Introduction

Since our last legal update detailing recent developments relating to the Carbon Farming Initiative (CFI), activity levels have been high in connection with the CFI.  Indeed, we have been very busy advising our clients on variations to existing methodology determinations, preparation of new methodology determinations, proposals to amend the positive list, preparation of recognised offset entity and project declaration applications, funding opportunities and structuring of CFI project development investments. 

The Clean Energy Regulator (CER) and Department of Climate Change and Energy Efficiency (DCCEE) have also been busy, with the latter releasing new draft Guidelines for submitting CFI methodologies and a discussion paper on the non-Kyoto Carbon Fund.  The CER has achieved a major milestone with the issuing of the first tranche of Australian Carbon Credit Units (ACCUs). This legal update details these latest developments.

Methodologies, projects and credits

Since our last legal update in September, a further methodology determination has been made. The Carbon Credits (Carbon Farming Initiative) (Avoided Emissions from Diverting Legacy Waste from Landfill for Process Engineered Fuel Manufacture) Methodology Determination 2012 was made on 29 November 2012.

This methodology involves diverting mixed loads of construction and demolition (C&D) waste and mixed loads of commercial and industrial (C&I) waste, originally intended for landfill, into a purpose built alternative fuel manufacturing facility where the mixed materials are processed into a variety of product streams, including a processed engineered fuel. The emissions abatement is the avoided emissions which would otherwise arise from this waste being landfilled.

As at the date of this legal update, 15 landfill gas projects, 1 piggery project and 1 savanna burning project have been registered. Further details of the registered projects can be found on the Register.

A milestone was achieved on 6 December 2012, with the first tranche of ACCUs being issued to LMS Energy Pty Ltd in respect of a number of its registered landfill gas projects. So far, 348,110 credits have been issued. Details of these can also be found on the Register page mentioned above.

Non-Kyoto Carbon Fund

DCCEE has released the “Non-Kyoto Carbon Fund - Discussion paper for public comment” (Discussion Paper) which discusses the proposed design of the Non-Kyoto Carbon Fund, inviting submission from interested stakeholders. The deadline for submissions is 14 December 2012.

The Non-Kyoto Carbon Fund seeks to create an incentive based market for ACCUs that are not able to be used in the domestic compliance market. These are ACCUs which are generated from project types that are not currently recognised under the Kyoto Protocol. Essentially the Non-Kyoto Carbon Fund is designed to:

  • encourage investment in non-Kyoto abatement activities; and
  • promote innovation and learning-by-doing for a range of non-Kyoto activities.

The Discussion Paper is primarily concerned with:

  • the mechanism for purchasing credits;
  • how funds will be allocated;
  • how to promote innovation across a range of activities;
  • funding eligibility;
  • whether the Federal Government will impose a cap on the price of credits; and
  • what will happen in the event that non-Kyoto activities are brought into the Kyoto framework?

Purchase Mechanism 

The Discussion Paper proposes that an effective method for incentivising delivery of non-Kyoto projects would be by way of ‘forward contract’. The forward contract would involve the Federal Government entering into contractual arrangements to purchase credits in the future, prior to the project being implemented. These contracts would take the form of a ‘carbon credit purchase agreement’ which would stipulate the price and due date for delivery of the ACCUs.

A precondition for payment would be generation of the credits by the project. The proposal is that the contract term would match that of the crediting period for emissions reductions project (ie 7 years).

Allocating funding

The objective for allocating funds is to give participants “fair and equitable access to funding, avoid administrative complexity and deliver value for money”. The Federal Government favours a competitive tender approach, however, the Discussion Paper considers the adoption of either a:

  • competitive tender approach; or
  • fixed price approach.

As part of the competitive tender approach the bid with the lowest-cost project would be the successful bid. All bids would be made at the same time with the identity of the bidders remaining concealed. All successful bidders would be paid under a uniform pricing approach which would result in all successful bidders being paid a price equal to the highest successful bid. A maximum price for credits would be set by the Federal Government (see further discussion below).

Alternatively, under a fixed price approach the Federal Government would set a price for the purchase of credits and invite applications for funding in periodic rounds.  

How will the Fund promote innovation across a range of activities? 

The Discussion Paper suggests that to encourage a range of activities, funding should be divided into bands, as follows:

  • non-forest revegetation from planting or direct seeding;
  • non-forest revegetation and regeneration due to human-induced promotion of natural seed sources;
  • soil carbon and biochar; and
  • other non-Kyoto activities, including feral animal management and restoration of wetlands.

Funding would be allocated to bands and it is within these bands that projects would compete for funding.

Program eligibility

The Federal Government is proposing that all bidders or applicants be ‘recognised offsets entities’ and have an approved ‘eligible offset project’ under the CFI to ensure that successful bidders submit “accurate and verifiable” bids and are capable of delivering the contracted number of credits.

Credit price cap

The Non-Kyoto Carbon Fund is designed to encourage investment in non-Kyoto abatement activities. The Federal Government considers that the incentive to invest should not exceed compliance market incentives. As such, the Federal Government proposes to set a cap for each competitive tender round. It is proposed that the cap would be no higher than “an observable, exchange-traded price” for:

  • Kyoto ACCUs (spot or futures price), if available; or 
  • domestic carbon units (spot or futures price), if Kyoto ACCU price is not available; or
  • EU allowances or other relevant international carbon prices, if domestic prices are not available.

Transition from non-Kyoto to Kyoto activities

The Federal Government is in favour of broader land sector accounting which would subsequently allow greater scope for non-Kyoto activities to be brought into the Kyoto framework. In this context, it is possible that a non-Kyoto activity could become eligible for compliance under the Carbon Pricing Mechanism and be the subject of a Non-Kyoto Carbon Fund purchase agreement. In such circumstances, contracted project proponents may find or consider themselves in a position of disadvantage if the price of Kyoto ACCUs is greater than the agreed contract price.

To avoid this scenario the Discussion Paper proposes an “opt-out” clause which will allow the project proponent to opt-out of the contract and sell to the compliance market. Alternatively, the Discussion Paper suggests that the Federal Government could simply require that the contract be terminated providing an “exit fee” to project proponents where the Kyoto ACCUs are less than the contracted price.

Carbon Farming Futures - Extension and Outreach Program

The deadline to be included in the first assessment for a grant under the Extension and Outreach Program is fast approaching. The Extension and Outreach Program falls under the Carbon Farming Futures program (CFF) [link to show me the money update] and works alongside the CFI. It aims to encourage farmers and land managers to reduce greenhouse gas emissions and participate in the CFI through technical information and support.

To achieve this, the Government is offering approximately $48million for grants (up until June 2017) to fund projects which support the Program’s objectives. For a project to be eligible, it must require funding of at least $100,000 per year and fall within one (or all) of the following three categories:

  • Information, tools and extension activities (component 1) E.g. producing and publishing booklets or hosting workshops and seminars
  • Extension providers and service delivery (component 2) E.g. creating relevant technical information, materials and tools
  • Targeted industry and regional initiatives (component 3)

To be included in the first round of assessment, applications must be received by Wednesday 19 December 2012 (funding will commence in April/May 2013). Further detail about the eligibility requirements can be found in the Grant Guidelines and the application documents are available at www.daff.gov.au/extensionsandoutreach.

It is also worth noting that grant applications have just closed for the first round of the Indigenous Carbon Farming Fund, which is intended to support the participation of aboriginal communities in the CFI. This grant program is the responsibility of the Department of Sustainability, Environment, Water, Population and Communities and further detail can be found here.

Updated Methodology Guidelines

The Guidelines for submitting CFI Methodologies (Guidelines) and an example template (Template) are currently being updated. A draft of both was released for public comment in November. The Guidelines and Template are provided to help people prepare their methodology proposal, ensuring that it complies with CFI legislation and other scheme requirements.

To recap, CFI allows farmers and land managers to earn ACCUs by increasing sequestration of carbon, or reducing greenhouse gas emissions on the land. For an offsets project to be eligible to receive ACCUs, it must employ an approved methodology. An approved methodology is one that has been approved by the Domestic Offsets Integrity Committee (DOIC) and consequently determined by the Minister.

One of the aims behind the amended Guidelines is to have new methodology proposals prepared in a way which is more consistent with the form and content of the ultimate methodology determination. Hence, there is a focus on requiring methodology proposals to be written in a way such that they provide “clear, unambiguous, complete and precise instructions”. More detail is provided on the process for review of methodology proposals, with it being noted that an initial review of a proposal is made by the DOIC before undertaking any preliminary assessment. Detailed instructions are also now included for completion of the Template.

What will next year bring?

There are now a large number of methodologies that are being processed and are at various stages of assessment by DCCEE and the DOIC. Further methodology determinations can be expected in the near future. It is also likely that landfill gas projects, particularly those transitioning from other offset schemes, will continue to be registered and generate ACCUs. We may also expect to see additional projects being registered under the piggeries, savanna burning and environmental plantings methodologies.