Stimulating biodiversity credit creation in NSW

The role of the Biodiversity Conservation Fund

Under the biodiversity offsets scheme established under the Biodiversity Conservation Act 2016 (NSW)(BC Act) developers who are required, pursuant to a planning approval, to offset the impact on biodiversity of their projects have a range of available options to meet their offset obligations. These options include purchasing their own offset sites (and retiring the credits generated by those sites), purchasing credits from the biodiversity credit market (generated by land owned by third parties) or payment of an amount into the Biodiversity Conservation Fund (Fund) in accordance with the offsets payment calculator (Calculator).

The current biodiversity credit market can be described as being relatively immature and of a very small scale. In many cases developers will be required to retire a required number and class of like-for-like biodiversity credits, resulting in a need for a very specific credit class. Given the small size of the existing market and the developer’s specific offset needs often the credit market is not a viable option for developers to meet their offset obligations. There are also inherent challenges, including significant time, expense and resources, involved in developers purchasing their own offset sites and entering into biodiversity stewardship agreements so as to be able to retire the credits generated by those sites.

Consequently, on its face the option for developers to pay into the Fund to meet their offset obligations is a very attractive one. However to date there has been relatively limited uptake of this option. As of 3 March 2021, 169 developers have paid $30 million into the Fund, transferring 384 offset obligations to the BCT[1]. The success of the Fund option has been dependant on the effectiveness of the Calculator and the reasonableness of the credit price being generated by that Calculator. Historically, the experience of many developers is that the credit price generated by the Calculator is excessive (compared to the option of self-funding offset sites) and therefore in many cases has been considered to be uneconomic and the Fund has not been utilised. Whilst for landholders there is concern that amounts being paid into the Fund are not sufficient to cover the costs and risks involved in landholders placing biodiversity stewardship agreements over their land and managing that land in perpetuity.

The Department of Planning, Industry and the Environment (Department) has identified a number of issues with the current Calculator including that:

• the Calculator is often being used as a credit price benchmark which was not the intention of the Calculator; and
• the limited size of the market and credit transactions has led to some calculated offset prices becoming highly volatile and difficult to predict which can deter developers from using this option, and can also result in the BCT not receiving sufficient payments from developers to fund the delivery of the offsets.

In terms of the second issue, the offsets scheme consists of a large number of distinct credit classes with few transactions. There are 359 different offset trading groups for ecosystem credits and 983 different species credits. As many as 88% of ecosystem offset trading groups and 97% of species credits have never been traded.[2]

What is proposed?

In recognition of the current limitations of the Fund as a means for developers to meet offset obligations, the Biodiversity Conservation Trust (BCT) is consulting with interested stakeholders and landholders on the development of a new developer charges model for developers who choose to pay into the Fund. The new charge system would replace the existing Calculator and ‘aims to provide greater confidence and stability in the setting of offset credit prices’[3].

The BCT intends to base the new developer charge system on the following principles:

• The developer charge should reflect the average cost of delivering offsets at a biodiversity stewardship agreement site;
• The value of payments into the Fund should balance the cost of acquitting these obligations over time, with a modest margin for risk and administration for the BCT;
• Charges should reflect the objectives of the biodiversity offset scheme to encourage the avoid, minimise, offset hierarchy and to ensure, as far as practical, offsets met through the Fund are like-for-like;
• The charge system should be robust and aim to reduce unnecessary volatility and improve certainty for participants;
• The charge system methods should be logical, explainable and transparent; and
• The charge system should be repeatable, utilise the best available information and not be onerous to implement.

The Department engaged EY Port Jackson Partners (PJP) to review the current Calculator and make recommendations for improvements. PJP made a number of recommendations to the Department including that the cost of acquiring new or rarely traded credits may be more accurately estimated through a cost-structure model which would be based on the following components:

• Total fund deposits (which are required to be paid upon the first transfer or retirement of credits and is the amount determined as the present value of the total of all scheduled management payments in respect of the site (under the biodiversity stewardship agreement) during the life of the agreement);
• Transaction and administration costs;
• Opportunity costs; and
• Landholder’s surplus margins (above the opportunity cost of the land).

In some circumstances an econometric model (similar to the current model but with refinements) or a market soundings approach may be more appropriate depending on the nature and scale of the market for the particular credit class. PJP recommended that ‘the method should calculate a developer charge that reflects a reasonable estimate of the cost to the BCT of acquitting the obligation in a like-for-like manner with a modest margin to account for risk.’

Importantly in respect to process it is proposed that:

(a)The calculator be removed from public view although developers would still have access to the BioBanking public registers, the Biodiversity Offsets Scheme public registers and the Spot Price index for biodiversity credits;

(b)Developers seeking to make a payment into the Fund would need to make an application to the BCT to obtain an offset obligation payment quote per credit for each relevant trading group (which may be valid only for a certain length of time eg one year), but noting that payments into the Fund can only occur after development consent;

(c)The BCT would administer the calculator based on the recommendations of PJP, with appropriate transitional arrangements; and

(d)The BCT would be transparent in its credit transactions and the price it pays to acquit offset obligations.

It is proposed that the new developer charge model be in place by early 2022.

What could it mean for developers and landholders?

The BCT is currently undertaking extensive stakeholder and landholder consultation on the proposed reforms. Whilst the final form of the new charge system is not yet known, improvements to the current Calculator may result in far greater use of the Fund as an alternative to other offsetting options. However as with all reforms, the devil is in the detail and the success of the new model will largely depend on how the inputs into the model are sourced, as well as the predictability of the model for developers and landowners alike.

For landowners, there are a number of challenges and costs in establishing offset sites on their land pursuant to a biodiversity stewardship agreement which must be considered as part of the charges model. The proposed charges model incorporates the idea of market sounding including as part of a cost-structure model, however this must be carefully managed to ensure that the information obtained and fed into the model is reflective of the market and not influenced by ‘abnormalities’ including ‘one-off’ commercial arrangements or trades between related companies. It is expected that the costs of entry, land management and opportunity costs may also differ widely between landholders depending on the size and resourcing of the landholder as well as the location and other features of the particular landholding. For developers, it is critical that the model is repeatable and transparent to provide certainty to developers of the cost of paying into the Fund so that this can be properly considered as an option for meeting biodiversity offset obligations.

The Fund provides an opportunity for the BCT to achieve strategic and highly effective biodiversity conservation outcomes, however its success is largely dependent not only on the size of the credit market but also on the attractiveness of the Fund for developers as an alternative to other offsetting strategies. As NSW continues to enjoy an infrastructure boom, the review of the existing Calculator provides an opportunity for interested stakeholders and landholders to provide input into the new charges scheme so that the full benefits of the Fund can be realised.

Please contact our environment and planning team if you would like to discuss the proposed changes to the Calculator in more detail, or if we can otherwise be of assistance with your biodiversity offsetting requirements.

Important Disclaimer: The material contained in this article is comment of a general nature only and is not and nor is it intended to be advice on any specific professional matter. In that the effectiveness or accuracy of any professional advice depends upon the particular circumstances of each case, neither the firm nor any individual author accepts any responsibility whatsoever for any acts or omissions resulting from reliance upon the content of any articles. Before acting on the basis of any material contained in this publication, we recommend that you consult your professional adviser. Liability limited by a scheme approved under Professional Standards Legislation (Australia-wide except in Tasmania).