The last few months have seen a rush of CFI project registrations. There are now 26 active projects and the first credits were issued at the end of November 2012. New methodologies have been approved, including a reforestation methodology. The first movers in this sector have been farmers, energy companies and other land managers – all of whom are starting to reap the rewards of their offset projects.
If you want to get involved, start by considering the list of approved methodologies and those up for approval and think about the questions we have raised in this article.
The Carbon Farming Initiative (CFI) is part of the Commonwealth Government’s Carbon Scheme. It provides an economic incentive to farmers and landholders to implement practices that reduce carbon pollution (such as storing carbon or reducing greenhouse gas emissions on the land). Such practices are eligible to create Australian Carbon Credit Units (ACCUs) which can be sold to liable entities under the Carbon Pricing Mechanism or to individuals or organisations looking to voluntarily offset their emissions. Under the CFI, projects eligible to generate Australian Carbon Credit Units (ACCUs) must apply a ‘methodology’ approved by the Department of Climate Change and Energy Efficiency (DOCC). Prospective CFI projects must therefore be covered by either an existing methodology or should propose a new methodology.
You can find more information on the CFI and how it operates here.
The methodologies that have been approved so far relate primarily to the collection and combustion of methane from legacy waste in landfills, as well as:
- reforestation, forest management and native forest protection;
- savannah fire management; and
- dairy and piggery manure management.
The DOCC continues to approve new methodologies. Four new methodologies were approved on 6 February 2012. They relate to reforestation and regeneration of native forests, biodigesting pig manure and diversion of waste to alternative treatment plants. These new methodologies give new opportunities to profit from farming land.
Since the commencement of the CFI, a total of 26 projects have been registered by the Clean Energy Regulator under these methodologies and four of these projects have already been issued with ACCUs. Among the projects that have been approved are:
- destruction of methane generated from manure in piggeries (example here);
- permanent sequestration of carbon by planting native species (example here);
- reduction of greenhouse gas through early season savannah burning (example here); and
- methane gas capture and combustion from landfill legacy waste.
Of these, only the landfill gas management projects have generated ACCUs. Such projects are advantaged by the ease with which they can quantify their emission reductions as well as their experience with related schemes such as the NSW Greenhouse Gas Reduction Scheme. The scale of landfill projects may also mean they are more commercially viable than the alternatives, with the South Cardup landfill project, for example, generating over 200,000 ACCUs at a notional value of over $2,000,000.
Impact of the upcoming federal election
While it is well documented that Tony Abbott intends on “repealing the Carbon Tax”, the Coalition’s policy in respect of the CFI is less known. Since the CFI is effectively a direct action initiative which encourages new projects to offset emissions, it is likely to align well with the Coalition’s policy of a direct action approach via an Emissions Reduction Fund. Recent comments by Greg Hunt and Tony Abbott support this view in that they have generally supported the approval of CFI projects (noting that the CFI is a very good idea which has been poorly designed and executed).
New methodologies and projects
A number of methodologies are under consideration by the Department of Climate Change and Energy Efficiency, and may be approved in the near future, including rangeland restoration and the creation of carbon sinks (full list here). In particular, a methodology covering permanent plantings of eucalypt species in low rainfall areas has recently been released for public comment (see further details). The DOCC has been relatively cautious and conservative with approving new methodologies, particularly those that seek to reduce carbon in ways other than the relatively easily quantifiable carbon sinks and/or gas capture. Proposals to reduce emissions by adding supplements to animal feed and by reducing camel numbers in the outback have been rejected by the DOCC, while the DOCC is seeking further information in relation to a number of other proposed methodologies (including soil carbon capture).
The principal issue with most methodologies, appears to be the variability of emissions reduction. The DOCC’s focus on ensuring that emissions reductions are measurable and consistent ensures the integrity of emissions reductions, but is much more stringent than other markets (such as Brazil). It remains difficult to quantify an emissions baseline and reduction in many respects. For example, where ruminant animals are involved, the variation in the baseline of emissions stemming from differences in existing animal diets across sectors and breeds makes it difficult to create a universally applicable methodology.
Development of a new project
If you have an existing project or an idea for a project, you need to consider the following questions:
- Does your project fit within existing methodologies: If your project does not fit within the existing methodologies, then you will need to make a submission for a new or revised methodology to the Department of Climate Change and Energy Efficiency and the Domestic Offsets Integrity Committee. You can find more information on these methodologies here.
- Is a grant available to support your project: The federal government has allocated a substantial sum under the Methodology Development Program. In some circumstances, eligible applicants can receive government support to develop support projects which will prepare CFI methodologies, measurement techniques and models. Please contact us if you believe your project may be eligible for a grant.
- How will you present your submission to the DOCC: The application process is complex and may involve working closely with various government departments. In addition to strong science, the manner in which an application is put forward can be a decisive factor. Care needs to be taken with how the DOCC is approached, and to ensure that submissions are persuasive.
- Who will own and manage the project: Projects under the CFI can be operated under a number of structures. You need to consider whether to operate as an independent landholder, as a co-operative with other landholders, in conjunction with service providers, or whether to sell to aggregators. The CFI legislation imposes various obligations on responsible entities.
- Do you need an AFSL? ACCUs are deemed to be financial instruments and dealing in financial instruments may require an Australian Financial Services Licence. As a general rule, if you develop and operate a CFI project on your own behalf and simply sell the ACCUs generated by that project, then you will not be required to have an AFSL. However, if your arrangements are complex (such as market making) or if you operate CFI projects on a significant scale then you may be required to hold an AFSL.
- Where will you sell your ACCUs: There are two types of ACCUs – those which comply with the Kyoto Protocol and those which do not. It is important to know whether your project will generate “Kyoto ACCUs” or “Non-Kyoto ACCUs” as this distinction will determine the markets in which you can sell your ACCUs and potentially their value. For example, ACCUs issued in respect of non-Kyoto projects are not eligible for surrender under Australia’s Carbon Pricing Mechanism – refer to the diagram below for more information. In addition, Australia has signed up to a second commitment period under the Kyoto Protocol which means that “Kyoto ACCUs” will continue to be eligible for the international compliance market (once you convert them into Kyoto units).
Click here to view diagram.
[Diagram extracted from The Carbon Farming Initiative Handbook prepared and published by the Department of Climate Change and Energy Efficiency.]