On 22 November, the Government formally released its Consultation Paper on the design of the Carbon Farming Initiative (CFI). Norton Rose Australia attended the key stakeholders’ briefing on the CFI in Canberra on Friday 19 November 2010 and we provide this update on the Consultation Paper and the details provided at this briefing.

What is the Carbon Farming Initiative?

The CFI was an election commitment made by Prime Minister Julia Gillard on 14 August 2010. The Initiative is intended to give farmers, forest growers and landholders access to domestic voluntary and international carbon markets, through a mechanism to credit carbon abatement activities in the land sector.

The CFI will be bought into operation through legislation, which the Government hopes to pass in the first half of 2011, with a view to the scheme starting on 1 July 2011. We understand that the legislation will be based on the forestry and offsets components of the CPRS legislation.

Coverage

The scheme would enable credits to be obtained for abatement undertaken in the land sector. Potential eligible abatement activities have been identified as follows:

  • reforestation and revegetation
  • reduced methane emissions from livestock
  • reduced fertilizer emissions
  • manure management
  • reduced emissions or increased sequestration in agricultural soils (soil carbon)
  • savannah fire management
  • avoided deforestation
  • burning of stubble/crop residue
  • reduced emissions from rice cultivation, and
  • reduced emissions from landfill waste deposited before 1 July 2011

Some of these activities (such as landfill waste emissions reduction) would count towards Australia’s Kyoto Protocol target, however, other activities (such as soil carbon) would not and therefore credits created from these other activities would only be able to be traded in voluntary markets. It is intended that the scheme administrator would determine whether the abatement activity was a Kyoto Protocol form of abatement, or non Kyoto abatement.

Carbon Farming Initiative credits

CFI credits issued for abatement recognised under the Kyoto Protocol would be specially marked as “Kyoto” CFI credits, and these credits would be exchanged for Kyoto Protocol units held by the Government (either assigned amount units (AAUs) or emissions reduction units (ERUs)) for use in international compliance markets (for example, the European Union Emissions Trading Scheme).

CFI credits sold into international voluntary markets, would be coupled with Australian AAUs (which would be cancelled upon sale) to ensure no double counting.

In relation to the sale of CFI credits into the Australian market, the primary purchasers at this stage (prior to any compliance market) would be those organisations, companies or individuals undertaking voluntary offsetting of their emissions, in order to achieve carbon neutrality. The National Carbon Offset Standard will be amended to recognise all CFI credits as eligible under the Standard.

For all CFI credits voluntarily surrendered, an equivalent number of Australian AAUs would be cancelled.

Integrity standards

The Government wishes to ensure that all abatement credited under the CFI meets internationally recognised standards, and accordingly the following integrity standards will form part of the scheme:

  • additional
  • permanent
  • avoidance of leakage
  • measurable and verifiable
  • conservative
  • internationally consistent
  • supported by peer reviewed science

Methodologies used under the scheme would be assessed by the Domestics Offsets Integrity Committee in accordance with these integrity standards.

Additionality

The principle of additionality traditionally presents the most difficult aspect of offset schemes. As the Consultation Paper notes, assessing additionality can be “time consuming, costly and subjective”.

Additionality is the principle that in order to create a carbon asset out of reducing emissions, that carbon asset should be created only where that emission reduction would not have occurred in the absence of the particular activity that was done to reduce the emissions. That is, a carbon offset should only be created where it is an additional abatement to business as usual. Business as usual includes efforts that countries are taking already in order to comply with their international obligations to cut emissions (such as under the Kyoto Protocol).

The CFI scheme proposes to streamline the assessment of additionality for activities to reduce the costs to project proponents. As part of this process the Government will be providing funding to develop methodologies, for example, approaches to baseline setting.

One of the suggestions is that a “positive list” will be prepared which will include activities which will be deemed to be additional, without any further assessment. Such activities may include not-for-harvest carbon forest sinks, on-farm tree planting or flaring of methane from landfills.

Permanence

Another issue which arises in offsetting schemes includes permanence. Generally, biological carbon stores (e.g vegetation) are considered permanent if they are in place for at least 100 years.

To address the permanence issue arising from sequestration activities, the Government proposes to adopt a “risk of reversal buffer” of 5 per cent, which would apply to all bio-sequestration projects. If project proponents wished to cancel their project, there would be an obligation to relinquish credits obtained through the project. Further, in certain circumstances (e.g the project proponent dies or becomes insolvent), a carbon maintenance obligation would attach to the land the subject of the project.

Methodologies

It is intended that, in the main, the CFI methodologies will be developed by the Department of Climate Change and Energy Efficiency and the Department of Agriculture, Fisheries & Forestry. There will also, however, be an opportunity for private project developers to put forward methodologies. The Domestic Offsets Integrity Committee will play a role in assessing methodologies and providing recommendations to the Minister for Climate Change & Energy Efficiency on whether methodologies should be approved.

Methodologies may consist of:

  • a description of the abatement activities, greenhouse gases and sources and sinks affected by a project
  • procedures for determining baseline emission and removals for a project
  • procedures for identifying and estimating leakage
  • procedures for estimating or measuring abatement (net of leakage) relative to the baseline
  • project monitoring requirements
  • any additional reporting or record keeping requirements.

Public consultation would take place in relation to draft methodologies prepared by the Government or project proponents.

Tax implications

Existing income tax provisions and goods and services tax (GST) provisions would apply to carbon credits issued under the CFI. Further information on the tax treatment of CFI credits can be obtained from our Climate Change Group.

What next?

Submissions on the Consultation Paper are invited by close of business on 21 January 2011. The Government will now start preparing legislation, with a view to having it passed by Parliament during the first half of next year.

The Government is keen to start working with industry groups to prepare the different methodologies, so that come 1 July 2011, activities can start generating CFI credits. For example, initial discussions have been held with the waste industry as to how this process may be taken forward.