In late December 2013, the Australian Government released its Green Paper further detailing the proposed development and implementation of an Emissions Reduction Fund.

The Green Paper is the culmination of the current Government’s consultation with key stakeholders over the past four years and elaborates on its proposal for reducing Australia's greenhouse gas emissions following the expected repeal of the existing carbon pricing legislation in July 2014 and the ALPs emissions trading scheme (ETS).

Broadly, the Government has proposed the Emissions Reduction Fund (ERF) as a ‘baseline-and-credit type’ system whereby the Government will credit carbon reductions through both of the following:

  • Activities Method, by endorsing specific projects/ emissions reduction activities through the direct purchase of emissions through a competitive bidding process whereby the Clean Energy Regulator will run public tenders for eligible emissions reductions and will enter into forward contracts to purchase emissions reductions from the operators of the lowest-cost emissions reduction projects arising from that tender process.
  • The types of activities/ projects that may be used will be required to meet pre-qualification requirements and the Government will establish defined methodologies for calculating the carbon reductions associated with different types of eligible projects.
  • Facilities Method, by crediting businesses for relative reductions in carbon emissions based on historical emission levels, either from a mean or median average of emissions over a four or five year period for that business or, where the business is a new entrant, the industry average or best practice emissions intensity for that industry.

Under both methods the ERF will seek to utilise the infrastructure and reporting arrangements currently in place for existing carbon related schemes, including the Carbon Farming Initiative and the National Greenhouse and Energy Reporting Scheme. While the ERF model provides clear incentives for new entrants to pursue a best practise approach to emissions reductions, it is unclear how new entrants into particular markets will be incentivised for pursuing certain other lower carbon infensive projects over alternatives (for example, there is no clear incentive for a new electricity generator to utilise a gas fired station over a coal fired station).

This can be contrasted with the ETS which, as a cap-and trade scheme, sought to directly impose a carbon price on the 1,000 largest Australian companies by providing each entity with a right to specific amounts of greenhouse gas emissions per year and required that each entity surrender sufficient permits to cover those emissions, which could either be purchased from other parties or allocated to them through their own activities.

A White Paper elaborating on the detailed design of the ERF and incorporating feedback received on the Green Paper is expected to be released within the next month and, while subject to the Government passing the necessary legislation in the Senate, the ERF is expected to become operational on 1 July 2014. While many in industry may have become somewhat disengaged from the various carbon and climate change policies over the last few years, the proposed ERF will mainly effect those who are already subject to the National Greenhouse and Energy Repoarting Scheme and other government initiatives.

Accordingly, until there is further clarity regarding the precise operation of the ERF, the key focus for those that are already subject to the National Greenhouse and Energy Reporting Scheme should be ensuring the accuracy and robustness of their internal processes for verifying and reporting emissions reductions so that they are ready for the transition to the new ERF.

Further information regarding the ERF and a copy of the Green Paper can be found here.