The Government’s plan to replace the carbon pricing mechanism with its Direct Action Plan took a step forward on 18 June 2014 with the introduction to Parliament of the Carbon Farming Initiative Amendment Bill 2014 (CFI Amendment Bill). If passed, the CFI Amendment Bill would implement the Emissions Reduction Fund (ERF), which would be used to purchase carbon abatement from proponents of eligible emissions avoidance and sequestration projects. In this paper, we summarise the arrangements for the ERF as set out in the Emissions Reduction Fund White Paper (White Paper) released in April and implemented through the CFI Amendment Bill. We focus on the practical steps that a project proponent would need to follow to access funds under the ERF, outline the Government’s proposed safeguard mechanism that will apply to certain large emitters, and highlight the key differences between the ERF and the Carbon Farming Initiative (CFI) and transitional arrangements. THE EMISSIONS REDUCTION FUND IN A NUTSHELL The Government intends to encourage reductions in greenhouse gas emissions by using the ERF to purchase carbon abatement through a reverse auction or other procurement process. Under the auction process, proponents of eligible emissions avoidance and sequestration projects will be able to submit a bid to the Government specifying a price per tonne of carbon abatement achievable through their project. The Government will then select the lowest bids. Successful project proponents will enter into a carbon abatement contract with the Government, under which the Government will agree to pay to the project proponent its bid price for the carbon abatement it achieves over a certain number of years. Project proponents will be entitled to sell carbon abatement that is not purchased by the Government to others, for example into the voluntary carbon market. The Government has confirmed that a total amount of $2.55 billion in initial funding is to be provided under the ERF, with further funding to be considered in future budgets. The Government intends the ERF to begin following the repeal of the carbon pricing mechanism. It will be implemented by extending and modifying the current arrangements under the CFI, which has been operating since December 2011. HOW TO PARTICIPATE IN THE ERF In order to receive payments from the ERF through the auction process, a project proponent must follow the following steps:
Step 1: Estimate and register project Step 2: Submit auction bid Step 3: Enter into a contract Step 4: Report on project and receive payment for credits
* page 9 of the White Paper.
Registering a project Only proponents of registered projects may participate in auctions. Project proponents can register their project, submit pre-qualification information and register for a forthcoming auction simultaneously. A project will be registered by the Clean Energy Regulator (CER) if the proponent meets basic probity checks, the project is covered by an approved methodology and the business has a legal right to undertake the project. Once a project is registered, the project proponent is entitled to receive one Australian Carbon Credit Unit (ACCU) from the Government for each tonne of carbon abatement it achieves over the relevant crediting period. There are two types of ACCUs - Kyoto ACCUs (where the carbon abatement is able to be used to meet Australia’s international climate change targets) and non- Kyoto ACCUs. The Government will only purchase Kyoto ACCUs through the ERF auctions. What projects will be eligible? To be eligible under the ERF, a project must: • be a new project; • not be required by law; • not occur as a result of another government programme; and • comply with an approved methodology. New projects are projects that have not been implemented before being registered with the CER. As a result, projects that are currently in operation or will commence operation before the ERF commences (including those which were implemented to reduce the impact of the carbon pricing mechanism) will not be eligible to participate in the ERF. However, existing CFI projects that pass the CFI’s additionality tests will remain eligible under the ERF for the remainder of their crediting period. A wide range of projects have been identified as being potentially eligible under the ERF, including upgrading commercial buildings, improving energy efficiency of industrial facilities and houses, reducing electricity generator emissions, capturing landfill gas, reducing waste coal mine gas, reforesting and revegetating marginal lands, improving Australia’s agricultural soils, upgrading vehicles and improving transport logistics and managing fires in savanna grasslands. * page 10 of the White Paper. Approved methodologies Proponents must adopt an approved methodology if they wish to participate in the ERF. Methodologies set out the rules for estimating emissions reductions from different activities, and there are already 22 methodologies that have been approved under the CFI. Further methodologies will be developed by technical working groups and the Government expects that more than 30 methodologies will be available upon the commencement of the ERF. The White Paper has stated that two categories of methodologies will be created under the ERF: • Activity methodologies are methodologies developed for specific activities, such as landfill gas capture, energy efficiency and land sector projects. For example, avoided emissions from diverting waste from landfill for process engineered fuel manufacture under the CFI will fall under this category. • Facility methodologies are methodologies that aggregate emissions reductions from multiple activities at large facilities (such as power stations, cement and aluminium production facilities, and oil and gas extraction plants) that report data under the National Greenhouse and Energy Reporting (NGER) Scheme. The following methodologies are currently in development: • a generic method for emissions reductions at facilities reporting under the NGER 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; and • methods for the land sector, including increasing soil carbon, reducing livestock emissions, expanding opportunities for environmental and carbon sink plantings, and reforestation. Methodologies under State-based schemes, such as the New South Wales Energy Savings Scheme, as well as the CFI, may also be utilised.
Future methodologies will be determined as follows:
Industry consultation on prior methods Technical working groups (comprising business and Department) to develop methods Draft determination for public consultation (14-28 days) Minister decision on method priorities Emissions Reduction Assurance Committee assessment and advice Minister makes determination
* page 36 of the White Paper.
Priorities for method development will be established and published annually. These priorities will be arrived at in consultation with businesses through technical working groups. Proponents will not be entitled to apply for endorsement of a methodology that they have developed. However, proponents of large projects, which have the potential to deliver more than 250,000 tonnes of emissions reductions a year on average, can propose the priority development of a bespoke method for their project. Submitting an auction bid Auctions will be conducted with sole regard to the criterion of cost, with other project attributes such as project risk and commercial readiness being assessed in the prequalification phase. Participants in an auction will submit a bid specifying a price per tonne of carbon abatement. Only one bid may be submitted for each project. Participants will not be able to see what other companies are bidding as bids will be ‘sealed’ or secret. The lowest bids will be accepted. However, only 80% of the carbon abatement offered for sale at an auction at prices below the Government’s maximum price will be purchased (as illustrated below).
PRICE Emissions reductions greater than the benchmark price are not considered Lowest priced 80% of emissions reductions below the benchmark price are selected, subject to the abatement budget
Selected Not selected*
page 43 of the White Paper.
If a proponent is not successful, it may bid again in the next auction. The key criteria for auctions are: • benchmark price: this will be kept confidential for each auction. However, in order to provide guidance to bidders in the first auction, the CER may publish the first benchmark price in advance. • pre-qualification requirements: in order to ensure that only genuine bidders participate in auctions, projects must be registered (and assessed) prior to auctions. • minimum bid size: a minimum bid size of 2,000 tonnes of CO2-e per year will be used to encourage the aggregation of small activities. The Government will retain discretion to enter out-of-auction contracts for major projects which can deliver reductions of 250,000 tonnes of CO2-e per year or more. • auction schedule: four auctions will be scheduled for the first year with indicative forward schedules of auctions to be published over the subsequent 12 months. Entering into a contract for the purchase of carbon abatement Following a successful auction bid, the project proponent will enter into a contract with the CER (on behalf of the Government) for the sale of eligible ACCUs (carbon abatement contracts). As ACCUs are only issued after abatement has been achieved and verified, payments under carbon abatement contracts will be in arrears. Standardised carbon abatement contracts will be used. They will include a payment schedule and conditions that require proponents to secure project finance and obtain any necessary regulatory approvals. The CER will have the right to terminate a contract if conditions are not met within a specified timeframe. Crucially, the standard carbon abatement contract period may be shorter than the crediting period (ie the period during which a proponent is entitled to receive ACCUs). The standard crediting period under the ERF for emissions reduction projects will be seven years and for sequestration projects will be twentyfive years.1 However, the contract period for a carbon abatement contract will be five years (although the Government is considering extending this period). As it is not possible for a project that has been successful at auction to seek additional funding through a future auction, there may be a period after the expiry of the carbon abatement contract when the proponent is receiving ACCUs that it cannot sell to the Government. It appears that there are two options for these additional ACCUs. First, they may be sold to other businesses (eg those businesses that cannot deliver emissions reductions to the Government from their own project). The inclusion of ‘make good’ provisions in the contracts, in the event that emissions reductions are not obtained as projected, is likely to increase this activity. Second, they may be sold into the voluntary carbon market (eg for use under the National Carbon Offset Standard). Reporting on carbon abatement and receiving payments Project proponents will report their carbon abatement to the CER. The reporting and verification arrangements under the ERF will build on those already in place under the CFI. Upon verification of eligible carbon abatement, ACCUs will be issued in arrears and purchased by the CER at the contract price. The tax treatment of ACCUs created under the ERF will be consistent with the tax treatment of ACCUs issued under the CFI. Payments received for undertaking projects will be treated as income for taxation purposes, with standard deduction allowances for costs incurred in the process being applicable. ADMINISTRATIVE ARRANGEMENTS Details about registered projects will be published on the ERF Register, which will be consistent with the existing arrangements under the CFI. These details will include information on all eligible projects, including the proponent, project description, applicable methodology, location and ACCUs issued for each project. PROJECT AGGREGATION The ERF introduces the concept of ‘project aggregation’. Unlike under the CFI, project aggregators will be eligible for ACCUs if they do not own the land to which a project relates. In this case, a project aggregator will only be required to show that it has the agreement of landholders to participate in the project. To support this, standard arrangements for transferring rights from households and small businesses to a project aggregator, as commonly exists under the current Small-scale Renewable Energy Target.
OBLIGATIONS FOR CERTAIN EMISSIONS-INTENSIVE FACILITIES – THE SAFEGUARD MECHANISM The Government intends to introduce a safeguard mechanism to ensure that emissions reductions paid for through the ERF are not displaced by a significant rise in emissions elsewhere in the economy. The safeguard mechanism is currently proposed to start on 1 July 2015 and will establish baseline emissions levels for facilities which exceed a threshold level of direct greenhouse gas emissions. This is likely to affect approximately 130 businesses, representing approximately 52% of Australia’s total emissions. The safeguard mechanism will apply: • to a subset of companies that report emissions under the NGER Scheme, using NGER Scheme reporting data; • only to direct (scope 1) (rather than indirect (scope 2 or scope 3)) emissions; • at the facility rather than the company level; and • only to facilities with direct emissions of 100,000 tonnes of CO2-e per year, including new facilities which meet this threshold. The Government has not yet established actions that will be required of businesses that exceed the baseline levels. However, it has stated that flexible compliance arrangements will be put in place in the event that baseline levels are exceeded. The Government will consult business prior to the implementation of the safeguard mechanism in line with the timeframes outlined in Figure 1. One of the issues that the Government will consult on is the application of the safeguard mechanism to the electricity sector. IMPLEMENTATION TIMELINE FOR THE ERF The Government is working to the timeline outlined in Figure 2. The proposed review of the ERF at the end of 2015 has been scaled down due to concern that an early review would reduce investment
April-May 2014 June-December 2014 January-April 2015 1 July 2015
White paper released Consultation on development of flexible compliance arrangements and treatment of new entrants Exposure draft legislation and draft regulations released Safeguard mechanism commences
* page 57 of the White Paper.
April-June 2014 July 2014 Dec 2014-March 2015 1 July 2015 End 2015
White paper released Exposure draft legislation released Crediting and purchasing elements of Emissions Reduction Fund commence Consultation on safeguard mechanism continues Exposure draft legislation for safeguard mechanism released Safeguard mechanism commences Review of Emissions Reduction Fund
* page 23 of the White Paper.
certainty. Instead, the 2015 review will focus only on operational elements such as the conduct of auctions and method development. THE ERF AND THE CFI – KEY DIFFERENCES AND TRANSITIONAL ARRANGEMENTS The ERF incorporates and builds on the CFI which, over time, will eventually be wholly folded into the ERF. Existing CFI projects with a project commencement date earlier than 1 July 2014 will have 12 months after the start of the ERF to register under the new rules. The key changes to the CFI in its transition into the ERF are: • simplification of the available CFI methodologies; • allowing for sequestration projects to choose a 25-year permanence obligation option rather than 100 years. (Projects that choose the 25-year permanence option will have their ACCUs discounted by 20% compared to 100-year projects. The 5% discount for risk of reversal will still apply); • replacement of the Domestic Offsets Integrity Committee with the Emissions Reduction Assurance Committee; • simplification of reporting and auditing arrangements under the ERF applying to approved projects under the CFI; • broadening of the land based projects eligible to generate ACCUs; • removal of the ability for a proponent to submit its own methodology for endorsement; and • removal of the ‘positive list’ and common practice assessment approach under the CFI. CONCLUSION In conclusion, the ERF provides new opportunities for proponents to access funding for eligible carbon abatement projects. In order to take advantage of these new revenue streams, a project proponent must: • register an eligible project; • submit a bid in an ERF reverse auction; • if successful, enter into a carbon abatement contract with the CER; and • report on carbon abatement, receive eligible ACCUs and sell them to the Government in accordance with their carbon abatement contract. On the flipside, the Government is proposing to introduce new obligations on emissions-intensive facilities via the safeguard mechanism. However, the form of these obligations is still subject to considerable uncertainty. Further detail is expected in the coming months, with the exposure draft legislation due to be released between December 2014 and March 2015. While the CFI Amendment Bill brings the ERF one step closer to reality, there is still some work ahead for the Government in implementing this key plank in its Direct Action Plan. With the repeal of the carbon pricing mechanism looking likely to occur within weeks, the critical issue for the Government appears to be whether the CFI Amendment Bill will be passed by the new Senate where the balance of power is now held by new micro-party Senators. If the CFI Amendment Bill is not passed by the new Senate, the Government may rely upon its powers under section 96 of the Constitution to fulfil its promise to reduce carbon emissions. Section 96 empowers the Government to grant financial assistance to the States and, should the Government be inclined, funding that would have been allocated to the ERF in the Government’s annual appropriation bills could be redirected to Statebased carbon reduction projects. In these circumstances, the ERF procedures set out above would not be implemented and participation in carbon emissions reduction programs would be governed at a State level.