or
Natural Resource Management organisations could be good institutions to undertake this kind
of work because of connections to potential proponents of projects. In the context of Outback
Australia, organisations such as the Indigenous Carbon Industry Network and/or land councils,
would also be well suited given their connections to Aboriginal native title holders.

3. Support an Outback carbon and environmental services pilot to develop
and test protocols for equitable high integrity carbon, environmental and
social co-benefits.
The newly elected Commonwealth Government has clearly signalled an intention to strongly endorse and encourage development of natural capital markets, monitoring, crediting, measurement protocols for a wide array of environmental benefits arising from changes in land management. We recommend the development of a pilot program targeted at co-designing Outback Australian carbon and co-benefit measurement, monitoring, crediting, market, and payment protocols. This can facilitate the research and development necessary to spur innovation of protocols to provide verifiable, integral and transparently measured additional social and environmental benefits.

A pilot program can play a key role in realising the Commonwealth Government’s intention to have the
Clean Energy Regulator develop protocols that define eligibility, provide land management
prescriptions, baseline and crediting measurement, and monitor project methods. A strong knowledge, research and innovation platform will still be required – outside of the CER – if we want to ensure an equitable, efficient provision of environmental services, in addition to carbon storage, that inspire confidence and realise premiums for landholders.

In Outback Australian settings, co-benefits related to preservation of cultural heritage are of central significance. We recommend a program specifically tailored for the Outback co-developed with relevant
Indigenous and conservation stakeholders. To realise greatest public benefit this should involve a research and development effort linked to several regional trials to allow confident development of transparent and scientifically validated co-benefit metrics and payments that expand benefits from
Outback abatement projects, ensure integrity of benefits, and spur innovations.
Appendix
Eligible areas
Forest HIR (FHIR) eligibility

Areas of the Outback Australia Study Area that are eligible for FHIR were defined as follows:

• NCAS data
o Areas that are classified as forest under the NCAS were excluded.
o Areas that are classified as woody vegetation or non-forest were included.
• ALUM data
o Areas that are classified as ‘Nature conservation’ or ‘Grazing native vegetation’ were
included.
o All other areas were excluded.
• NVIS data
o Vegetation classes under the Major Vegetation Groups classification that are defined as
having a canopy cover of greater than 20% and the ability to achieve greater than 2 m
were included. These include:
 Rainforests and Vine Thickets  Casuarina Forests and Woodlands
 Eucalypt Tall Open Forests  Melaleuca Forests and Woodlands
 Eucalypt Open Forests  Other Forests and Woodlands
 Eucalypt Low Open Forests  Tropical Eucalypt Woodlands/Grasslands
 Eucalypt Woodlands  Mallee Woodlands and Shrublands
 Acacia Forests and Woodlands  Low Closed Forests and Tall Closed Shrublands
 Callitris Forests and Woodlands  Unclassified forest
o All other vegetation classes were excluded.

Sub-forest HIR (SFHIR) eligibility

Areas of the Outback Australia Study Area that are eligible for SFHIR were defined as follows:

• NCAS data
o Areas that are classified as woody vegetation or forest under the NCAS were excluded.
o Areas that are classified as non-forest under the NCAS were included.
• ALUM data
o Areas that are classified as ‘Nature conservation’ or ‘Grazing native vegetation’ were
included.
o All other areas were excluded.
• NVIS data
o Vegetation classes under the Major Vegetation Groups classification that are defined as
having a canopy cover of less than 20% and the ability to achieve greater than 2 m were
included. These include:
 Eucalypt Open Woodlands
 Acacia Open Woodlands
 Other Open Woodlands
Economic Model
The economic model evaluates the potential stream of income changing land use to Human-Induced
Revegetation (HIR) would generate, minus the cost of establishing and maintaining the new land use
(e.g., the cost of establishing and maintaining a new carbon project) and the cost of foregone income from current agricultural use.

Returns from carbon credit supply are accumulated for 25 years for both the 25-year and 100-year permanence period scenarios. While agricultural opportunity costs are considered for 25 years for the
25-year permanence period scenario and for all years in the 100-year permanency scenario. To account for the time-value of the investment decisions discounted cash flow analysis was applied to sum all benefits (carbon payments) and costs into a single net present value metric. The assumed discount rate was 5.26 percent real.

Functionally, the ℎ of changing from current agricultural land use to carbon land use at carbon credit price can be expressed as:

ℎ = ℎ − ℎ (1)

In equation 1, ℎ is the present value of returns to HIR at price was calculated as:

× ℎ
ℎ = (2)
(1 + )
=0

Where ℎ described sequestered carbon in each year t. Spatially differentiated estimates of
ℎ annual incremental and cumulative values over a 25-year and 100-year horizon were estimated across relevant areas for HIR using the FullCAM model.

The term is the discount rate applied in discounting future costs and returns and is the time horizon in our case 25 years and 100 years.

The term ℎ in equation 1 is the present value of all costs for HIR: it is calculated as:

ℎ + ℎ +
ℎ = ℎ + (3)
(1 + )
=0

Four elements of cost are considered in equation 3: ℎ is the fencing costs assumed for HIR projects.
This value is not discounted as it occurs at project initiation. ℎ are the maintenance costs that occur in each year t over the investment horizon and brokerage costs ℎ . The final term considered in calculating the present value of costs is the opportunity cost of forgoing previous agricultural land use
returns. This is expressed as the profit at full equity ( ) (agricultural returns net of all costs of agricultural production) at time .

The model produces estimates of the increasing level of supply (t CO2e) that would become viable with increases in the level of carbon credit payment ($/t CO2e). To this end, the NPV model (equation 1) was solved iteratively at all points in the grid representing unique supply and economic conditions for a range of carbon prices ranging from $1/t CO2e to $100/t CO2e. At the first price that was sufficiently high to produce a positive (or zero) NPV for any sample grid cell, estimated carbon supply for the area associated with the grid cell was added to cumulative supply.

Opportunity Costs

Agricultural profitability was calculated using the concept of profit at full equity (PFE). PFE is a measure of profit which is calculated as the revenue from the sale of agricultural commodities minus all fixed and variable costs. Because forgoing current agricultural land use would involve forgoing income from the use but also not require incurring the costs, it is an appropriate measure of opportunity cost. To properly account for how land ownership costs would be incurred regardless of land use, this concept assumes that the land is fully owned. Figure A1 displays the assumed agricultural opportunity costs across the outback study region.

PFE is a function of the gross revenue ($/ha/year) less the production cost ($/ha/year). PFE also captures multiple commodities as primary and secondary products (e.g., sheep wool, sheep meat), variable costs such as area dependent costs (i.e., seeding, fertiliser) quantity dependent costs (i.e., harvest, storage) and fixed costs such as insurance, maintenance and others. To estimate PFE and how it varies across the study we updated the spatially explicit national agricultural profitability (PFE) layer produced by
Marinoni et al. (2012) for at a 1.1km resolution.

Following Marinoni et al. (2012) PFE/ha is calculated as:
= (1 × 1 × ) + (2 × 2 × 1) − (( × 1 + ) + ( + ) + (4)
( + + )

Where P1 is the Farm Gate Price ($/ha or $/DSE), Q1 the Yield or Stocking Rate ($/ha or $/DSE), TRN the
Turn-off Rate (Ratio) – (portion of livestock herd sold per year; set to 1 for non-livestock commodities), P2 the Price of Secondary Product ($/kg or $/l), Q2 the Yield of Secondary Product
(kg/DSE or l/DSE), QC the Quantity Dependent Variable Costs ($/t or $/DSE), AC the Area Dependent
Variable Costs ($/ha), WR the Water Requirement of Land Use (ML/ha), WP the Water Price ($/ML), FOC
the Fixed Operating Costs ($/ha), FDC the Fixed Depreciation Costs ($/ha), FLC is the Fixed Labour Costs
($/ha).The agricultural profitability dataset was updated for 2021 and adjusted for inflation using data from the Consumer Price Index (ABS, 2021).

Figure A1: Agricultural production profit at full equity (PFE). Adapted from Marinoni et al. (2012).

Costs Associated With HIR

In addition to agricultural opportunity costs, the other costs involved in the transition from business-as- usual agriculture to HIR were fencing costs (ℎ ), maintenance costs (ℎ ) and brokerage costs
(ℎ ). Fencing costs were set at $24 ha-1 following the work of Cockfield et al. (2019). This value assumes that fencing a 10,000ha area would cost $240,000, based on a 40 km perimeter and a unit value of $6,000 km-1. Also following the work of Cockfield et al. (2019), a flat rate was used to quantify maintenance costs. This was applied as $1 ha-1 over the first 5 years following establishment and $0.5 ha-1 for every year thereafter. The brokerage costs were applied as 20 per cent of the total value of the carbon within a given pixel. As such, if the carbon price or amount of carbon abatement increased, so did the brokerage costs. This rate of brokerage cost is consistent with the amounts charged in ERF projects.

Spatial analysis
All datasets were resampled to a spatial resolution of 0.05 degrees and spatial analysis was carried out using the Numpy and Rasterio modules within Python 3.6 (Python Core Team, 2016).
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