The first steps towards a legislated carbon price have been taken with the Parliament passing the Government’s carbon offset scheme.  This represents a key milestone for the Government by making way for the introduction of the Clean Energy legislative package to be introduced later in the term

The land sector produces almost one quarter of Australia’s greenhouse gas emissions and will not be subject to the proposed Carbon Pricing Mechanism beginning in July 2012.  The Carbon Farming Initiative (CFI) has been introduced by the Government in an attempt to capture some of those emissions as well as creating an additional income stream for farmers and landholders.

The Carbon Credits (Carbon Farming Initiative) Act 2011 and two associated acts were passed by the Federal Parliament on 23 August 2011 to establish the CFI.  The CFI is a carbon offset scheme that allows farmers and land managers to create Australian carbon credit units (ACCUs) by carrying out carbon storage and pollution reduction activities.  Two types of ACCUs can be created.  Those that can be used to meet Australia’s Kyoto Protocol obligations are known as Kyoto-ACCUs and the remaining are non-Kyoto ACCUs.  After 1 July 2012, up to 5% of an entity’s liability may be met via purchasing of Kyoto ACCUs under the proposed Carbon Pricing Mechanism, with no such restriction operating when the mechanism moves into its flexible price phase.  Non-Kyoto ACCUs may be sold into the domestic voluntary market or exported to foreign purchasers. 

Under the Carbon Credits (Consequential Amendments) Act 2011, passed alongside the main Act, ACCUs and eligible international emissions units will become subject to Australian financial services regulations by February 2012 at the latest.  Companies and others in Australia involved in those units should start to consider whether they require an Australian financial services licence and comply with other financial services laws.  This is discussed more in the article "Carbon traders and others - welcome to the world of financial services regulation".

The CFI legislation establishes a mechanism to approve methodologies which contain detailed rules for implementing and monitoring specific abatement activities under the scheme.  All offsets projects will need to use approved methodologies to determine baselines, measure the greenhouse gas abatement and monitor the project.  Methodologies can be developed and proposed by private proponents, industry associations or government agencies but require assessment by an independent expert committee (known as the Domestic Offsets Integrity Committee) and approval by the Minister.  Methodologies must show permanent abatement that results in an additional reduction in greenhouse gas that would not have occurred in the project’s absence.  A range of methodologies are currently under consideration including:

  • forest management and native forest protection;
  • savannah fire management;
  • landfill gas recovery;
  • manure management;
  • management of methane from livestock; and
  • soil carbon and biochar.  

Greenhouse gas abatement in the land sector will be achieved in two main ways:

  • reducing or avoiding emissions, for example, through capture and destruction of methane emissions from landfill or livestock manure; or
  • removing carbon from the atmosphere and sequestering it in soil or trees, for example, by growing a forest or farming in a way that increases soil carbon.

Abatement activities will be undertaken as offsets projects.  The processes involved in establishing and operating offsets projects are set out in the Act, and include the following requirements:

  • the project proponent must satisfy the “fit and proper person” test and become recognised as an offsets entity;
  • the project must be covered by an approved methodology;
  • the project must satisfy other scheme eligibility requirements, including being on the “positive list” of activities that are not common practice and not being on the “negative list” that are excluded from the scheme; and
  • project reports must be submitted to the Carbon Credits Administrator.  

Due to the standards required to ensure scheme credibility, it is expected that approved methodologies may be slow and, potentially, costly to develop.  This could severely limit the extent to which landholders participate in the CFI.  Also, the requirement of ‘additionality’ is expected to be tested as early-movers who have commenced carbon offset projects face potential difficulties in obtaining approval under the initiative.  However, the real test for the CFI lies in the future carbon price established under the Carbon Pricing Mechanism which, if passed, will provide a large compliance market for ACCUs.