On The Tools: What the ETS Means for Farmers

An exert from On the Tools podcast episode with Nick Butcher, co-founder and CEO of CarbonCrop.

Nick breaks down the Emissions Trading Scheme (ETS) and the new Climate Change Response Amendment Bill. He shares how farmers can unlock carbon potential on their land, avoid legislative pitfalls, and diversify income while improving environmental resilience.

Listen to the podcast episode here.

The transcript has been lightly edited for readability.

Marie-Claire

Today I am really just delighted to have Nick Butcher with me. Nick is the co-founder and CEO of CarbonCrop. They're on a pretty awesome trajectory. Right Nick? And doing some very cool things in the carbon space. So great to have you. Looking forward to hearing your story and what's happening.

Open up with, give us that one minute jargon-free explainer of how it works. What do you do?

Nick

I will give it a crack. I'm terrible at staying jargon free, but I'll try and go low jargon at least.

What we're aiming to do is help landowners identify opportunities around forest restoration and protection on their property and how to get paid for it. In New Zealand there is a thing called the Emissions Trading Scheme where you can get paid with carbon credits for forest that's growing on your property. You can turn those carbon credits into cash money, which is often a very valuable thing for a farmer.

What we're aiming to do is help landowners identify opportunities around forest restoration and protection on their property and how to get paid for it.

Starting out, we found that a lot of farmers found the scheme very difficult to interact with, and our goal was to sort of streamline and automate that as much as possible so that lots of people who actually had opportunities and weren't realising them could start to get paid for the carbon that they were sequestering.

We've been very successful in that we now manage hundreds of farms in the ETS directly. I think we've paid out somewhere north of $30 million to landholders now. So it's quite serious sums of money that are available. And much of that was previously going unclaimed.

As we grew, however, we've started realising that there are opportunities not just for farmers themselves, but also in the way that farmers interact with others in the ecosystem. Like catchment groups, primary sector processors, regulatory agencies, NGOs... All these different groups, many of them actually want the same thing - to have the right trees in the right places for the right reasons looked after in the right way, being paid for to the extent that's fair.

“All these different groups, many of them actually want the same thing - to have the right trees in the right places for the right reasons looked after in the right way, being paid for to the extent that's fair.”

But it's been very hard in the past for them to coordinate. We're now putting a lot of effort into these planning and coordination tools to help landholders not just get paid for the trees that they already have, but to identify other places that it might make sense for them to consider... I hesitate to say forestry... because the moment you say that, people think you're gonna plant my farm out in pine trees.

“I hesitate to say forestry... because the moment you say that, people think you're gonna plant my farm out in pine trees. More than 80% of the forest that we have in the ETS is actually biodiverse indigenous forest.”

More than 80% of the forest that we have in the ETS is actually biodiverse indigenous forest. And when we're talking about future forests, we're certainly open to all types - Indigenous forest and also silver pastoral activities very much in scope. We're increasingly seeing farmers now planting willows and poplars and other potential erosion control and shade species while still continuing farming activities under them.

So it's probably not a minute. Probably had plenty of jargon, but that's the scope of who we are.

Really, it's about trying to help diversify farm activities, provide more revenue streams, provide environmental resilience, and make it easier for farmers to interact with these systems that exist in the market.

“Really, it's about trying to help diversify farm activities, provide more revenue streams, provide environmental resilience, and make it easier for farmers...”

Marie-Claire

And how do you actually do that? Tell me about the technology. What is it? How does it work?

What does it do?

Nick

We came out of an AI research group, so software is very much at our core. Basically people would get in touch with us and say, I'm interested in what opportunities I might have for the ETS. And we would run a whole bunch of software in the background. If they were keen to continue with that, then they could say to us, oh, that bit there looks good. Can you help me work through the registration process? And we'd provide all of that as basically a services offering.

To begin with, the software was painful for us to use, but as the system has matured... I won't say it's now perfectly elegant as it is still just fundamentally quite a complex space... but the sharp edges have become rounded off.

So we have now independent consultants using our system, catchment advisors using our system, primary sector entities using our system. We still provide a service offering to a large degree, but it's increasingly for the pro user for their customers.

So it's at heart, it's a combination of a software platform and sometimes a full service offering. We really split between the two depending on who we're interacting with.

We're pushing more and more towards building and supplying the software and then training other people to use it, rather than doing it ourselves - just because of the scale we're working at now. We're a pretty small team. We can't support 20,000 farmers across New Zealand ourselves. We really want to empower others within the ecosystem to do that. And we just build the tools.

Marie-Claire

So as a farmer myself then, I've never really explored this area. What's my first step? What would I do? Why do I reach out to you and what happens when I do?

Nick

Yeah, great question. Hopefully we can find you some money. If you wanted to get in touch now, you could just email us.

In terms of the steps, though, as a farmer who's interested in the opportunity, you get an analysis of your farm. Basically, this tells you what forest you already have that might have entitlements that you could access. If you're interested in claiming those entitlements, we can walk you through the implications.

As for the registration process, we have a full service offering where we take a cut of your credits in the future and we basically hands free, do the whole thing for you. Just get money in your bank account.

You're also though free to go off and get somebody else to do that if you prefer or do it yourself or ignore it completely, and at least you now know what you're ignoring.

Increasingly though, other stakeholders use CarbonCrop to provide those services to landholders when they're interested.

We're finding catchment groups are a really great channel for us to provide these tools at scale to a region. They already have really well aligned interests. They want to improve water quality. They want to improve diversity. They want to help the farmers within their region access different revenue streams and be more resilient.

A really great initial point of call if you're interested in having any work like this done is get in touch with your catchment group and tell them that you're interested in this and tell them that you've heard the CarbonCrop might be a way for you to get access to this information.

We also have a bunch of tools for planning to plant new forest, where you can see what the costs might be, see what the returns might be, and particularly now with the new ETS legislation, see what the restrictions might be and the implications of those over time.

In many cases, you won't be able to register exotic forest and the ETS on land that's in Land Use Classifications 1-6, which is a lot of farmland. If you are a farmer anywhere in New Zealand now and you are interested in potentially accessing ETS revenue for new forest, you need to be extremely careful where and how you partner. The act now has some quite nasty hooks that are not very obvious at the outset.

It'd be very easy to get yourself into a bad situation where you sacrifice a lot of value just by taking the superficially obvious pathway and then going, oh, dang, this has suddenly meant that I can't sell my farm without realising a significant loss of value.

In fact, we have just launched a new tool, which ties in with a new legislation that has been released.

As a new farmer who's interested, you could now go to our website. The link is www.carboncrop.com/ETS-LUC-assessment. If you go there, it's got an interface that allows you to find your farm. You basically just click the titles that you want the assessment to be done for, and then we'll take that in as a request for an analysis.

We're doing some work over the next few weeks to finalise the report and then we'll email you a PDF, which says here is your situation in regards to this new legislation, or at least some part of it. In the past, we've supported doing that as well for a full ETS opportunity assessment for your farm, and we'll still be doing that too as they come in.

I don't like the way that some of the legislation has been drafted overall. This is probably unusual for arguably a forestry company, but I actually do support the goals of the legislation. I think it is important to avoid having this sort of massive shift from productive farmland to exotic forestry.

And when you look at the statistics, I think it is a problem. So I think it's good that they're trying to solve it, but there are still some bits of the legislation that we hope are gonna be sort of refined and made a little bit less hooky in the years to come.

Marie-Claire

So this is the Climate Change Response Amendment Bill, right? That's just become an act that we're talking about? Give us the high level then - what are the changes that this amendment has brought in?

Nick

So I think somewhere in the long name it's got 'forestry conversion' as one of the keywords. The main goal of it was to reduce the amount of more productive farmland that was being converted full shift over into exotic forestry - primarily driven by carbon forestry.

So key to note is that it doesn't stop you planting a forest anywhere. The mechanism is that it's gonna stop you from registering some of that forest in the ETS. The idea being to pull out this massive commercial incentive to do large scale conversions.

So key to note is that it doesn't stop you planting a forest anywhere. The mechanism is that it's gonna stop you from registering some of that forest in the ETS.

It's focused on LUC 1-6, so LUC 7-8 you can do whatever you're able to do before.

The starting point is that for exotic forest, you cannot register that in the ETS at all. And then there's a whole bunch of cases in which that won't hold or there are exemptions that you can access.

Some of the cases where it's not restricted are: if it's already there as of the 31st of October this year you can still register it; if you can prove that you had an investment in process, you can still register it; if it's land that's considered to be high or severe erosion risk by the regional council... there's a long list of exceptions to the rule, which are designed to stop having some inadvertent, perverse outcome.

But the general rule is LUC 1-6, you can't register it at all. The two big exemptions for this are, if it's LUC 6 land, there's an annual ballot process for up to 15,000 hectares where you can basically apply for a future permit to register it. If you get that permit, then that would mean you could go ahead and plant that land and be confident you could register it.

And also they were quite careful not to completely take away farmers' options. The goal here was to stop full farm conversion. Generally, it was accepted that actually having mixed farm forestry and the sort of mosaic land use and woodlots was actually a really good thing for farms in terms of revenue resilience, but also climate resilience. Having shade for stock and stuff is a great thing. They didn't want to take that off the table.

So they've also got this 25% provision where you are allowed to register up to 25% of your total LUC 1-6 area as new exotic forest in the ETS.

So there are actually quite a few avenues that are still there. It's not like it's off the table by any means. It's just that they're quite complicated how they all interact. You definitely wanna make sure that you've got a super clear picture before you start putting trees in the ground. Otherwise, you can sort of paint yourself into a corner a bit, and it could be very expensive.

Opportunities are growing in this space. I'd say there are a lot of farmers who we've talked to in the past where they thought their forest isn't eligible for the ETS and they were wrong. If you're not sure, definitely double check because it can be a big opportunity.

We're particularly optimistic with some of the discussions and opportunities for farmers where it has been historically really unfair. The farmers who've done the most in terms of stewardship (preserving relatively mature native forest) are the ones who have the least entitlements. They're told sorry, that's not eligible for the ETS because it's pre 1990. It's still a really challenging space. There's no off-the-shelf solutions where it's like suddenly you can get paid for your activities there, but it's moving in a good direction.

I think that it's increasingly acknowledged that if you want people to act as a good steward of something, you have to give them the resources and the incentives to do so. Generally, I'd say farmers are heavily incentivised to protect old growth native forest because it's their farm and they care and they want to look after it.

But it's pretty hard, especially when you have really high pest levels, to actually resource it. No one pays you to get rid of all those pigs and deer, and they're not gonna disappear by themselves. Better recognising the benefits on biodiversity and carbon for those mature forest pest initiatives is moving in the right direction. We're hopeful that, especially through some of the primary sector processor engagements that we have, in the absence of regulatory frameworks, they can provide an opportunity.

But it's pretty hard, especially when you have really high pest levels, to actually resource it. No one pays you to get rid of all those pigs and deer, and they're not gonna disappear by themselves.

The great thing about the ETS is just the certainty that it provides and the scale that it's at. It's very hard to get that in the voluntary carbon market. Generally, our attitude has been that the voluntary carbon market is a great place to kind of trial and prove out possible opportunities, but if you want it to be something that can impact national scale, historically at least, most of that has been compliance mechanisms or like large scale incentive mechanisms with high certainty.

So those are the main ones.

To the extent that I'd close with anything, it's just please check your situation for your farm. Especially, please don't plant any new exotic forest on your farm without fully understanding the new legislation because you're either going to not get money that you may well have expected and probably want, or you're going to get that money in a way that takes your options away for the future and could have pretty negative implications for the sale of your farm down the road if you're not careful.

So those are the main messages, I think.

...please check your situation for your farm. Especially, please don't plant any new exotic forest on your farm without fully understanding the new legislation...

Marie-Claire

And are they likely to be more amendments? Have you been involved in the conversation around these policy changes and do you think there'll be more?

Nick

We are involved in the conversations. There are lots of people are, through the various consultation mechanisms. We certainly have opinions on where we would like to see it go in time.

The biggest part that I would like to see changed in future is the one that I mentioned before: the rule on this 25% provision. Let's say you have a thousand hectare farm and you plant 10 hectares of trees. You've got this 25% provision, so theoretically you're good for up to 250 hectares.

Your first 10 hectares goes in and you say, I would like to register that 10 hectares using my 25% allowance. In theory, you've still got 240 hectares left. The problem is that if you change any of the titles that comprise your farm or your farm changes ownership. All of that remaining allowance is forfeit, which is...

Marie-Claire

Wow.

Nick

...it wasn't the policy objective. It was rather a solution to a perceived technical constraint. What you don't want is people going, alright, I've got my a thousand hectare farm. I'm gonna register 250 hectares of it, and then I'm gonna sell that 250 hectares off to somebody else. Now have 750 hectares left and I'm gonna register 25% of that.

And you just kind of whittle away the whole thing like death by a thousand cuts. You still end up with the whole farm going into forest. But to prevent that, they basically said, if you use it once, you're now stuck with it, and if you transfer it, it's gone. And I don't think that is good.

It means that when you're a farmer who's planning on planting and then registration, you have to look quite a long way down the road and anticipate certain outcomes. I would really like to see that changed. I think it is something that could be solved through more careful design.

I mean, I'm also sympathetic to those who implemented the legislation because they're trying to hit a deadline. This is definitely a complex solution. I can see why they left it out, but to me it's crying out for a fix. You're not going to make every single land use decision that you're gonna make for your farm in the next three years and be certain that you're not gonna try and sell it sometime in between.

It could even have the really negative implication of forcing people to rush these decisions and going, well, I know I'm gonna lose it if I don't use it. Oh, I guess I'll throw trees all over this bit here just to make sure that I get it in the ground and then can get it registered. That's a really bad outcome I think, for everybody involved.

So we would love to see an amendment around that. For anyone listening, we have ideas and we're keen to support implementation of it. I think it is a solvable problem but it's not there today.

Today, this is definitely one of those things where be extra careful what assumptions you're making about what your options are as time goes by, 'cause it, it could bite you.

Marie-Claire

And as this is all evolving, do you guys have a newsletter or a way people could keep in touch and keep up to date with all of this? I know you don't wanna be giving advice out, but you are the experts and you are on top of a whole lot of complicated information.

So hopefully people can stay in touch with you that way.

Nick

We do have a newsletter. If anybody is even vaguely interested this in this space, please go to our website, sign up and ask for the assessment. If you already know the answers, then at least it'll put you on our mailing list to get additional information as we send it through. Fust go to our website. You can sign up for general mailing list information, but it's so context specific.

As you said, we don't wanna give advice. Inevitably we are giving at least qualified advice, but it's always heavily caveated with, please don't draw assumptions from what was said. Please carefully investigate your particular situation.

And really, it's just hard to give any generic advice because it's so farm specific. Everybody has different existing forest, different distribution of land use classifications across their farm, and also different objectives and desires and what they want to do with their farm. To say, oh, you should do x or y would be a good fit ... it's just naive if you don't actually know their situation.

So we almost can't give generic advice other than be very careful to get some case-specific advice before you go jumping into this, because there's lots and lots of pitfalls.

Marie-Claire

So tell us a bit more about the business. You mentioned you were spun out of a founding company. Talk to us a bit about that, how did that happen, and your journey too.

Nick

So back in, I think it was probably early 2020, late 2019, the Nelson Artificial Intelligence Institute was created. And then late 2020 I got involved. The brief was, basically that we think there's a way that if we show computer vision models pictures of trees, we'll be able to tell how much carbon is in those trees, and that could be useful to somebody.

I knew that the ETS was the thing and I actually initially thought that probably this wasn't gonna be much of an opportunity because it would be a solved problem. If you had an ETS, then you must have solved the problem about how to see if you were eligible for the ETS. But as soon as we looked into it, every single landholder we talked to said, oh yeah, I started in on that, but it was really hard and I just gave up on it to be honest and moved on. It's not like I had a shortage of things to do on the rest of my farm.

This is just there on the sidelines, so we thought we could help basically by building tools and processes to make it easy for people to engage with.

Many of them, the ETS has actually kept them afloat - particularly through 2024, which is a pretty horrible year for farming. For a lot of the farms, it's actually one of the dominant sources of revenue now. These are farms, not commerical forests. They have significant areas of regeneration. But when people think of carbon revenue, they think, oh, you sold out and you became a carbon farmer. It's not the case. These are very much active, highly productive farms. They've just got this low-productivity land, shifted it into a forestry asset, or it was already forest because it was natural regeneration, and now they've got that as a new revenue stream.

The first few years, as a startup and for me personally, they're really rough. You don't have any money, you don't have any customers. You're sort of fumbling around trying to find out what you can actually provide that's valuable and you don't have that immediate validation. Especially as a tech company, in some ways we move very quickly, but in others it takes a while to actually get good product market fit for your technology.

It was really in early 2023 that we started paying out our first large sums of money to landholders. It was just so rewarding to see. How happy they were to have had this work for them, the positive impact it was having on their farming operation and also because currently about 85% of our forest is indigenous forest.

It comes with obligations - it's not free money. You're on the hook for that forest now. You have to maintain it as forest. You have to protect it. You have to allow it to continue to regenerate. If it all falls over, at the very least, you stop earning carbon from it and potentially you have to give the money back.

It felt like we were having quite an impact in terms of supporting restoration activities. And I'd say that that sort of continued through until late '23. Early '24 was really when we started getting to the level of capability where we could offer a bigger portfolio of solutions for primary sector processors.

Now we're also providing services to catchment groups and regional councils and the wraparound ecosystem of other people who want the same thing - really good farming practices, profitability and good environmental outcomes.

Sometimes there is tension. Say what you want about pine trees - they grow really quickly and they're quite cheap to plant and they can deliver a lot of revenue. So there is a balance to be had, but most people are actually pretty pragmatic about trying to find a reasonable path that achieves a good outcome overall for everybody involved.

It's been really gratifying actually to see how the tools that we built early on have become relevant to this broader community of users. I presented to a catchment group a month or so ago and just showing them how we'd sort of put it together. Their jaws just kind of hit the floor, going, this is the missing piece! This is what we've needed! This allows us to suddenly bring all of these conversations together and actually move things in the right direction. We can't wait to put it in.

It's a thrill. People put their hearts and souls into these projects, trying to keep them alive. And when you get that kind of click of someone going, I love what you've built, it's super gratifying. And then when you see them actually do something different on their farm enabled by what you've put together, that's an amazing feeling as well. Now customers tell us what they want to see.

Marie-Claire

And you don't have to guess anymore. So what are they asking for? What's on the horizon? Where, where do you see it evolving?

Nick

One big thing is integrated planning - afforestation with multiple outcomes, especially silverpastoral.

It's not necessarily taking the land out of production, it is planting trees on the more erodible areas, which also gives you shade, and linking with the various different incentive programs.

Something that I imagine is really relevant to your listeners, perhaps, is that carbon is becoming a bankable asset class for some farms. Some of the major banks now have an in-house position on what the future carbon price will be. It's not to say that they're necessarily generous with their assumptions, but it means that it's actually an asset class which they will lend against.

And in the past, especially in recent years with many farms running right on the ragged edge of their borrowing capacity, this revenue stream from carbon hasn't actually been admissible to support your borrowing capacity. That's now changing, and that I think is transformational for some farms. Generally, hill country sheep and beef farms have been in the toughest situation in terms of debt. They're also in the best situation, usually in terms of the ability to leverage this new category - maybe borrow a bit more or pay down their debt through this new revenue stream.

So that's, that's a big part of it too - providing tools to banks to do these. The assessment and the forecasting, the assumptions around returns and eligibility are really complicated. We have a lot of tooling in place now to package that up and give them a neat sort of prospectus or portfolio of what you could do and how that might impact the farmer's future position.

Marie-Claire

Is world domination in the plans?

Nick

I'd say we don't really even want to dominate New Zealand. We want to collaborate as much as possible. We've got the stakeholder matrix and there's about 15 different groups, all of whom have their own special skills.

It's very clear that we're never gonna be everything to everybody. We're gonna be lucky if we're everything to even one person. We're trying to really just fit cleanly into the bit where we are the best and then make sure that we interface nicely with all the others. We're not a full farm management system, for example, and there are people who've spent decades building really good integrated full farm management systems. We're not arrogant enough to think that we're just gonna come along and displace that straight away. But we're really good at the carbon and the vegetation and the planning part, and so we just want to focus on being good at that.

We have been spending a lot more effort recently is in the sort of interaction between forest vegetation, biodiversity, water quality, and pest control. We're pretty good at the biodiversity and vegetation forest part. We haven't done a lot historically on water quality or pest control. The more discussions we have with catchment groups around the challenges to water quality - lack of vegetation, runoff, possibly nutrient surplus...

But actually pests are a huge source of water quality issues through erosion triggers and effluent sources. And similarly if you're trying to create new forest and you've got a massive pest issue, good luck with your survival rates. They're just all gonna get eaten. So, it's really become clear that we have to provide good, integrated solutions for solving some of those pest presence problems.

And at the same time, we can help with the water quality problems. The Land for Life project in Hawkes Bay, which we're now involved, are not really viewing it so much as an opportunity to solve climate change through carbon, but rather to help address their water quality and erosion issues using carbon as a revenue source to finance the forest. If we don't provide an integrated solution that addresses the water quality implications of an afforestation plan, we're only really solving half the problem.

We're putting a lot of effort into those areas now. At the core of it all is still the landholder and their farm. Like no one wants to (good luck if you do) tell someone to do something for their farm that is bad for them and their farm.

Ultimately it's how do we do something that's really good for you and your farm and makes good commercial sense and gives you good like long-term sustainability options and stewardship options and means that 50 years from now you're gonna be in a great place. But as we're doing that, how do we also achieve great outcomes for your local catchment and for the wider region in terms of pest reduction and water quality improvement and biodiversity benefits?

Those are the things that we're really good at, the core forestry stuff now, and it's those other areas where we're starting to spend a lot of effort because it just, it's clear, there's so much opportunity and there's quite a lot of gaps in.

So many of the groups we talked to historically with carbon, it was like, how are you doing your carbon planning? Spreadsheets, really big, complicated spreadsheets. We've largely solved that now for the people we're working with. But when we talk to people with pest control plans, now it tends to be spreadsheets, really large, complicated spreadsheets.

There are good tools out there, but we, we think that there's a lot that we can add.

Marie-Claire

Amazing. I ask this of everybody and didn't, didn't pre-warn you, so sorry, not sorry, if CarbonCrop was a farm animal, which one would it be?

Nick

I'm gonna go with goat. I really like goats. I think they're tenacious, they're really friendly, they survive in all sorts of different environments. I think goats are great, otherwise I'd probably go for sheep for similar reasons. I know sheep farming's a pretty hard business to be in, but I love sheep. I think they're just cool animals. They scare me less than cows as part of it.

I was going for a run up the hill last night, where we live. There's a paddock there that had been full of like fairly tall grass. It's been empty until recently, but as I ran past it, there's suddenly this boom of these cows that I startled. I just terrified. It's not until they're right there, in the dark, and you hear this unexpected thundering that you remember how big cows are.

So I'm gonna stick with my original answer of goat. A lot for a lot of time for goats.

Marie-Claire

Unexpected benefits. You know, there's a whole variety of benefits they come with. Misunderstood sometimes.

Nick

Also wildly problematic, like feral pest species. So we don't have those associations, but well managed, well farmed goats that are on a farm and the place that they're supposed to be - those kind of goats,

Marie-Claire

Goat in the right place. Absolutely.

Nick

Exactly.