PIP COURTNEY, PRESENTER: The Federal Government this week introduced a bill into Parliament for its so-called direct action plan to tackle climate change. $1.9 billion is to be put aside for activities such as tree planting in what is often described as carbon farming.

However, many West Australian landowners who invested in a form of carbon farming some years ago will miss out. They planted oil mallees, which can also produce renewable fuels and tackle salinity.

But as Sean Murphy reports, the early adopters of this new industry are on the verge of giving up.

SEAN MURPHY, REPORTER: At Kalannie in the central wheatbelt of WA, trees have transformed a landscape degraded and highly susceptible to salinity. In just over 20 years, Ian Stanley has planted 1.2 million oil mallees, turning his 25,000 hectares into a profitable cropping enterprise and winning Australia's major landcare award along the way.

Planting oil mallees saved farms all over southern WA from dryland salinity, but they promised much more than landcare. Farmers like Ian Stanley hoped they'd become an alternative cropping enterprise, providing feed stock for a renewable energy industry and storing carbon in their vast root systems.

But failure to develop a market for the trees has meant they're now draining the soils they helped to save.

IAN STANLEY, "BUNGADALE" KALANNIE: On average across this paddock, my son told me he was yielding about 2.5 tonnes in the middle of the alley, and along the edge of the trees that yield is down to half a tonne. My sons are just starting off on their own farming career.

This is unacceptable. They can't afford that. The only alternative to managing these will be to push them up, and they're gone forever. They won't get planted back. To me, it would be a tragedy, it would be a real tragedy. Something my father started, seems to have only been one generation, to now thinking that we need to get rid of them.

SEAN MURPHY: Seven years ago, when Landline visited Ian Stanley, he was developing a new industry producing eucalyptus oil from his mallees. But back then he believed the tree crop's true potential would be in storing carbon.

(Footage from 'Landline' September 2007 interview with Ian Stanley)

IAN STANLEY: I think with the advent of carbon trading and the potential of the tree to sequester carbon - it's been said to me that the oil mallee is God's sequester. It's a very, very efficient sequester of carbon. So I think those two things combined could make it quite profitable.

REPORTER: Why is it such a good carbon sequester?

IAN STANLEY: It grows vigorously on low rainfall, low rainfall areas where you would be able to afford to plant these trees, and it also has the ability to store a lot of carbon below the ground in what everyone refers to as the mallee root - that's pretty much all carbon.

SEAN MURPHY: In 2007, Ian Stanley was also optimistic about potential new industries for biofuel and power generation using the oil mallees. None of it has happened and now he says many growers are losing patience.

IAN STANLEY: The industry stalled, pretty much. The trees are now grown and they've done all those things we've asked of them, but they're to the point now where they have started to impact severely on our ability to grow crops alongside them. The industry's in a bit of a crisis point, quite frankly, because I know there's trees now being pushed up. Once they get pushed up, they're lost forever.

SEAN MURPHY: Oil mallees can be harvested every three to four years and will continue to grow for more than 100 years.

DAVID MCFALL, CONSULTANT: Once you cut the tree, it re-shoots, so it's a non-destructive management regime we put on there. But it's very critical - if you want to sustain this system, you have to cut these trees. Beause the alternative is the tree will keep foraging out, particularly if we get drying conditions in the wheatbelt. Then a lot of farmers are faced with 30 or 40 per cent crop reduction in their alleys, which is totally unsustainable.

SEAN MURPHY: David McFall was an enthusiastic adopter and promoter of integrating oil mallees into mixed farming systems.

Faced with predictions that dryland salinity could consume as much as 60 per cent of the wheatbelt, he says the WA Government actively encouraged farmers to plant oil mallees, and he says there was an expectation that an energy-cropping industry would be developed.

DAVID MCFALL: There was a strong partnership between the farmers, the government agencies through forestry agency and ag department to reintegrate trees in an innovative way that is complementary to farm systems. That partnership was quite sound for a few years but then, because it got hard, the obligations of the government was to look for marketing, look at all the big industry, and that got hard, so virtually they've limited their exposure and left farmers holding the baby.

KEN BASTON, WA AGRICULTURE MINISTER: Government was always... The Department always said that, you know, approach it with caution. It was never 'This is going to be the magic number.'

SEAN MURPHY: The West Australian Government invested $27 million in this pilot power plant at Narrogin in 2005. It proved that oil mallees could be used to generate electricity as well as produce biofuels and biochar, but they were all too expensive and the plant was closed after 12 months.

KEN BASTON: At the end of the day, economics drives everything with regards to that. In Western Australia, we've got a very good system of delivery of power and, of course, one of the things we do have in West Australia is gas, which is a very cheap fuel for any power generation.

SEAN MURPHY: (Talking to David McFall) Was it a waste of money?

DAVID MCFALL: Well, look, it is, in context, if nothing goes forward, for sure.

SEAN MURPHY: The Narrogin pilot plant was mothballed in 2006 and so was a government business plan to build nine similar generators in regional areas. Industry supporters like David McFall say the plan still has a lot to offer.

DAVID MCFALL: We've got a lot of struggling communities and we can see a distributed network of power generation, biofuel plants, heating swimming pools, heating hospitals, heating schools as all part of that strategic regrowth and reinvigoration of our regional areas.

SEAN MURPHY: One community that could benefit is Katanning, in the heart of WA's Great Southern region. The local shire has spent $25 million building Australia's biggest undercover sheep-selling facility. It will turn over up to $100 million a year and the council wants to use it to attract new businesses.

ALAN MCFARLAND, KATANNING SHIRE PRESIDENT: We're an agricultural area, so one of the things here - we have an abattoir, we have the saleyards, and we can build on that. We've got the local machinery dealers hall here in town. But, if anything, we have an over-reliance on agriculture. If we can get other industries into town and thus spread the load so when we do have a dry year we still have people employed, we still have the facilities happening in town, and we still have a local economy.

SEAN MURPHY: But the shire says its electricity substation is at capacity and it needs power to generate new industries. The solution, it believes, is an oil mallee-powered biomass generator.

ALAN MCFARLAND: It's a reliable base load. We have a lot of oil mallees in the region. They were planted probably 15 years ago, when the Narrogin plant was happening, so people were planning for the future then. We've also got a regional waste facility here, so there will be biomass coming from there as well as the oil mallees in the whole area.

SEAN MURPHY: So what's needed to make it happen?

ALAN MCFARLAND: At the moment we probably need the vision of someone to build a plant. So once that power generation facility goes in, everything else will fall into place.

SEAN MURPHY: At least one WA company has invested in a thermal power generator which can be fuelled with oil mallees. At Macco stockfeeds near Williams, they're using oil mallees to help produce 135,000 tonnes a year of palletised feed for the live export industry. The company invested $750,000 in a biomass boiler because the cost of gas was becoming too much.

So, in dollar terms, how much money have you saved?

PHIL BERESFORD, MACCO STOCKFEEDS: Savings today is probably looking at $400,000-$500,000 a year in fuel costs with a payback period of... less than two years, anyway, for the whole plant. So it's been fairly good to us.

SEAN MURPHY: This prototype oil mallee harvester could be a game-breaker. The Queensland-based research and development company Biosystems Engineering says it can deliver oil mallee chips for about a third of current pricing.

RICHARD SULMAN, BIOSYSTEMS ENGINEERING: We will get that cost certainly down below $20 a tonne. So we've created a step change in that cost and that is going to have a profound effect on the supply chain cost delivered to any end converter that will take wood and make heat and power, transport fuels, etc.

SEAN MURPHY: But Richard Sulman says the lack of support for an oil mallee industry in Australia is forcing him to take his invention overseas. He already has an order for 80 harvesters from Brazil, which has a huge biomass industry growing Australian eucalypts.

RICHARD SULMAN: When I go to Brazil, I walk down the street, eucalyptus is everywhere. It's integral to part of their way of life in their food processing, in grain processing, in steel production. They have made the whole notion of carbon tax really irrelevant, because they run most of their economy on renewables. We could learn a lot from that.

SEAN MURPHY: A hundred years ago, farmers would've put aside about 20 per cent of their land to feed their horses. So energy cropping as such is nothing new. Oil mallees are a modern-day equivalent, but their potential benefits extend far beyond the farm gate. Yet at a time when Australia's renewable energy targets are under review and the Federal Government's about to roll out a new carbon farming initiative, oil mallees just don't seem to be part of the policy conversation.

Federal Environment Minister Greg Hunt says that will change when the carbon farming initiative, or CFI, comes into being next month.

GREG HUNT, FEDERAL ENVIRONMENT MINISTER: I've often spoken publicly about revegetation through mallee and mulga and other appropriate species. Mallee, of course, has the value of not just being a great storehouse or form of sequestering carbon, but the oil is a valuable product of and in itself. So under us, it's in.

SEAN MURPHY: It's good news for farmers wanting to plant oil mallees, but it's come too late for many tree nurseries in WA. About eight have closed down since the Rudd government's decision to reduce the cost of carbon in line with Europe early last year.

KEITH PARNELL, "BELLE VISTA" TINCURRIN: We were producing four million seedlings annually that had been a build-up over 15 years or so from when we first started the nursery. We've got four million for the last four or five years and we slumped to 300,000 seedlings for the past season and this one we're in now. Very devastating - complete collapse in the seedling industry right across... certainly Western Australia and probably all of Australia.

SEAN MURPHY: Keith Parnell says he has little faith in the government's new carbon farming initiative.

KEITH PARNELL: Until world market conditions pick up and the need for mitigating carbon in the atmosphere through new industry output happens again, then the price is probably going to stay very low so it makes it very difficult to do anything.

SEAN MURPHY: Just down the road, Neil and Val Ballard have planted about 350,000 oil mallees on their 1,400 hectares. Shelter belts played an important role in their pasture seed production system. They're frustrated that the rules governing the carbon farming initiative rule out their trees.

NEIL BALLARD, "SEVEN TREES" TINCURRIN: One of my long-term objectives was to be able to trade carbon that was produced here. But when the legislation was proclaimed on 1st of July 2012, I think it was, if I'd have ripped all these out then and planted them on one July, they'd be worth something. But they won't take any retrospectivity, so all these - even though you can prove when they were planted - it doesn't count.

SEAN MURPHY: The Government says it won't change the existing 2007 cut-off for the trees which qualify. But it is making the CFI more flexible, with farmers no longer having to lock up land for 100 years to qualify for carbon credits.

GREG HUNT: We can't repair the historic problems created by the ALP, but we can fix things going forwards.

SIMON GOODWIN, OIL MALLEE ASSOCIATION: I believe there's a legitimate concern about how certain some of these policies are going to be.

SEAN MURPHY: Oil Mallee Australia's general manager Simon Goodwin says the industry can also become a major renewable energy source. Research projects at Curtin University's Fuels and Energy Technology Institute are likely to bear fruit in the next few years.

Under the guidance of Professor Chun-Zhu Li, the centre has already proven technology for oil mallee gasification, or power generation, as well as producing bio-oils for transport fuels and biochar.

PROFESSOR CHUN-ZHU LI, CURTIN UNIVERSITY: If we use this biomass resource to generate electricity, the capacity will be similar to the current coal-fired power plants. At Curtin University, they're already producing a range of transport fuels that can be used in existing petrol and diesel infrastructure.

SEAN MURPHY: The potential for an aviation fuel industry using small regional refineries is also huge. Australia's Future Farms Cooperative Research Centre was working with some of the biggest players in the industry to develop fuels which emit 40 per cent fewer greenhouse gases.

JOHN MCGRATH, FUTURE FARM INDUSTRIES CRC: The people we've been working with - so Airbus, Virgin Airlines and General Electric and a couple of local Australian biofuel manufacturers - suggest that it's in the order of three to five years away before that technology is both available and certified.

SEAN MURPHY: But the CRC was disbanded this year and the Government's current renewable energy target review is only looking at carbon credits for fuels used for electricity. Critics say it's a mistake not to include transport fuels and thermal power and the Government should be supporting a regional approach to renewable energy.

RICHARD SULMAN: Companies like SPC, the abattoirs, grain milling companies, there's a great opportunity for those businesses to actually today competitively obtain heat and power from wood that will outcompete gas at today's price.

SEAN MURPHY: Back at Kalannie, Ian Stanley is developing his own small-scale plant to produce energy and biochar from straw or woodchips. He says oil mallee saved farms across the wheatbelt and if they can be used for local power generation, they have the potential now to save rural communities.

IAN STANLEY: If that industry and that picture is right, then that attracts people and preserves our communities and our football clubs and all the other things that are so important to the social fabric of all our regional communities. So I don't think it's difficult. I think it just needs political will, and certainly the people who own the trees have that will. We want them to stay there. But in the end, if it means we can't farm viably with our present crops, then they've got to go.