The idea of earning extra income from "carbon credits" has attracted considerable interest and optimism from the general public, and forest growers in particular.

But after the initial optimism the intricacies of what it is, how it will work, and questions on benefits for small-scale growers inevitably arise.

In 1997 in Kyoto, Japan, all developed countries agreed to reduce or limit emissions of their greenhouse gases. This agreement was driven by the acceptance that concentrations of greenhouse gases such as carbon dioxide and methane were increasing in the atmosphere with potential to bring about major changes in global climate.

The agreement called the Kyoto Protocol included the recognition of forests as carbon sinks, and provided for carbon trading to offset the emissions of greenhouse gases to meet the Kyoto emission reduction targets.

The Kyoto Protocol is still subject to ratification by a minimum number of 55% of participating countries and enough of the industrialised countries to compromise 55% of the total emissions of all the industrialised countries, before it comes into force. At this point of time this has not happened and Australia, although a strong advocate of flexibility in meeting any commitments at least cost, has not taken any decision on "carbon credit" trading.

Nevertheless, the Australian Government sees potential in being a world leader in any future emission trading and is encouraging the establishment of large areas of plantation. The "carbon credits" that may stem from these plantations are seen as having great potential on the future international market.

As trees grow they absorb carbon dioxide from the air to drive the process. About 50% of the dry weight of a tree is carbon.

The growth of a plantation on previously cleared land will markedly increase the total carbon stored on the land. "Carbon credits" will recognise the absorption of this carbon.

he intention is that credits will be certified and recognised by a certificate owned by individuals or companies who have created the storing of the greenhouse gas. These certificates can then be sold to industry wanting to reduce their greenhouse gas emissions.

• At this stage there is no official government policy and the government can not guarantee carbon credits for forest sinks.

• There is no dovetailing Commonwealth/State/Territory legislation for carbon trading at this stage.

• Legal systems for the issue of carbon credits (emission permits from carbon sinks), and carbon rights need to be developed.

• The market needs to be planned and matters including who verifies and issues carbon credits, legal security, insurance against loss and price fluctuations addressed.

• Sydney is the likely Australian regional centre for carbon trading with the Sydney Futures Exchange likely to be the authorised market-clearing house.

• The value of carbon credits is not clear simply because they have yet to be traded to establish a price. Estimates of prices vary wildly and will be clarified to a degree when the Sydney Futures Exchange commences forward trading.

NSW Government has adopted a pioneering role in setting a framework to facilitate carbon trading, despite the fact that no guarantees for trading can be given. The rationale is to act now or be left behind in the marketplace.

The framework involves legislation in the form of the Carbon Rights Legislation Amendment Act 1998 (CRLA Act) and the Natural Resources Legislation Amendment (Rural Environmental Services) Act 1999 (NRLA Act).

In essence the CRLA Act amends the Conveyancing Act 1919 to allow for the creation of carbon sequestration rights by separating timber and carbon from the land, and enables electricity generators and distributors to trade in these rights. It also allows State Forests of NSW, as a government department, to trade in these rights, alongside private enterprise.

The NRLA Act recognises carbon sequestration in planted forests as a means by which electricity retailers can achieve net reductions in their greenhouse gas emissions. It allows the imposition of conditions on the licence of each retail supplier of electricity with the NSW Government seeking the use of renewable resources for energy production in the ratio of 5% by 2003. An additional 2% Commonwealth Government requirement is mooted.

The NSW Government is working through State Forests NSW to develop partnerships between industry investors, markets and landholders. Using funds generated by investors seeking to create a carbon pool for their own use State Forests can establish plantations on private land. This creates the opportunity for landholders to rent land to State Forests for plantation establishment in return for an annual cash payment (or annuity).

There are a number of private enterprise organisations competing in the NSW marketplace offering similar commercial opportunities to landholders.

An option is for landholders to grow a commercial forest on their own land with potential for carbon trading to contribute to overall returns. Landholders contemplating this course of action need to take the following issues into account:

• Kyoto "forests" must not have been planted before 1990. Only the carbon sequestered by the forests during 2008 to 2012 is tradeable. Discussion is pending about the period after 2012.

• To be eligible for carbon trading "forests" must be:

• Planted on land, which historically has not been covered by forest (ie afforestation).
• Planted on land which historically was forests but which has since been used for some other purpose (ie reafforestation).
• Additional to those that would otherwise have been planted.

• Further clarification of the definition of the term "forest", which is central to carbon credit markets, is still pending however native forests are excluded.

• Methodology for measuring and verifying the quantity of sequestered carbon in trees is still being researched. For individual growers measurement, particularly with a high degree of accuracy, would appear to be expensive but a requirement none the less.

• The costs of services and transactions associated with the issue of carbon credit certificates and selling the carbon are unclear, but will certainly be subject to economies of scale. Small-scale growers will no doubt pay more per unit of carbon.

• Growers who sell carbon credits and then go on to harvest the same forest will incur carbon debits. They will be required to offset these debits by buying replacement carbon credits on the open market. The risk of price fluctuations plus cost of necessary monitoring and certification are obvious detractions.

• Forests planted from 1990 on, and prior to 2008, will always have a carbon emission at harvest (ie carbon debit) greater than the carbon sequestered during the eligible 2008 to 2012 period (ie carbon credit). This is because carbon emission at harvest is to be based on carbon accrued from planting to harvest. This is an inequity that will have to be addressed.

• The total of all costs a grower is likely to pay for the production and trading of certified carbon credits is unanswerable at this stage, and so are the returns. Consequently the economics are unknown and hardly the basis for pragmatic decisions.

At this stage small scale growers may not find carbon credit trading sufficiently secure or rewarding:

• The Australian Government has made no definite decision about carbon trading and credit repatriation so carbon trading can not be guaranteed.

• Economics are unclear. For small growers costs of production, monitoring, certification and trading appear substantial per unit of carbon credit. Prices at this stage are unknown and will be determined to a degree by future forward trading.

• There is uncertainty in many areas including legal frameworks for the issue of carbon credits and carbon rights, the setting of market place parameters, carbon monitoring procedures and carbon accounting standards. To a degree research can not keep pace with the information demands being placed on it by the carbon-trading debate.

• Existing accounting rules particularly those relating to "carbon debits" currently compromise returns.

• Multiple benefits for growers will be difficult to optimise. For example quality wood production, which necessitates pruning and thinning, will compromise carbon storage through the removal of stems, branches and leaves. Therefore silviculture will need to be reconciled with carbon sequestration.

• To sequester carbon between 2008 to 2012 plantations would need to be planted now particularly as initial research work indicates carbon uptake is highest in the first 10 to 12 years. With current uncertainty relating to several areas of proposed carbon trading this timing will not appeal to many growers.

• At this stage a valid option for landholders could be to rent land to organisations like State Forests NSW, or equivalent private enterprise organisations, and take advantage of annuity payments.

• Alternatively a pooling of resources may have advantages relating to the increased scale of operations. However benefits would still be dependent on developments in carbon credit trading arrangements, changes in rules and prices.