In brief

What has happened?

The Australian Parliament has passed legislation to implement the Government’s ‘Direct Action’ climate change policy.

The legislation:

  • facilitates the Government purchasing domestic carbon abatement through the ‘Emissions Reduction Fund’ (ERF), and
  • establishes the framework for a baseline ‘safeguard mechanism’ to apply to major emitters. Large designated facility emissions must be reported and penalties apply if the emissions exceed an assigned baseline after the surrender of carbon units.

Who needs to know?

Businesses working with carbon abatement projects or with material greenhouse gas emissions exposure.

What are the opportunities?

Your business may be able to be paid for carbon abatements, or otherwise take advantage of the scheme (for example aggregating and trading in units).

What are the threats?

Businesses with material greenhouse gas emissions exposure may be subject to additional administration and financial obligations.

Things to do now

  • Consider opportunities to sell carbon abatement to the ERF, including under existing and draft methodologies.
  • Consider whether your business may be affected by the baseline ‘safeguard mechanism’.

Direct Action legislation

Legislation was passed by Parliament on 24 November 2014 to implement the government’s ‘Direct Action’ climate change policy, in place of the Carbon Tax.

Central to Direct Action is an ‘Emissions Reduction Fund’ (ERF), through which the government will purchase domestic carbon ‘abatement’ (sometimes also called ‘offsets’ or ‘emissions reductions’).

The objective of the ERF is to remove and avoid greenhouse gases to meet Australia’s international emissions reduction targets. Australia has committed to reducing its greenhouse gas emissions by 5 per cent by 2020 against 2000 levels.

How will the ERF work?

The ERF has three key elements:

  1. Crediting carbon abatement,
  2. Purchasing carbon abatement, and
  3. Safeguarding carbon abatement.

Crediting carbon abatement

Carbon abatement will be verified and credited according to approved methods under the Carbon Farming Initiative (CFI) system. Proposed projects must meet new ‘additionality requirements’ which require that:

  • the project has not yet begun to be implemented,
  • the project is not required by regulation or other government programs, and
  • the project goes beyond standard business activities.

Carbon abatement must be eligible to be used under international law to meet Australia’s emissions reduction targets. Carbon abatement from eligible offsets project will be recognised by the issue of Australian Carbon Credit Units (ACCUs).

All eligible offsets projects will be recorded in the ERF Register maintained by the Clean Energy Regulator (Regulator).

Several ‘priority’ ERF methodologies are under development across a range of sectors. These include methodologies for wastewater treatment, transport and energy efficiency. More information is available at the Department of Environment’s website.1

Purchasing of ACCUs

The Regulator will conduct a carbon abatement purchasing process. This may be by reverse auction, tender process or ‘any other process’ that may be allowed by regulations. In conducting the process, the Regulator will purchase ACCUs (or other ‘eligible carbon units’ that may be allowed by regulations) at the lowest price, to encourage competition and maximise the total abatement it can purchase.

The first auction is expected to take place in early 2015. A benchmark price will be set for each auction below which bids will not be considered. Up to four auctions will occur in the first year. The Regulator will give advance notice of the scheduling of auctions for subsequent periods.2

The Regulator will enter into standard carbon abatement contracts with successful bidders for a period of up to 7 years, or longer, if an eligible offsets project is expected to have a crediting period of more than 7 years.

How will the safeguard mechanism work?

The legislation passed creates a framework for the safeguard mechanism. These provisions were introduced by Senator Xenophon.

The safeguard mechanism will work through the National Greenhouse and Energy Reporting Act 2007 (Cth) (NGER Act). It is proposed to commence operation on 1 July 2016. ‘Safeguard rules’ will be developed to further outline the mechanism. These rules are expected in late 2015.

Operators of ‘designated large facilities’ must be registered and report the facilities’ direct (called Scope 1) greenhouse gas emissions under the NGER Act. The threshold for what constitutes designated large facilities will be set by the safeguard rules. The Government has suggested it be 100,000t carbon dioxide equivalent per annum.

A baseline will be set for ‘designated large facilities’ under the safeguard rules. Operators of designated large facilities must ensure the facility’s emissions do not exceed its baseline. If, after the surrender of ACCUs or other units specified in the safeguard rules, a facility’s emissions exceed its baseline the operator will be exposed to penalties. There is the potential for international units to be allowed.

Many details of the safeguard mechanism are still to be determined, including the designated large facility threshold, baselines, acceptable units and the penalties. The Government has indicated it will consult further and the safeguard rules are expected in late 2015, before the proposed 1 July 2016 start.

This system could be described as a baseline emissions trading scheme, differing from a cap-and-trade emissions trading scheme such as the former Carbon Tax.

Things to do now

Businesses interested to sell or deal in carbon abatement

Carbon abatement businesses should:

  • Consider opportunities to sell carbon abatement to the ERF, including under existing and draft methodologies,
  • Consider how transitional arrangements for existing projects will apply, and
  • Work with the government to ensure approval and compliance under the new system.

Businesses with material greenhouse gas emissions exposure

Businesses with material greenhouse gas emissions exposure should:

  • Consider if likely to be caught by the safeguard mechanism. The Government has indicated a 100,000t carbon dioxide equivalent per annum threshold. If so, consult with the government and prepare for the mechanism, and
  • Consider the commercial implications of the safeguard mechanism, including potential costs and pass through under electricity, gas and coal supply and related agreements.