A key element of the Australian Government’s “Direct Action” carbon policy appears poised to become law, after passing its biggest hurdle, a hostile Senate on Friday 31 October 2014. At this stage, the bill is expected to be enacted into law once it is debated in the House of Representatives.

We set out below a brief overview of the key features of the bill and factors for business to consider.

What is the proposed bill?

The bill is known as the Carbon Farming Initiative Amendment Bill 2014 (Bill), which proposes to amend the Carbon Credits (Carbon Farming Initiative) Act 2011, being the legislation that established the Carbon Farming Initiative (CFI) (see our previous alert, Cashing in on Carbon Farming).

There are a number of major changes to the CFI under the Bill. In particular, the Bill expands the types of projects eligible to participate in the scheme and introduces the Emissions Reduction Fund (ERF) to replace trading of units credited under the scheme. We discuss these further below.

Expansion of eligible projects

To participate in the scheme, a proponent must put forward an eligible offsets project, which is determined by declaration from the Regulator. Examples of the types of eligible projects under the CFI and ERF are set out in the boxes below.

Click here to view the table

Emissions Reduction Fund

The ERF is a $2.5 billion fund which the Regulator will use to purchase eligible carbon credit units issued in respect of ERF projects.

The basic premise of the scheme is that the proponent will be issued with units for a reduction in emissions generated by the project. The Regulator purchases those units to gain the benefit of the reduction which is intended to be used by the Government to meets its international commitments to reduce national emissions.

The Regulator has significant discretion as to how the funds will be disbursed. Under the Bill, the purchasing process can be achieved by reverse auction (ie where proponents compete to sell their units to the Commonwealth), a tender process or any other process determined by the Regulator. The Regulator can also set pre-qualification conditions. This means that not every project will be eligible to be included in an auction or other purchasing process.

The Regulator has the power to purchase units even if they do not yet exist. In the event the project proponent is unable to deliver the estimated emission reductions, it will be given an opportunity to “make good” using units from other eligible offset projects.

Other new features of the ERF are as follows:

  • the way methodology determinations for demonstrating emission reductions are made has been overhauled. Such determinations are to be made at the discretion of the Minister having regard to certain matters; and
  • the “additionality test” has been repealed and replaced with requirements of “newness” (ie that a project has not begun to be implemented), or that a project is not required to be carried out under a specific law or another government scheme.

Penalties

As a result of amendments proposed by Senator Xenophon, the Bill includes a “safeguard mechanism” which was put forward as a means of addressing the issue of reductions in emissions in one area being offset by increases in emissions in another area.

Under the “safeguard mechanism”, operators of designated large facilities will be required to keep net emissions within baseline levels. If the operator exceeds this threshold, it will be in an “excess emissions situation” and must either apply for an exemption from the Regulator or face a civil penalty. The mechanism is not intended to take effect until 1 July 2016. In the interim, details of how this part of the scheme is to apply has yet to be determined including who will be a designated large facility, how the baseline emissions are to be calculated and the applicable penalty for an excess emissions situation.

What does this mean for business?

There is only a limited pool of funding available under the ERF and no mechanism for topping up that fund in the event it runs out before Australia’s 2020 emission reduction target is met. The future of the scheme following exhaustion of the fund is therefore uncertain.

In the circumstances, businesses seeking to put forward a project should be considering the timing for registering their proposal, transitional arrangements for existing CFI projects, monitoring the status of methodology determinations and, given the alternative purchasing models available, working on their pitch.