Whilst the carbon “tax” has been officially shelved, there is still considerable commercial opportunity associated with greenhouse gas management in Australia. The Federal Government has established an emissions reduction fund (ERF) to enable it to meet its global commitments by purchasing greenhouse gas offsets from Australian emissions reduction projects.

The first auction under the ERF was conducted in April 2015 and saw some $660 million paid to 144 greenhouse gas reduction projects, with the purchase price paid for offsets at an average  of $13.95 per tonne of carbon or its equivalent. In order to meet its global commitments over the coming years, the Australian Government will need to continue to purchase carbon offsets from Australian projects. Now is the ideal time to consider whether your organisation could benefit from participation in the scheme.

Credit for emissions reduction

Access to the ERF requires organisations to implement activities under the Carbon Farming Initiative (CFI) that reduce greenhouse gas emissions in return for Australian Carbon Credit Units (ACCUs) issued by the Clean Energy Regulator. Activities can be broadly categorised as those that remove carbon from the atmosphere (sequestrations) or those that reduce the rate of emissions for a given activity (emissions reduction).

To guarantee the integrity of the removal or reduction of emissions, activities must conform to one of the “methods” approved by the Minister for Environment. These methods set out the types of activities that may qualify for ACCUs and what reporting and auditing will be required. To date, the new methods include activities relating to waste management, transport and upgrading high energy consumption appliances. There are also a number of land-based methods for forest management, revegetation and cotton and pasture management.

The first step in determining whether or not your organisation  can generate ACCUs is to consider the suite of approved methods. The Commonwealth Department of Environment has recently released several new methods to support the ERF and has a range of draft methods in the pipeline. This removes one of the cost barriers to participation in generating ACCUs, as it was formerly up to a prospective participant to develop the method by which they proposed to remove or reduce emissions.

Critically, to qualify as an activity under the CFI, the activity must pass the “newness” test. If your organisation commences a project to reduce emissions and you later find that it may have qualified under the CFI, then you will have lost the opportunity to generate ACCUs under the scheme. It is important, therefore, that your organisation understands the methods that are in place and keeps abreast of new methods receiving approval.

Generating an income from emissions reduction

Once you determine whether or not your organisation may be able to generate ACCUs from an eligible project, you will be faced with a number of choices in selling your ACCUs. The most obvious at present would be to sell the ACCUs to the Government in one of its “reverse auctions”, which works in a similar way to a competitive tender. If your submitted price is accepted you will automatically enter into a contract with the Government to “deliver” your promised ACCUs by an agreed date. There is also the possibility of selling the ACCUs on the voluntary market either in Australia or internationally.

The other option is to “bank” the ACCUs in preparation for two alternative markets that are set to emerge as the scheme begins to mature. One of these emerging markets is being called the “secondary market” and will commence operation when the first lot of ACCUs are due for delivery to the Government. If a successful bidder in the ERF cannot deliver ACCSs as promised, then they must make up any shortfall by purchasing ACCUs from participants who have banked their credits.

The other demand for ACCUs will come from those Australian companies who are exceeding an emissions baseline imposed on them by the proposed “safeguard mechanism”.

Emissions cap under the “safeguard mechanism” for high emitters

To balance the prospect that any gains in emissions reductions could be wiped out by “business as usual” industrial pollution from large emitters, the Direct Action Policy also envisaged that a “safeguard mechanism” would be introduced. In essence, this mechanism proposes that high emitters generating emissions above a specified threshold must purchase sufficient ACCUs to cover their emissions. It is expected to operate similar to other “cap and trade” schemes.

The safeguard mechanism is expected to affect 140 of Australia’s largest greenhouse gas emitting facilities, or just over 10% of those corporations currently registered on the National Greenhouse and Energy Register. The safeguard mechanism is not expected to commence until mid-2016. Consultation on the mechanism took place earlier this year and has now closed, with draft legislative rules expected soon.

As to which facilities will be included, baselines are proposed to   be determined primarily on the highest annual emissions between 2009 and 2014 for existing facilities that meet the proposed coverage threshold of annual emissions of 100,000 tonnes CO2-e. A series of options have been proposed for addressing facilities that do not have the requisite five years of emissions records, including a default baseline of 100,000 tonnes CO2-e where the facilities do not otherwise provide performance data over a three-year period of operation.

For new entrants after initial baselines have been set, the Federal Government is proposing the determination of baselines using a best practice benchmark that is the average emissions-intensity of the top 10% of industry peers. Facility expansions that justify an increase in the set baseline would be determined by an emissions intensity benchmark, multiplied by a production metric. There remains a great deal of detail to be settled on how the scheme will work and what tolerances will be allowed.

Once up and running, the key operative purpose of the safeguard mechanism will be to penalise facilities that exceed their annual capped emissions allowance. Projects that fail in the ERF auctions on price, or where ACCUs were banked instead of being committed to an auction, will likely be able to sell their emissions reductions safeguard mechanism to participants who exceed their baseline caps.

Bottom line for Project Managers, CFOs and Environment Managers

  • Having survived a change in government, the CFI and the mechanism for creating ACCUs looks set to be here for the longer term.
  • For the time being, organisations are strongly encouraged to keep a sharp eye on the release of new methods that may  suit their activities whilst taking a long term view on how those activities may deliver a return on investment.
  • Organisations should seek specialised legal advice on options available for them to participat.