If you have a project that is likely to need biodiversity offsets then you might be wondering how to proceed. It's important to make biodiversity a priority at the beginning of your project to ensure there are no surprises at the end.

The NSW Biodiversity Offset Scheme (BOS) is the framework for offsetting impacts to native vegetation and habitat, while the Biodiversity Assessment Method (BAM) is the methodology which is applied to assess biodiversity values at a site scale and determine offset requirements. The BOS and BAM are mandatory for development in NSW.

It's a cluttered assessment framework and since its inception in 2017, the methodology, associated underlying datasets, calculations and supporting financial metrics have been continuously evolving. Issues are being regularly identified which bring additional complexity and the perfect solution is a work in progress. So it's important to get the right advice from an expert who's up to date with this moving feast.

There are three main ways to acquit the offset liability of your project:

• Make a one off payment to the Biodiversity Conservation Trust using the Biodiversity Offset Payment Calculator (BOPC)
• Establish your own Biodiversity Stewardship (offset) site
• Purchase credits from the market (limited availability)

The BOPC is the Government's tool for working out how much money you need to pay for a particular amount of vegetation or habitat clearing, as opposed to finding an offset site yourself. The Government has recently proposed changes which will affect it's management, transparency, and the way it values offsets. Confused yet? Stay with me. This means prices will go up and not down, so it's better to do it yourself.

The trouble with the BOS is its complexity. For example, NSW adopted a bioregional approach to the conservation of biodiversity with 18 bioregions, numerous subregions, over 1,500 Plant Community Types and about 1,000 threatened species. Under the BOS this equates to roughly 1,400 different credit types.

The econometric model underpinning the BOPC was attempting to determine a market for each type of credit in each region. You need good data to predict future prices and much of the information in the BOPC is lacking this data (due to the absence of an active credit market) resulting in widely variable and unreliable predictions of offset liabilities to be worn by the BCT. Change is coming and you need to be prepared, so how do you do it?

Small credit liability = make a one off payment

If your project only needs a small number of credits then using the BOPC is still likely to be your easiest option.

Even if the credits you need are available on the market, you are unlikely to find a willing seller unless they have already made significant sales to other parties.

So if you only need a small number of credits, just cut your losses and make a one off payment. Keep in mind that the BOPC pricing is currently updated quarterly and we've seen significant swings in prices from quarter to quarter. You can't rely on a price unless you've got your development approval in hand and are ready to pay.

Medium to large project = DIY offset

If you have a medium to large project (let's say more than 10 hectares of clearing) with multiple threatened species identified, then it's probably better to go it alone, and setup a Biodiversity Stewardship (offset) site yourself.

Part of the reason is with what I like to call 'credit stacking' - think of a cake with two layers. The BAM assesses both ecosystems and species and then creates credit liabilities for each. The BOPC then gives you prices for each even though these credit types would reasonably be expected to be found together on another site in a similar location (as they were in the first place). This results in duplication, and if you have a large offset requirement with multiple species, can result in a doubling of your financial obligation through the BOPC.

Generally, the larger the offset the better, as there are significant economies of scale. Of course this advice is highly dependent on the location of your development as the BAM is very specific on the like for like equivalences. For example, If you are in the Cumberland Plain in Western Sydney, you will have trouble finding suitable land at a reasonable price, and may be better off looking to the market or the BOPC. If your project is anywhere else in NSW, then read on.

So, how do you cost an offset site?

In simple terms, the cost of an offset credit is made up of two parts: Part A is the cost of management actions to improve biodiversity values into the future; and Part B is Opportunity Costs (optional). Opportunity cost includes land value, assessment costs and profit/risk margins.

For example, say you need 200 credits for a ten hectare development (working off about 20 credits per hectare impacted). Firstly you need to work out how much offset land is needed to create those credits. It's not a simple matter of using a standard rate per hectare, as the BAM is very sensitive to data collected on site. We've seen anything from between 1 and 9 credits created per hectare. To be certain, you need to undertake field surveys and calculations to determine the outcome (we can help). For simplicity, let's say you can create 5 credits per hectare. That means you need 40 hectares of suitable 'like for like' vegetation to create the 200 credits you need.

Next you need to ask yourself is 40 hectares of similar land in the region (to that which is being developed) going to be easy or hard to come by? If it's easy, then you can shop around and find the goldilocks offset site. Not too degraded, not to pristine, but just right. Offset sites in moderate condition generate the most credits as they have they greatest potential to improve over time with appropriate management (according to the models). If it's going to be hard to find (due to land availability, amount of vegetation remaining or property sizes) then you will likely need to factor in additional funds to secure the land you need. For this example, let's assume you can purchase 40 hectares of suitable land for $1M.

Now that you've got the land, you need to work out how much it's going to cost per hectare to manage. Again there is no magic number here. According to the Government, the average mangement cost per hectare of the former BioBank Scheme was about $3,500. This is highly dependent on the size of the offset site, the condition of vegetation and the works required. I'm aware of management costs at least an order of magnitude higher. For this example, let's say the total cost to manage the land in perpetuity is $400K. Over 40 hectares this equates to $10K per hectare.

So you have land worth $1M and management costs worth $400K. What about those other Part B Opportunity Costs? Because you are selling the credits to yourself, you are simply seeking to limit your financial liability. Sure, you need to consider the cost of assessment and any legal/financial fees, but there will be no profit per se (unless you have significant surplus credits available to sell at a later stage). Let's assume the additional opportunity costs are $100K. This brings the total liability to $1.5M. Dividing this over 200 credits results in $7,500 per credit. You can then easily evaluate this estimate against previous credit sales in the market or the BOPC estimation.

Generally doing it yourself will be cheaper as you are not paying for someone else's profit (or risk).

Get the right advice upfront

You can undertake this exercise to a high degree of accuracy before you've even commenced your development, and that's what we would always advise you to do. Getting the right advice on offsets is critical. Offset liability has the potential to be the single largest cost to your development and we're regularly seeing offsets affecting project financial viability.

The key here is to avoid impacts in the first place. The BOS is predicated on avoidance. If you can't avoid impacts, then you'll end up paying for them (in offsets). If you can't afford to pay, then your project doesn't stack up on biodiversity grounds, simple right?

What I've outlined in this article, is in effect what the Government's proposed change to the BOPC is seeking to do, to have the BCT accurately assess the cost of an offset and then charge you a premium for it. If you want security and cost effectiveness, then the key is to sort out your own offsets. It's the only way to have certainty with the constant changes occurring.

This is a simplified view of the process, and there is a lot more complexity. It’s important to get expert advice from someone who understands what goes on in the little black box and gives you clarity and advice upfront, minimising costly project delays or significant financial offsets.

Get in touch for more advice and support with identifying and resolving the complex biodiversity offset requirements for your project.