Overview

Three recent developments have made the shape of the Government’s ‘Direct Action’ program much clearer, and have given indications of its possible future development.

  1. On 13 December 2014, the Carbon Farming Initiative Amendment Act 2014 (Cth) came into effect, establishing the basic architecture of the Direct Action program.
  2. On 26 March 2015, the Government released a discussion paper on the final element of that program – the safeguard mechanism for the emissions reduction fund.
  3. On 28 March 2015, the Government released an issues paper on the setting of Australia’s post-2020 target for greenhouse gas emissions.

It is now clear that the ‘Direct Action’ program will come fully into effect on 1 July 2016 and will have two pillars:

  1. the Carbon Credits (Carbon Farming Initiative) Act 2011 (Cth), under which Australian carbon credit units are generated and can be bought by the Commonwealth, and
  2. the National Greenhouse and Energy Reporting Act 2007 (Cth), under which ‘large designated facilities’ will be assigned ‘baseline emissions numbers’ which the facilities must not exceed except by surrendering ‘Australian carbon credit units’. This obligation will be enforceable by civil penalties and injunction.

'Large designated facilities', and 'baseline emissions numbers' for them, will be identified under yet-to-be-released legislative rules. Draft rules are scheduled for release in July 2015 and finalisation in October 2015. The recently released discussion paper clarifies various policy issues relevant to these proposed rules. It also raises new issues, particularly to do with the coverage of new investments, of significant expansions of existing investments, and of the mining, oil and gas sectors.

Australia’s future emissions target is the subject of the recently released issues paper. It indicates that, depending on the outcome of the international greenhouse conference scheduled to occur in Paris in December 2015, the Government may be willing to consider implementing a range of additional policy measures supplementary to the Direct Action program.

The period for submissions on the discussion paper ends on 27 April 2015. The period for comments on the issues paper ends on 24 April 2015.

Who needs to know?

These developments are highly significant for all businesses in Australia that have material exposure in relation to greenhouse gas emissions.

Set out below are short further details of these developments.

Carbon Farming Initiative Amendment Act 2014 (Cth)

Introduction

On 13 December 2014, the Carbon Farming Initiative Amendment Act 2014 (Cth) (CFI Amendment Act) set up the Government’s ‘Direct Action' program by amending:

  •  the Carbon Credits (Carbon Farming Initiative) Act 2011 (Cth) (CFI Act), and
  • the National Greenhouse and Energy Reporting Act 2007 (Cth) (NGER Act).

Amendments to the Carbon Credits (Carbon Farming Initiative) Act 2011 (Cth) (CFI Act)

The CFI Act creates a framework for investment in carbon abatement. It provides a mechanism for eligible projects to be issued with ‘Australian carbon credit units’ (ACCUs), and for the exchange of ACCUs.

The CFI Amendment Act made these substantial changes to the CFI Act. It

  • alters aspects of the administrative structure of the CFI Act,
  • makes changes to the processes under which ACCUs are issued, and
  • allows the Commonwealth to enter into contracts for the purchase of ACCUs.

The last of these changes is the most significant. The CFI Act now has a new Part 2A under which the Clean Energy Regulator (Regulator) may, on behalf of the Commonwealth, enter into contracts for the purchase of ACCUs following a ‘carbon abatement purchasing process’. These processes include, but are not limited to, reverse auctions and tender processes.

All ‘carbon abatement purchasing processes’ must be conducted in accordance with legislative rules made under section 308 of the CFI Act. Such rules – the Carbon Credits (Carbon Farming Initiative) Rule 2015 – were made on 13 February 2015 (2015 Rules)1. The 2015 Rules contemplate the publication of ‘guidelines’ on the Regulator’s website2.

The first auction of ACCUs under the 2015 Rules and these guidelines will be held on 15 and 16 April 2015.

Amendments to the National Greenhouse and Energy Reporting Act 2007 (Cth) (NGER Act)

The CFI Amendment Act also made substantial changes to the NGER Act

The most significant changes are those which will, as from 1 July 2016, introduce a new Part 3G, a new Part 3H and other related provisions – (Safeguard Provisions). The Safeguard Provisions are designed to give effect to the ‘emissions reduction safeguard mechanism’ which was negotiated in the Senate at the time of the passage of the CFI Amendment Act.

Safeguard Provisions

Safeguard Rules

The Safeguard Provisions will operate through legislative rules which are to be made under the NGER Act by the Minister (Safeguard Rules)3. No draft of the Safeguard Rules is yet available, but the NGER Act requires the Minister to take all reasonable steps to ensure that Safeguard Rules are in force by 1 July 20164. The discussion paper that the Government released on 26 March 2015 (March 2015 Discussion Paper) is designed to lead to final Safeguard Rules5. The Government’s schedule is to release a draft of the Safeguard Rules in July 2015 and to finalise them in October 2015.

Although the Safeguard Rules remain to be finalised, it is clear from the Safeguard Provisions that the Safeguard Rules will be unable to create offences or penalties6, to provide for powers of arrest, detention or seizure7, to impose a tax8 or to make any appropriation of funds9.

Three New Obligations

The Safeguard Provisions, when they come into effect on 1 July 2016, will impose three significant new obligations:

  • an obligation to register certain types of facility under the NGER Act
  • an obligation to report under the NGER Act on registered facilities, 
  • and an obligation to avoid an ‘excess emissions situation’ at relevant facilities.

Each of these obligations is enforceable by injunction. The last of them is also enforceable by civil penalties.

Obligation to Register Facilities

Summary of Obligation

The obligation to register will lie with a person who is the responsible emitter for a designated large facility during the whole or a part of a financial year (being a financial year that begins on or after 1 July 201610)11 and who is not already registered under the NGER Act12.

An application to register must be made by 31 August next following the relevant financial year13. Accordingly, the first application period will end on 31 August 2017.

The application must be made to the Regulator14, must be in the form approved by the Regulator15, and must contain information specified by the Safeguard Rules16. As no draft of the Safeguard Rules is yet available, the scope of this last requirement remains unclear, and the March 2015 Discussion Paper does not deal with this question.

Responsible Emitter

A person is the 'responsible emitter' for a facility if17 the person has (within the meaning of the NGER Act) 'operational control' of the facility after 1 July 201618.

Designated Large Facility

Determining whether a facility is a 'designated large facility' depends on19 the total amount of 'scope 1 emissions' of greenhouse gases from the operation of the facility during a financial year (being a financial year that begins on or after 1 July 2016)20. The facility will be a 'designated large facility' if the total amount of these emissions has a carbon dioxide equivalence (CO2e) in excess of the number specified in the Safeguard Rules. On 24 April 2014, the Federal Department of the Environment released a white paper (2014 White Paper). The 2014 White Paper indicates that a facility will be a 'designated large facility' if the annual 'scope 1 emissions' from the operation of the facility are in excess of 100kTCO2e. The March 2015 Discussion Paper takes the same approach21.

The NGER Act allows the Safeguard Rules to exclude specified scope 1 emissions from the calculation of whether a facility is a 'designated large facility'22. The scope of this exclusion remains unclear as no draft of the Safeguard Rules is yet available and the March 2015 Discussion Paper does not deal with this question.

Injunction

The obligation to register will be expressly enforceable in the Federal Court by the Regulator by injunction.23

Obligation to Report

Summary of Obligation

A person who is the responsible emitter for a designated large facility during the whole or a part of a financial year must report in respect of the facility.24

Monitoring Period

For the reporting obligation to arise, the person must be the responsible emitter for the facility during at least one day in a 'monitoring period' for the facility25.

A 'monitoring period' for a facility is either a financial year (being a financial year that begins on or after 1 July 2016) or, if a 'declared multi-year period' exists in respect of the facility26, then that multi-year period. Such periods can be declared27under the Safeguard Rules28and must consist of two or more consecutive financial years.

Duplicate Reporting

The reporting obligation will not arise if, as regards the period during which the person was the responsible emitter for the facility29, the covered emissions of greenhouse gases from the operation of the facility are 'dealt with' in a report given to the Regulator under existing provisions of the NGER Act.

Manner of Reporting

The report must be given in a manner and form approved by the Regulator30.

The report must contain such matters as are specified in the Safeguard Rules31. As no draft of the Safeguard Rules is yet available, the content of this obligation remains unclear. The March 2015 Discussion Paper does not deal with this issue.

The report must be given to the Regulator within four months after the end of the relevant financial year (that is: by 31 October in any relevant year)32.

Record-Keeping

A person under the reporting obligation must keep accurate records for the purposes of reporting.33

Injunction

The reporting obligation and the record-keeping obligations described above are expressly enforceable in the Federal Court by the Regulator by injunction34.

Obligation to Avoid Excess Emissions

Summary of Obligation

This is the most significant innovation in the Safeguard Provisions. A person who is the responsible emitter for a designated large facility must ensure that, in respect of a relevant monitoring period, an 'excess emissions situation' does not exist for the facility.

Excess Emissions Situation

An 'excess emissions situation' exists for a facility in respect of a relevant monitoring period if the 'net emissions number' for the facility for that period exceeds the 'baseline emissions number' for the facility for that period35. The 'net emissions number' for a facility during a monitoring period is the number of tonnes (calculated in CO2e) of the total amount of emissions of greenhouse gases from the operation of the facility during that period36.

The 'baseline emissions number' is to be determined in accordance with the Safeguard Rules37. The 2014 White Paper indicates that the 'baseline emissions number' for a facility will be set at the highest level of reported emissions between FY2009-2010 and FY2013-2014.

The March 2015 Discussion Paper takes the same approach, but indicates the need to reflect in the Safeguard Rules policies which will allow, or compel, readjustment of 'baseline emissions numbers' in certain circumstances38.

The March 2015 Discussion Paper also considers at some length the need to include in the Safeguard Rules special approaches for the establishment of baselines for:

  • new investments already underway (that is: investments that have already committed resources by, for example, taking a final investment decision, commencing construction or having recently commenced production 39),
  • new investments that have not yet taken an investment decision 40, and
  • significant expansions 41.

The March 2015 Discussion Paper also considers at some length the need to include in the Safeguard Rules special approaches for the establishment of baselines for the electricity sector42. The Discussion Paper proposes a special 'sectoral baseline' which would apply to all grid-connected electricity generators and which would be determined on the basis of their average emissions over the past five years, as opposed to their highest annual emissions over that period (the basis on which other industry baselines are determined).

Finally, the March 2015 Discussion Paper also considers the need to include in the Safeguard Rules special approaches for the establishment of baselines for mining, oil and gas operations 'for which a historical high point does not fully reflect expected business-as-usual emissions', for example: if emissions are likely to exceed historical highs because extraction is proposed from reserves that are deeper or more difficult to access43.

Injunction

The avoidance obligation described above is expressly enforceable in the Federal Court by the Regulator by injunction44.

Civil Penalty

In addition, failure to fulfill the avoidance obligation attracts a civil penalty in a yet to be prescribed amount. The maximum penalty will be that amount (in the case of a corporation) and one fifth of that amount (in the case of an individual).45

Use of Prescribed Carbon Units to reduce Net Emissions Number

The 'net emissions number' for a facility for any relevant period can be reduced (but not below zero) by the surrender of prescribed carbon units46 in accordance with procedures set out in the Safeguard Provisions47.

Prescribed carbon units can also be 'banked' against future periods in accordance with those procedures, subject to the Safeguard Rules.48 As no draft of the Safeguard Rules is yet available, the content of this mechanism remains unclear, and the March 2015 Discussion Paper does not deal with this question.

A prescribed carbon unit is either:

  • an ACCU issued under the CFI Act49, or 
  • a unit that is specified in the Safeguard Rules50.

In the latter case, it is immaterial whether the unit was issued in or outside Australia51provided that the unit was issued under a scheme relating to carbon abatement52 namely: the removal of one or more greenhouse gases from the atmosphere or the avoidance of emissions of one or more greenhouse gases (or both),53and the unit represents carbon abatement that is able to be used to meet Australia's climate change targets under the Kyoto Protocol or its successor54.

Accordingly, the Safeguard Provisions indicate that units other than ACCUs may be available for surrender under the Safeguard Rules. The March 2015 Discussion Paper confirms that ACCUs will be eligible offsets under the Safeguard Mechanism55 but does not discuss the availability of other units.

Post-2020 Emissions Target

On 28 March 2015, the Government released its short issues paper Setting Australia's post-2020 target for greenhouse gas emissions (March 2015 Issues Paper).56

The March 2015 Issues Paper invites submissions on further policies complementary to the Direct Action program which should be considered to meet Australia's post-2020 emissions reduction target.

The March 2015 Issues Paper contains significant statements of the Government's current policies and approaches. It states that:

  • a strong and effective global agreement, that addresses carbon leakage and delivers environmental benefit, is in Australia's national interest, 
  • the Australian Government is committed to achieving a five per cent reduction on 2000 emissions levels by 2020, 
  • actions by state and local governments will be critical to Australia's efforts, 
  • Australia's targets must represent a fair and appropriate contribution to tackling climate change in light of [Australia's] particular national circumstances, 
  • Australia's particular economic structure, including the emissions intensity of its economy is putting upwards pressure on its greenhouse gas emissions, 
  • the Government will announce a post-2020 emissions reduction target in mid-2015, ahead of the conference of the parties to the United Nations Framework Convention on Climate Change to be held in Paris in late 2015 (30 November to 11 December), 
  • the Government is willing to consider a range of effective and cost-efficient options for actions supplementary to the [Direct Action program].