With the debate on the carbon pricing mechanism focusing primarily on the potential cost impacts, it is easy to overlook the opportunities presented by its sister scheme – the Carbon Farming Initiative.

The Carbon Farming Initiative is a carbon offset scheme that enables land managers to generate carbon credits that can be traded or used to meet mandatory or voluntary carbon commitments. The scheme is potentially open to landfill owners or operators who capture and combust methane arising from certain waste deposited at their landfill either in a flare or an internal combustion engine.

The recent approval of the 31st landfill gas project under the Carbon Farming Initiative1 is an encouraging start for the industry but there are expected to be more landfills in Australia that could benefit from participation in the scheme. With the approval of a second landfill gas methodology in December 2012 opening the door for more projects to participate in the scheme and buyers of carbon credits already in the market, it is timely for landfill owners and operators to be assessing their opportunities under the scheme.

In this article, we comment on those opportunities and outline the path to participation in the scheme. We also comment briefly on the opportunities for landfill owners and operators under the Renewable Energy Target Scheme.

INTRODUCTION TO THE CARBON FARMING INITIATIVE

Under the Carbon Farming Initiative (CFI), certain types of projects that reduce or sequester greenhouse gas emissions may be accredited as “offsets projects”, meaning that they may be entitled to receive valuable carbon credits. A potentially eligible “offsets project” is the capture and combustion of methane arising from ‘legacy’ waste deposited at landfills, which we refer to as a landfill gas project2.

Legacy waste is any waste that was deposited before 1 July 2012 and any landfill with legacy waste is potentially eligible under the CFI – open or closed and regardless of size.

It is important to be aware of the difference between the application of the carbon pricing mechanism (CPM)3 and the CFI to landfills. The CPM is mandatory and requires the operators of certain landfills to acquire and surrender “eligible emissions units” for the greenhouse gas emissions from their non-legacy waste (ie waste deposited after 1 July 2012). In contrast, the CFI is voluntary and provides an opportunity for the operators of certain landfill gas projects to be issued with carbon credits for the abatement of emissions from legacy waste.

BENEFITS AND RISKS OF PARTICIPATING IN THE CFI

Carbon credits under the CFI are known as Australian Carbon Credit Units (ACCUs) and ACCUs issued for landfill gas projects are “Kyoto ACCUs”4. An ACCU represents the abatement of one tonne of carbon dioxide equivalent.

Benefits of participating

Kyoto ACCUs can be used by a ‘liable entity’ to meet its obligations under the CPM5. Therefore, ACCUs issued in respect of a landfill gas project may either be sold to a liable entity (directly or through a broker) or, if the landfill operator who has generated the ACCUs is itself a liable entity, surrendered directly to meet carbon pricing obligations6. Although there is a 5% limit on the use of ACCUs to meet carbon liabilities during the first three years of the CPM, that limit does not apply to landfill operators. Also, demand for Kyoto ACCUs during this period is expected to far outstrip supply.

ACCUs may also be sold to individuals and/or organisations (here and overseas) who wish to voluntarily offset their greenhouse gas emissions, eg under Low Carbon Australia’s Carbon Neutral Program.

Currently, it is not possible to export ACCUs to a registry overseas7. However, this may be possible in the future allowing entities who are participating in another emissions trading scheme to surrender ACCUs to meet their obligations under that scheme (either directly or after being converted to another type of unit). For example, although Australia currently only has a one-way link with the EU Emissions Trading Scheme (which will allow permits under that scheme to be surrendered here but not vice versa), negotiations are underway for a full link to be in place no later than July 2018. The Government has confirmed that ACCUs will form part of those negotiations.

As ACCUs from a landfill gas project do not have an expiry date, they could be held for future use or sale and a security interest in the ACCUs may be granted in the interim.

A key advantage for existing landfill gas projects is that they are entitled to receive ACCUs for eligible abatement since July 2010, meaning that these projects are first to the market with ACCUs8.

It is important to be aware that ACCUs are ‘financial products’ and therefore a financial services licence from ASIC is required to provide financial services in ACCUs, such as financial product advice and dealing in ACCUs. A person who sells ACCUs from their own project will not usually need a financial services licence, but carbon brokers, banks and other carbon traders will.

Price risks

Although the price of Kyoto ACCUs will be determined by the market, it is expected that the price will be strongly influenced by the price of carbon units under the CPM and, during the flexible price period, the price of certain international units.

Therefore, when considering the merits of participating in the CFI (particularly if constructing a new project), it is important to be aware of the political context and the likely effect of possible changes in the wider carbon market on the anticipated price of Kyoto ACCUs.

Although the Federal Shadow Environment Minister Greg Hunt has confirmed that a future Liberal Government would keep the CFI (if elected to Government in September), a considerable portion of the market for Kyoto ACCUs would disappear if the CPM is repealed. Without the creation of new demand (ie a market mechanism to replace the CPM), or some other form of price support, the value of Kyoto ACCUs could drop significantly.

Also, last year, in conjunction with the linking of the CPM to the EU Emissions Trading Scheme, the Government removed the $15 floor price which would have applied from 1 July 20159. As it is expected that the price of carbon units and Kyoto ACCUs will likely track the price of European units, investors in landfill gas projects are now exposed to the uncertainties surrounding the future price of European units (which is currently trading at record lows).

An example of the impact of these uncertainties is Bundaberg Regional Council’s decision not to proceed with its proposed landfill gas project at its University Drive landfill site because of the impact of the removal of the floor price on expected revenue10.

HOW TO PARTICIPATE IN THE CFI

Before ACCUs may be issued for landfill gas projects, there are 4 formal steps that a project proponent must follow:

  1. Apply to be recognised as an offsets entity and open a registry account
  2. Obtain approval for a landfill gas project
  3. Undertake the landfill gas project & submit reports
  4. Apply for ACCUs

Step One: Apply to be recognised as an offsets entity & to open a registry account

In order to be eligible to participate in the CFI, an entity must be a “recognised offsets entity” and have an account in the Australian National Registry of Emissions Units.

Anyone may apply to the CER to become a recognised offsets entity (including Councils and their contractors)11.

Step Two: Obtain approval for the landfill gas project

Only offsets projects that have been declared eligible by the Clean Energy Regulator (CER) may be issued with ACCUs.

There are three key criteria that must be met before a landfill gas project may be declared eligible under the CFI – (a) it must come within one of the approved methodologies; (b) it must pass the additionality test and (c) it must not be on the negative list.

(a) Landfill gas projects covered by an approved methodology

There are currently two relevant approved methodologies:

  • Carbon Farming (Capture and Combustion of Methane in Landfill Gas from Legacy Waste) Methodology Determination 2012 (issued on 7 August 2012) (August Methodology); and
  • Carbon Credits (Carbon Farming Initiative) (Capture and Combustion of Methane in Landfill Gas from Legacy Waste: Upgrade projects) Methodology Determination 2012 (issued on 13 December 2012) (December Methodology).

The August Methodology covers the following landfill gas projects:

  • projects that involve the following activities:
    • installing, on or after 1 July 2010, a landfill gas extraction system; and
    • collecting gas emitted from legacy waste from the landfill facility; and
    • combusting the methane component of the gas in a flare or internal combustion engine to chemically convert it to carbon dioxide;

(this must be a new system in its entirety);

  • transitioning GGAS projects12; and
  • transitioning Greenhouse Friendly projects13.

That methodology was widely criticised for excluding projects installed prior to 1 July 2010 and upgrades to those projects unless they were transitioning Greenhouse Friendly or GGAS projects.

This was addressed to an extent by the December Methodology, which covers the following additional landfill gas projects:

  • projects that involve completing the installation of a landfill gas flaring or generation system between 1 July 2007 and 1 July 2010 and not connected to any system previously installed;
  • projects that involve upgrading, on or after 1 July 2010, an existing landfill gas flaring or generation system (ie a system that was installed before 1 July 2007); and
  • transitioning Cities for Climate Protection projects14.

(b) The additionality test

In order to pass the additionality test, a project must be on the “positive list” and must not be required by federal, state or territory law (this is a requirement for all projects other than transitioning GGAS and Greenhouse Friendly projects).

The positive list sets out activities that are deemed to go beyond common practice in the relevant industry and includes “the capture and combustion of methane from waste deposited in a landfill facility before 1 July 2012”.

The more challenging hurdle for landfill gas projects is the requirement that the project not be required by law. To satisfy this, the project must capture more landfill gas than is legally required.

In order to assist with determining whether this requirement is met, the Government has issued the “Carbon Farming Initiative – Guidelines for Calculating Regulatory Baselines for Legacy Waste Landfill Methane Projects” (dated July 2012) (the Guidelines). Under the Guidelines, both quantitative and qualitative legal restrictions are relevant.

Quantitative restrictions

There are two options for calculating the legally required amount of gas capture (in quantitative terms) – either by using the default calculations in the Guidelines15 or by asking the relevant state or territory environmental regulator to undertake a landfill-specific assessment16.

Qualitative restrictions

Qualitative restrictions on methane emissions from landfills may be imposed in a variety of ways, such as a requirement to install a landfill methane capture system, or to control, manage or limit greenhouse gas, landfill gas, methane and/or odour.

The Guidelines provide that where the landfill operator is subject to any form of qualitative restriction, this is taken to mean that the landfill operator is required to capture 30% of landfill methane.

Project proponents must determine both the quantitative restriction and qualitative restriction and identify the higher of the two required rates of capture. The additionality test will be met if the landfill gas project will capture more landfill gas than the higher capture rate. A CFI Landfill Regulatory Baseline Calculator is available to assist project proponents to calculate their regulatory baseline.

(c) The negative list

The negative list includes projects that are excluded from the CFI because there is a material risk that the project will have a material adverse impact on the environment, employment or the local community.

Currently, the only entry on the negative list that may affect landfill gas projects is projects that were mandated by law on 24 March 2011 but are no longer mandatory because the relevant law was repealed after that date. This is to avoid any incentive on regulators to relax legal requirements to enable projects to meet the additionality test and take advantage of the CFI.

What this means in practice for landfill gas projects is that, if the landfill gas capture legal requirements have been relaxed since 24 March 2011, a project will only be eligible to claim ACCUs for gas capture beyond what was required on 24 March 2011.

(d) Other considerations

The CER will also consider the following criteria when assessing an application for a landfill gas project to be declared eligible under the CFI:

  • the applicant must be the project proponent and a recognised offsets entity;
  • all environmental, planning and water approvals must be in place before ACCUs can be issued – although projects can be declared eligible pending approvals; and
  • the application must include a declaration as to whether the project is consistent with the regional natural resource management plan for the project area – projects that are inconsistent with the plan may still be approved but it will be noted on the public register.

If the project is approved, a Declaration of Eligible Offsets Project will be issued and the project will be recorded on the Register of Offsets Projects.

Step Three: Undertake the landfill gas project & submit reports

Once a landfill gas project has been approved, it should be undertaken in accordance with the relevant methodology.

The August and December Methodologies set out the rules for undertaking eligible landfill gas projects, including the requirements for calculating net greenhouse gas abatement, monitoring, record keeping and reporting to the CER.

Calculating the net greenhouse gas abatement attributable to the project

This is an important calculation because it determines the number of ACCUs that may be issued for a landfill gas project.

The two key aspects of the total net abatement calculation are, firstly, that greenhouse gas sources and sinks must be accounted for and, secondly, that it must not include gas captured and destroyed under baseline conditions.

The sources and sinks that must be included in the abatement calculations include:

  • emissions attributable to grid derived electricity and/or fuel used in the process of gas capture and combustion eg to power pumps and engines used in the operation of flares;
  • emissions from supplemental fuel used to sustain combustion eg natural gas;
  • landfill gas captured and destroyed; and
  • emissions generated by the combustion process including fugitive emissions from the incomplete combustion of methane and the generation of nitrous oxide during the combustion process.

It is interesting to note that, according to the December Methodology, emissions attributable to electricity delivered from the grid are only included in the calculation where the electricity is delivered prior to 1 July 2012 (as after that date the emissions are subject to a carbon price). It is not clear whether the August Methodology will be amended to include the same qualification.

The proportion of methane generated by legacy waste that is captured and destroyed under baseline conditions is to be calculated in accordance with the Guidelines (other than for certain upgrade projects17).

A project’s baseline is approved for the duration of a “crediting period”. The first crediting period is 7 years. During this period transitioning GGAS projects and Greenhouse Friendly projects are not required to calculate their baseline and instead are to use the relevant default baseline, which is 24% for transitioning GGAS projects and 0% for transitioning Greenhouse Friendly projects.

The Methodologies include detailed formulas for calculating the net greenhouse gas abatement amount.

Monitoring, record keeping and reporting

Project proponents are required to issue an “offsets report” to the CER, with the first offsets report due anytime between 12 months and 5 years from the date the project was declared eligible (giving proponents the flexibility to decide when it is most cost effective to prepare the report).

Offsets reports for landfill gas projects must be reviewed by a registered greenhouse and energy auditor. A list of registered auditors is available on the CER’s website.

The Methodologies also specify accuracy and transmitter requirements for monitoring equipment, quality assurance and quality control requirements, and the records that must be kept.

Step Four: Apply for ACCUs

In order to receive ACCUs for a landfill gas project, the proponent must apply to the CER for a “certificate of entitlement”, which it can do when it submits its offsets report.

The certificate of entitlement specifies the number of ACCUs that the proponent is entitled to receive for abatement achieved over the reporting period and the registry account number that the ACCUs should be issued to.

When the CER has issued the ACCUs into the registry account, the details will be published in the Register of Offsets Projects.

Withdrawing from the CFI

A project proponent can withdraw from the CFI at any time.

Also, a landfill gas project may be transferred to a new proponent provided that they are a recognised offsets entity.

Potential issues and opportunities for Councils

Where there is an existing landfill gas project on a Council landfill, the Council should review whether the project or upgrades to the project may be eligible under the CFI.

If so, and the project is operated by a contractor (as is usually the case), the Council may wish to review its arrangements with the contractor to determine whether it may have a right to any ACCUs that are issued to the project and/or to a share of the revenue from selling any such ACCUs. If not, the Council may wish to seek to renegotiate the arrangements.

Where there is currently no landfill gas project at a Council’s landfill, the costs and benefits of installing such a project should be assessed and, if the Council wishes to proceed, it should determine who the project proponent will be and how the costs, benefits and risks will be allocated between the parties (assuming a contractor is to install and operate the project).

Relationship with the Renewable Energy Target Scheme

Under the Federal Government’s Renewable Energy Target Scheme (RET), a power station that uses landfill gas to generate electricity can apply to become an accredited renewable energy power station. When accredited, it may create large-scale generation certificates (LGCs) for each megawatt-hour of electricity generated using landfill gas. LGCs are tradable and are sought after by liable entities under the RET (wholesale electricity retailers and some generators) to meet their legal obligations.

Therefore, as well as generating ACCUs, operators of landfill gas projects that involve electricity generation may also be eligible to create LGCs, thereby providing an additional revenue stream for the project. An added bonus is that LGCs may be created for electricity generated from emissions from nonlegacy waste as well as legacy waste.

However, the cost of connecting a landfill gas project to the electricity distribution network may be significant and there may be additional gas treatment requirements, making an electricity generating project typically more costly to install and operate compared to projects where the methane is simply flared. Also, there would need to be sufficient volumes of landfill gas to make power generation feasible.

Conclusion

Through the CFI, the Government has provided landfill owners and operators with the opportunity to earn an additional revenue stream (or avoid costs under the CPM) whilst contributing to the national greenhouse gas mitigation effort. This is likely to be an attractive proposition for existing landfill gas projects that meet the eligibility requirements under the CFI.

The potential financial benefits of participating in the CFI may also trigger the development of new landfill gas projects, particularly where the project may also be eligible to create LGCs. However, when considering investing in a new landfill gas project it is important that due consideration is given to the risks – particularly around the future price of Kyoto ACCUs.

In order to participate in the CFI, there are a number of administrative steps that must be followed and requirements that must be met. It is important that anyone who is considering becoming involved in a new CFI project is aware of these steps and requirements, to inform the development of the project and negotiations with any other parties involved.

Councils with existing landfill gas projects on their landfills that are being operated by contractors should also be aware of the ins and outs of the CFI, to inform their review and possible renegotiation of the arrangements with their contractors.

With a large number of potential buyers of Kyoto ACCUs already in or shortly to join the market, now is the time for landfill owners and operators to review their opportunities under the CFI and, if appropriate, navigate the path to participation.