Carbon and the waste sector
Norton Rose has released a number of legal updates in recent weeks outlining the Australian Government’s Clean Energy Future policy and associated legislative package. This has included a number of sector specific updates on the impacts and opportunities of the proposed Carbon Pricing Mechanism (CPM). This legal update focuses on the waste sector and draws upon our extensive experience working with the sector, and our recent participation on the Waste Technical Working Group, which has been assisting the Government in developing the legislation and supporting materials.
Carbon pricing mechanism
The provisions in the Clean Energy Bill 2011 (CE Bill) applicable to the waste sector are, like the provisions applicable to other covered sectors, almost identical to those set out in the Carbon Pollution Reduction Scheme (CPRS) legislation. The primary difference is the simplification of who is deemed to be the liable entity and new arrangements for joint ventures.
What landfills are covered?
A landfill facility is defined under the CE Bill as a facility for the disposal of solid waste. It includes some landfills that have closed, although landfills which ceased taking waste before 1 July 2008 are expressly excluded. This cut off date is the same as that proposed in the CPRS legislation and is tied to the date of commencement of reporting obligations under the National Greenhouse and Energy Reporting System (NGERS). Covered landfills include both putrescible and solid inert landfills, although in practice, it is primarily putrescible landfills that generate significant volumes of landfill gas (methane) which are likely to trigger the threshold.
The automatic threshold for liability is 25,000 tonnes of CO2-e greenhouse gas emissions during a financial year. In considering whether a landfill facility triggers the threshold, it is important to remember that methane gas has a Global Warming Potential 21 times that of carbon dioxide, so it will only require a little over 1000 tonnes of methane emissions a year to trigger the 25,000 tonnes of CO2-e threshold. On the basis that the carbon price will commence on 1 July 2012, landfills will be assessed on the 2011/2012 financial year to determine whether they trigger this threshold.
In certain circumstances, the threshold lowers to 10,000 tonnes of CO2-e. These circumstances are generally known as the “prescribed distance rule”, and cover smaller landfills which are within a certain distance of a larger landfill (ie one emitting over 25,000). It is intended that the Department of Climate Change and Energy Efficiency (Department) will publish a list of the designated larger landfills through regulations, and that smaller landfills which accept the same type of waste as a designated larger landfill and are within a certain distance to the larger landfill will also then be a landfill facility under the CE Bill and be liable for the carbon price. Accordingly, it is expected that this list will be released at a date which is close to the commencement date in order to capture the most up-to-date information.
The prescribed distance rule was also proposed under the CPRS and is intended to ensure that there is no diversion of waste from large landfills to smaller landfills in order to avoid the cost impact of the carbon price.
The government has released a fact sheet, which indicates that its assessment is that 190 of the 500 facilities covered by the CE Bill will be landfills. The fact sheet explains that these numbers are only estimates based on emissions data reported under NGERS, so it is possible this figure of 190 could increase once smaller landfills which are caught by the prescribed distance rule are added. Submissions lodged to date with the government by the waste industry have suggested that the prescribed distance should be set at 37 kilometres, which differs significantly from the 80 kilometres that was proposed under the CPRS.
What emissions count towards the threshold?
The CPRS introduced the concept of “legacy waste emissions”, and the CE Bill continues this approach. Legacy waste emissions are emissions which arise from waste deposited before the start of the carbon price (ie 1 July 2012). These emissions will not attract any liability but will be included in determining whether a landfill exceeds the relevant threshold. In other words, it is necessary to measure or estimate emissions from all waste within a landfill to determine whether the landfill is covered by the carbon price, but the carbon price liability only applies to emissions from waste deposited after 1 July 2012. The rationale for this approach was that landfill operators could not recover the cost of a carbon price liability for waste that they had already received.
The government has stated in its Explanatory Memorandum for the CE Bill that it will develop a methodology for calculation of a legacy emissions profile to allow liable landfill facilities to determine the ongoing annual emissions from legacy waste, and that these details will be set out in the regulations. At its Waste Technical Working Group meeting last week, the Department acknowledged the urgency for finalising this methodology but envisaged it was still some way off.
Who is a liable entity?
In summary, the liable entity for a landfill facility will be one of the following:
- The person with operational control of a landfill facility
- A participant in a designated joint venture
- The holder of a liability transfer certificate
A person is defined to include an individual, a body corporate, a trust, a body politic and a local governing body. In turn, a local governing body is defined as a local governing body established by or under a law of State or Territory. The definition of person therefore includes both councils and State/Territory government entities who operate landfills.
The concept of operational control is established under NGERS, and essentially means the party that has responsibility for developing and implementing operational and environmental policies for the facility. In a landfill context, this will generally be the licence or permit holder, although there may be times when these obligations have been transferred to the landfill contractor (if different to the licence or supervisory holder). It will therefore be necessary to examine the relevant service contract to establish which is the party with operational control over the landfill and hence, which party has liability under the CPM.
If a landfill is owned or operated by a joint venture, and no one participant in the joint venture has the greatest ability to introduce and implement the operational and environmental policies, then liability is imposed on all participants in the joint venture. In these circumstances, the joint venture participants must notify the Regulator of the joint venture and the facility by 31 July 2012, and apply for a “participating percentage determination” which will determine their share of liability for emissions from the landfill.
In some circumstances, it will also be possible for participants in a joint venture to have liability transferred to the actual operator of the landfill, if there is a separate party who is fulfilling this role.
Additionally, it is also possible for an operator of a landfill to transfer liability to another company within the same corporate group or to the party who has financial control over the landfill (if a non-related corporate entity) through the liability transfer certificate mechanism.
How is liability determined?
A landfill’s liability will be determined by using the methods for estimation established under NGERS (Methods 1-3). (There is currently no accepted method (ie Method 4) for actual measurement of landfill gas). This is causing some concern across the industry given that liabilities will exist under the CE Bill based on measurements which potentially have a significant variation to actual emissions.
It is also important to note that local councils are not currently required to report landfill emissions under NGERS (unless they qualify as a “constitutional corporation”, which is a view that some Councils have taken). Accordingly, only the private sector will currently have familiarity with the requirements of NGERS. It will be important for those Councils which own or operate landfills who consider they may exceed the 25,000 tonne threshold (or 10,000 if within the prescribed distance rule) to immediately familiarise themselves with reporting requirements under NGERS because if the carbon pricing mechanism legislative package gets passed they will have reporting obligations relating to scope 1 (direct) emissions from 1 July 2012 onwards. These Councils will not have other obligations under NGERS such as reporting scope 2 (indirect) emissions, energy production or consumption if they are not a constitutional corporation that already have to report.
Landfills that closed after 1 July 2008 will also still be subject to reporting requirements under NGERS if they exceed the 25,000 tonne threshold (which as indicated above is determined by counting both legacy and new waste), even though they will not have any direct liability under the CPM given they will not receive any new waste after 1 July 2012.
How is liability satisfied?
During the fixed price period (2012-2015), it will be necessary for landfill operators to purchase and surrender sufficient carbon units to cover their non-legacy waste emissions. Up to 5 per cent of a landfill’s liability during this period may be satisfied by surrendering Kyoto Australian Carbon Credit Units (ACCUs) created under the Carbon Farming Initiative (CFI) (see below).
Once the flexible price period commences (1 July 2015), landfill operators can use:
- carbon units purchased at auction from the Regulator;
- Kyoto ACCUs; or
- eligible international units (although only 50 per cent of a landfill’s liability may be satisfied this way).
A critical aspect for the waste sector is that landfill gas emissions are generally not created in the same year that the waste is deposited in the landfill. Accordingly, landfills which are covered under the CE Bill are unlikely to have any liability during the first year of the fixed price period. However, it is expected that operators will still need to charge their customers a ‘carbon price’ for waste received during this period and, importantly, this ‘carbon price’ will need to reflect the actual cost of complying with the carbon pricing mechanism in the year that the emissions are actually generated. So, notwithstanding that during the first year of the mechanism, the fixed price for carbon units is AUD $23, it is expected that landfill operators will need to charge a higher amount to ensure that their future liability under the CE Bill is adequately covered (current estimates indicate the price may need to be around AUD $30. The fact that fixed price carbon units must be surrendered in the eligible financial year relating to their vintage year means that banking of the units cannot be used during this phase to cover future years of compliance.
Additionally, landfill operators will also be faced with the difficulty of having to estimate what the future price of carbon units will be once the CPM changes to the flexible period from 2015.
It will be interesting to see whether additional rules or regulations are made to deal with these issues and any involvement of the ACCC will need to monitored closely. As a general rule, where businesses want to claim that price rises are linked with the carbon price, care will need to be taken to be able to substantiate these claims.
Consequences of non-compliance
If insufficient units are surrendered to the Regulator, the liable entity will be required to pay a unit shortfall charge. During the fixed price period, this charge will be set at 130 per cent of the fixed charge for the relevant financial year, and during the flexible price period, the charge can be up to 200 per cent of the benchmark average auction charge for the previous financial year.
Other details of the CPM can be found in our legal update on the policy announcement and draft legislation.
Clean Energy Finance Corporation (CEFC)
The AUD $10 billion funding package being made available through the CEFC has the potential to provide a valuable complementary incentive to the uptake of new technologies in the waste sector, additional to that created by the price signal of the CPM. While the more detailed parameters of the CEFC are yet to be released, at this stage there appear to be significant opportunities for CEFC funding for waste to energy or similar projects.
Carbon Farming Initiative
The Carbon Farming Initiative (CFI) is a carbon offsetting initiative intended to give certain land based activities access to domestic voluntary and international carbon markets. The initiative allows project proponents to carry out activities on the land that reduce or sequester emissions and obtain “Australian carbon credit units” (ACCUs) for those activities. Further detail of the CFI can be found in our legal updates.
The CFI will allow participation by the waste sector by allowing landfills that reduce emissions from legacy waste to create ACCUs. Given the limitation on creating offsets outside of covered sector emissions, there will be no scope to create CFI offset credits with respect to new waste, including from waste diversion activities (eg composting) or alternative waste treatment technologies. The carbon price signal (and potentially also the CEFC) will provide the main incentive for these activities.
Additionality is a regulatory aspect of most carbon offsetting regimes, and this is also the case under the CFI. 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, the emissions reductions must go beyond ‘business as usual’ and must not be required under any regulation or licence.
The approach taken to additionality under the CFI is to create a positive list. If a project is of a type that is on the positive list, and is not in whole or part required to be carried out by an existing law of the Commonwealth or a State or Territory, the emissions reductions from the project will be considered as additional to business as usual. The draft list that has to date been released by the Department includes the following activity on the positive list – “capture and combustion of methane from legacy waste”.
Every CFI project must operate under a “methodology”. The methodology sets out the scope and conditions of activities that may be carried out under it, provides the method of calculation for the estimation of baseline emission levels for the project, the definition of the project area or areas, and the method of estimation/measurement of abatement or sequestration.
The Department has released a methodology covering the emissions from legacy waste deposited in a landfill which have been avoided through the collection and combustion of methane by a landfill gas extraction system (Methodology).
The abatement activity covered by the Methodology covers:
- Installing a gas collection system (including wells, flares and electricity generation systems)
- Collecting landfill gas; and
- Combusting the methane component of the landfill gas using flares and/or an electricity generation system to convert it to carbon dioxide which is released to the atmosphere.
A key aspect of the Methodology is determination of the baseline. While there was previously some lobbying by the waste industry for a standardised baseline, the settled position now is that the baseline will be need to be determined on a case by case basis. Accordingly, the Methodology provides that the project baseline is the methane that would have been emitted from the landfill in the absence of the project.
- In circumstances where there were no regulatory requirements to capture and destroy methane emissions prior to project commencement, this is equivalent to the methane emissions from the landfill.
- In circumstances where there were regulatory requirements to capture and destroy methane emissions prior to project commencement, this is equivalent to the methane emissions from the landfill minus the methane captured and destroyed to meet regulatory requirements.
The Methodology is currently being considered by the Domestic Offsets Integrity Committee (DOIC) following a period of public consultation.
The Department is also reviewing circumstances where regulatory requirements have changed after a project has been commenced. Specifically, it appears that some States have modified licences after a project has voluntarily commenced so as to require the project to be continued as a condition of the licence. This appears to have had the effect of penalising owners or operators who have “gone early”, ahead of regulatory requirements.
Can a landfill be covered by the carbon pricing mechanism and participate in the CFI?
It is likely that many landfills will include both legacy and non-legacy waste. For such landfills, there will be one portion of the landfill for which emissions may be abated and ACCUs produced under the CFI, and another portion of the landfill that will have a liability under the CE Bill.
The Methodology deals with this by requiring the calculation of a “legacy waste emissions profile” which will apportion emissions from a landfill attributed to legacy waste compared to non-legacy waste (for example, 30 per cent legacy to 7 per cent non-legacy). ACCUs will be allocated only in relation to emissions reduced on the proportion of legacy waste.
The waste industry has raised concerns about the impact this will have on landfills which have minimal capacity remaining after 1 July 2012. There is a suggestion that owners of these landfills may make a commercial decision to stop taking putrescible waste, or any waste, from 1 July 2012, on the basis that the commercial gain of accepting the small quantity of non-legacy waste will be eclipsed by the long term monitoring and reporting obligation for the legacy waste and the difficulties of calculating the true carbon price for the small amount of non-legacy waste that is accepted in that initial period.