On 9 May 2014, the Australian Government released its draft Carbon Credits (Carbon Farming Initiative) Amendment Bill 2014 (Exposure Draft), which establishes the Emissions Reduction Fund (ERF). 

The ERF is the central component of the Government's Direct Action Plan. The Exposure Draft implements a number of the policy positions set out in the Emissions Reduction Fund White Paper (White Paper), which was published by the Government in April 2014.

 Maddocks has previously provided a legal update on the Emissions Reduction Fund Green Paper, which is available here, and the Coalition's Climate Change Policy, including the Direct Action Plan, which is available here.

The ERF builds on existing arrangements under the Carbon Farming Initiative (CFI) and expands its coverage to include any type of eligible emissions reduction project. Key elements of the CFI will be incorporated into the ERF. 

This article provides an overview of the ERF, as set out in the Exposure Draft and White Paper.

How will the ERF work?

  • Project proponent uses an approved method to estimate the likely emissions reductions (referred to as carbon abatement in the Exposure Draft) from their proposed project.
  • Proponent registers its project with the Clean Energy Regulator (CER) on the ERF Register.
  • Proponents of approved projects submit an auction bid to sell the project's emissions reductions, on the basis of price per tonne of carbon dioxide equivalent (CO2-e).  
  • Successful bidders enter into contracts with the CER, in which the Government agrees to purchase the emissions reductions.
  • Proponents report their emissions reductions to the CER.  
  • Once verified, proponent receives payment from the CER for the emissions reductions at the contract price.

Eligibility

  • A key requirement under both the CFI and the ERF is that emissions reductions must be 'additional'. The Exposure Draft  amends the 'additionality' test by removing the 'common practice test' (i.e. the project must be of a kind that goes beyond common practice) and introducing:
    • the 'newness requirement' (that the project has not begun to be implemented before it has been registered)
    • the 'government program requirement' (that the project is not likely to occur because of funding from another State or Commonwealth government program).
  • The requirement that the project must be additional to regulatory requirements remains ('the regulatory additionality requirement').
  • To be eligible, projects must be a project undertaken pursuant to an approved method.

Approval of methods

  • The ERF will feature two types of emissions reductions methods:
    • activity methods (i.e. for specific emissions reduction activities)   
    • facility methods (i.e. for multiple activities at large industrial facilities).1
  • Approved CFI methods will continue to apply under the ERF until they are varied or revoked.
  • The Exposure Draft provides that new ERF methods cannot be made unless they cover emissions reductions that count towards Australia's climate change targets under the Kyoto Protocol.2
  • The Domestic Offsets Integrity Committee will be renamed the Emissions Reduction Assurance Committee (ERAC). The ERAC will provide advice to the Minister for Environment (Minister) on the suitability of draft methods.
  • Technical working groups have been set up to develop suitable methods, which will be assessed by the ERAC. Methods currently under development include:   
    • a generic method for emissions reductions at facilities reporting under the National Greenhouse and Energy Reporting Scheme
    • capture and destruction of coal mine fugitive emissions   reductions in emissions-intensity of transport  
    • commercial, industrial and aggregated energy efficiency
    • capture and combustion of landfill gas  
    • alternative treatment of organic waste  
    • capture and combustion of biogas from wastewater
    • methods for the land sector, including increasing soil carbon, reducing livestock emissions, expanding opportunities for environmental and carbon sink plantings, and reforestation.3
  • There will be a public consultation period of 28 days on draft methods (unless the ERAC considers that a shorter period, of no less than 14 days, is appropriate).4
  • The Minister will make the final determination on emissions reductions methods, having regard to certain matters, including advice from the ERAC.  
  • Emissions reduction methods will be legislative instruments.

Purchasing emissions reductions

  • The CER may conduct one or more of the following 'carbon abatement purchasing processes' for the purchase of eligible carbon credit units:  
    • a reverse auction
    • a tender process
    • any other process.5
  • The White Paper explains that proponents will be able to submit their projects into a competitive bidding process so that the Government can purchase emissions reductions at the lowest cost. The proponent must have their project registered on the ERF Register to be eligible to bid in ERF auctions.  
  • The CER will have 'significant discretion' regarding the design and conduct of reverse auctions and other purchasing processes.7
  • The CER may set pre-qualification requirements for participation in an auction. These will include: a credible estimate of emissions reductions for the project, a minimum bid size and the capacity of the applicant to carry out the project. These requirements are not set out in the legislation. Rather, it is intended that they will be set out in documents published by the CER.8   
  • The Exposure Draft contains a set of principles that the CER must have regard to in exercising its purchasing powers. The principles include ensuring the integrity of the purchasing process so that the assessment and selection of projects is conducted in a fair and orderly manner.
  • Legislative rules may also be made by the Minister to provide further guidance regarding the conduct of auctions or other processes.

Entering into contacts 

  • The Exposure Draft allows the CER to enter into contracts (i.e. with a successful bidder) to purchase eligible carbon credit units.
  • The contract will set out the Commonwealth’s obligation to pay for the emissions reductions and the contractor's obligation to deliver the emissions reductions.9
  • Payments will not be made until the emissions reductions have occurred, and carbon credit units have been issued and transferred to the relevant Commonwealth Registry account.10

Reporting and auditing

  • Reporting requirements will be specified in method determinations. Proponents will be able to submit reports and receive credits more frequently (at most every six months), compared to the reporting requirements under the CFI (which allows proponents to choose when to report, provided that the period between reports is no less than 12 months and no more than five years). 
  • Currently, all reports must be accompanied by an audit report. The Exposure Draft provides that an application need only be accompanied by an audit report if it is required. Legislative rules will be made by the CER specifying the frequency and scope of the audit report that must be provided with project reports for different types of projects.12

Existing CFI projects

Until 1 July 2015, applications can still be lodged under the CFI eligibility rules.13      

Existing CFI projects will remain on the ERF register and will continue to operate under their methods for the remainder of their crediting period.14  

Under the ERF, projects will only be approved and registered for a single defined crediting period. However, CFI project proponents can apply for a second crediting period when their existing crediting periods come to an end.15

Currently, all CFI sequestration projects must be maintained for 100 years or the credits issued for the project must be relinquished. The Exposure Draft provides for proponents of new sequestration projects to nominate a 100 or 25 year permanence period when they register their project (however, the number of credits issued for 25 year projects will be discounted by 20 per cent). Proponents of existing CFI sequestration projects can request to convert from a 100 to a 25 year permanence period and relinquish credits as necessary to reflect the 20 per cent crediting discount.16

Safeguard mechanism

  • The purpose of the safeguard mechanism is to encourage businesses to keep emissions within historical baselines to ensure that emissions reductions paid for by the ERF are not displaced by a significant rise in emissions elsewhere.17   
  • It is intended that the safeguard mechanism will apply to the largest emitters only - that is, about 130 entities with direct emissions of 100,000 tonnes of CO2-e annually or more.  
  • Very little detail has been released on the safeguard mechanism to date.   
  • The White Paper indicates that the safeguard mechanism will commence on 1 July 2015 in order to allow for further consultation with business. Legislation to establish the safeguard mechanism is expected in early 2015.  
  • The White Paper states that no revenue from businesses is sought, nor will any be budgeted by the Government, as part of the safeguard mechanism.18

Funding for the ERF

  1. In the Green Paper, the Government set out an initial funding commitment of $1.55 billion to the ERF, which was extended to $2.55 billion in the White Paper.   
  2. However, the budget papers show $1.14 billion for the establishment of the ERF over the next four years, with the Government committing to provide funds totalling $2.55 billion to the ERF for longer-term contracts for the purchase of emissions reductions. The Minister for the Environment said:

Funds will be allocated flexibly over time according to the profile of projects contracted under the Emissions Reduction Fund. The Government will be able to write contracts up to the value of $2.55 billion over the forward estimates period. Payment will be made as abatement is achieved.19

Passage of the legislation  

  • The Government will need a majority in the House of Representatives and in the Senate in order to pass the Exposure Draft. In its current composition, the Greens hold the balance of power in the Senate.   
  • This means that, in order to pass the legislation prior to 30 June 2014, the Government will need the support of the Australian Labor Party or the Greens. Both parties have expressed opposition to the Government's Direct Action Plan.21   
  • After 1 July 2014, the Government will need to secure the support of at least six of the eight crossbenchers, including the Palmer United Party.