On 20 December 2013, the Australian Government released the Emissions Reduction Fund Green Paper, inviting public comment and written submissions until 21 February 2014. The Emissions Reduction Fund (ERF) is central to the Government’s Direct Action Plan aimed at reducing Australia’s greenhouse gas emissions to five per cent below 2000 levels by 2020 and initial allocations of $300m, $500m and $750m have been made over the forward estimates. The Clean Energy Regulator (Regulator) will run a reverse auction to buy back, at the lowest cost, Australian Carbon Credit Units (ACCU) from businesses.
The design of the ERF is based on three guiding principles:
- Lowest-cost emissions reductions. The overriding objective of the ERF is to identify and purchase emissions reduction projects at the lowest available cost.
- Genuine emissions reductions. The ERF is aimed at driving emissions below their projected levels by providing incentives for projects that would not otherwise occur. This is referred to as the concept of ‘additionality’.
- Streamlined administration. The ERF will build on existing reporting schemes to avoid duplication and streamline administrative processes.
The impact of the Government’s proposed ERF reforms is considered below.
Crediting emissions reductions
The ERF is designed to build on the existing framework for credit emissions reductions under the Carbon Farming Initiative (CFI), where ACCUs are issued by the Regulator. The ERF aims to identify and provide incentives only for activities that would not have occurred but for the ERF. It is not designed to credit emissions reductions that receive incentives under any other government program.
Two types of emissions reduction methods are proposed under the ERF:
- Activity methods for specific emissions reduction actions. These would expand methodologies under the CFI to other areas of the economy and include opportunities outside industrial settings. Existing international methods, such as the Clean Development Mechanism under the Kyoto Protocol, will be adapted to Australia and expand the range of available methods. Each scheme has different estimation methods – for example, some schemes require a project-level assessment of additionality – so it is proposed that the most useful aspects of different methods be combined under the ERF. Aggregation methods will also be developed to provide organisations an opportunity to act as aggregators and bid into the market as a group.
- Facility methods for aggregate emissions reductions from multiple activities at a facility. These methods would credit facility owners for reductions relative to past practices, utilising data that they report under the National Greenhouse and Energy Reporting Scheme. A streamlined approach to calculating new emissions reductions is intended to be developed over time.
There are a number of industrial sectors that have significant potential for emissions reductions through the implementation of new technologies that remove greenhouse gases, such as carbon capture, or react with them, such as nitrous oxide reduction catalysts. In the mining sector, there are opportunities for waste coal mine gas abatement and land fill gas power generation. Commercial buildings such as shopping centres and office buildings have the potential to increase energy efficiency through upgrades to clean power technologies. In the transport sector, there are opportunities in vehicle efficiency improvements or the use of electric vehicles, and in the waste sector, methane capture and waste diversion represent further emissions reduction opportunities.
Purchasing emissions reductions
A reverse auction process will be utilised for selecting projects under the ERF scheme. Emissions reduction projects are to be tendered by proponents in a competitive bidding process, with the ‘best-value’ bids (lowest cost per tonne) being selected. The Regulator may apply a confidential benchmark price so that only bids less than that price would be considered. In addition, a minimum bid size has been proposed to ensure that the focus of the ERF is on large-scale emissions reduction opportunities.
At the start of the ERF, a simple process is proposed where business may submit bids at any time and the Regulator will run tender rounds at regular intervals. Once the supply of emissions reductions is well established, the Regulator would move to a more formal auction process and conduct auctions several times a year, depending on the supply of projects.
Once a project is selected under the ERF, the Regulator enters into a forward contract to purchase the emissions reductions in return for an obligation from the proponent to deliver them. Standard contract terms and conditions are proposed to be used to avoid administrative inefficiencies and set a maximum contractual period of five years. These contracts will also include provisions to encourage on-time delivery of emissions reductions and allow the Government to monitor delivery progress. Given the uncertainties associated with the timing and amount of emissions that can be reduced, make-good or termination provisions will also be considered.
Safeguarding emissions reductions
The ERF aims to allow businesses to continue ordinary operations without penalty. A mechanism that provides incentives to not exceed historical emissions baselines has been proposed to safeguard the value of funds expended under the ERF. In order to accommodate for facilities that experience a sustained downturn and then increase emissions back to full production capacity, baseline parameters will be set from data that represent a high point in historical emissions for a facility. The number of entities subject to baseline levels will be limited to a subset of corporations currently reporting under the National Greenhouse and Energy Reporting Scheme, exempting small businesses that don’t produce significant emissions.
In the event that an entity exceeds its baseline level, flexible compliance arrangements will be made available to enable the reduction of emissions to the baseline level (or below). These may include setting an initial transition period where baseline exceedances do not apply or allowing for a multi-year compliance period. For new investments or facilities with no historical data available, the ERF will set baselines at industry average or best practice emissions intensity.
Carbon farming initiative
The CFI will be expanded upon by the ERF, with coverage extending beyond the land sector and credits issued across the economy. The CFI will continue to operate while the ERF is implemented and CFI credits, as personal property, may continue to be traded, banked or used to offset emissions. They may also be used to meet carbon tax obligations until February 2015. It is expected that entities utilising the CFI will be well placed to bid under the ERF.
Consultation and review
The Government is inviting submissions in response to the ERF Green Paper until 21 February 2014. In particular, it is seeking views on opportunities for large-scale, low-cost emissions reductions, how to ensure emissions reductions are genuine, how to operate an efficient auction process, how to provide funding certainty for businesses, the coverage of the safeguard mechanism and the treatment of new entrants, how to streamline the CFI, and the proposed governance arrangements (administration by the Regulator). A 1 July 2014 start date has been set down for the commencement of the ERF.
See the Australian Government website here for guidelines on making a submission.