Key Points:

There have been key changes to the operation of the additionality test, crediting and reporting period rules.

Legislation for the Federal Government's Emissions Reduction Fund (ERF), the Carbon Farming Initiative Amendment Bill 2014 (ERF Bill), was introduced to Federal Parliament on 18 June 2014. Although the ERF Bill is largely consistent with the Exposure Draft released last month, there have been key changes to the operation of the additionality test, crediting and reporting period rules.

This article provides a brief overview of the operation of the ERF, then comments on those key areas of change and highlights some other importance aspects of the ERF Bill.

Operation of the ERF

The ERF Bill represents the culmination of the Government's consultation on the ERF, which is the centrepiece of its Direct Action Policy to achieve Australia's international emissions reduction commitment of decreasing greenhouse gas emissions to 5% below 2000 levels by 2020.

It adopts much of the legislative architecture of the Carbon Farming Initiative (CFI), in theCarbon Credits (Carbon Farming Initiative) Act 2011 (CFI Act).

This allows registered project proponents to generate Australian carbon credit units (ACCUs) from projects which satisfy a series of eligibility requirements, are registered under CFI Act, and are carried out in accordance with a methodology which is approved under the CFI Act. So far, the CFI has focused on land sector projects (eg. landfill and agribusiness). The ERF will extend the CFI by providing more methodologies across a wider range of activities.

The Clean Energy Regulator (CER) will continue to issue ACCUs under the ERF regime as it does under the CFI regime. However, the ERF regime also provides for the CER to purchase ACCUs. Although the ERF Bill gives the CER a very broad discretion as to how it purchases ACCUs, the Government has indicated that the primary purchase mechanism will be a reverse auction, and that the CER will use standardised forward contracts for its auction purchases.

Additionality

The concept of "additionality" is essentially that emissions abatement which is achieved by projects under the CFI must be additional to abatement that would occur in the ordinary course.

The current CFI test for additionality is that a project's emissions reductions must go beyond what is "common practice" for the relevant industry and must not be required by another Commonwealth, State or Territory law, such as the NSW Energy Saving Scheme. The CFI Act also provides for a "positive list" and a "negative list" of project types, and a project must be of a kind which is on the positive list and not on the negative list to be eligible.

Three-part additionality test

The ERF Bill repeals the current additionality test and instead includes a new, three-part test:

  1. the "newness requirement", which is that the project must not have "begun to be implemented" when an application for registration is made;
  2. the "regulatory additionality requirement", which is essentially a carry-over from the CFI Act; and
  3. the "government program requirement", which is that "the project would be unlikely to be carried out under another… government program or scheme" if it were not declared an eligible offsets project under the ERF.

Although the reference to "common practice" has been removed, the ERF Bill Explanatory Memorandum indicates that this will be incorporated in the ERF methodologies.

Newness requirement

The ERF Bill provides more clarity than the Exposure Draft about the "newness requirement". It confirms that preliminary steps, such as carrying out feasibility studies, establishing baselines or obtaining project approvals, will not constitute the "implementation" of a project. However, making final investment decisions, acquiring a lease or commencing construction work for the purposes of the project will constitute "implementation" of a project. The Government has indicated that it will provide further guidance in this area.

Practically, the "newness" requirement (and the uncertainty as to whether their registration application will be successful) means that proponents will have to wait until their projects have been declared eligible offsets projects before they are able to commence project activity. The ERF Bill addresses this concern by inserting an early notification procedure as a transitional measure. For one year, project proponents will be able to lodge an intention notice with the CER, stating that they intend to commence a project after 1 July 2014. The CER can then treat this project as "new" so long as it commenced after the receipt of the intention notice.

Government program requirement

Some industry stakeholders commenting on this test in the Exposure Draft have queried what "government programs or schemes" would attract this requirement (eg. only climate change or energy efficiency related schemes?), what it means for a project to be carried out "under" a government scheme, and how it can be determined whether a project "would be unlikely to be carried out under" another scheme. The ERF Bill does not change this requirement.

The ERF Bill Explanatory Memorandum states that the purpose of this requirement is to ensure that the Government does not pay for projects twice, and it is not the Government's intention to prevent multiple sources of funding where a project needs this. We can expect further guidance from the Government on the types of government projects and schemes that typically provide sufficient funding for projects and would attract the requirement, such as NSW's Energy Savings Scheme.

Crediting periods

Longer crediting periods for sequestration projects

A project's crediting period is the number of years for its emissions reductions activities are eligible to generate ACCUs. Currently, under the CFI Act, the standard crediting period is seven years, although the regulations provide for an extended 15 year crediting period for reforestation and soil carbon sequestration projects.

While the ERF Bill maintains the seven year crediting period for emissions avoidance offsets projects, it extends the crediting period for sequestration projects from 15 years to 25 years. This reflects the proportionate length of time that it takes sequestration projects to achieve emissions reductions through establishing carbon stores in trees and soils.

Start date of crediting period

The ERF Bill allows for deferral of the start date of the crediting period to align with the actual commencement of the project. Start dates can be deferred for up to 18 months from the date of project registration. This recognises the time lag that some projects experience between applying for declaration as an eligible offsets project and actually commencing operations.

Number of crediting periods

In support of the "newness requirement" of the additionality test, under the ERF, each project can only have one crediting period. However, there is an exception for existing CFI projects that can apply for a second crediting period starting with the commencement of the ERF.

It will be interesting to see how these longer crediting periods and the requirement of a single crediting period per project interrelate with the terms of the carbon abatement contracts. Government policy currently specifies a five year contract duration, however, the Government has conducted some market testing on this issue.

Reporting periods

The ERF Bill provides greater flexibility in reporting requirements for eligible offsets projects. The Exposure Draft reduced the minimum reporting period from the existing one year period to six months, and the ERF Bill allows for even shorter periods if specified in the legislative rules which will accompany the ERF. The Government is intending to make these rules as flexible as possible to allow for the variations between projects and the resource capacities of project proponents.

Other significant changes

Other significant changes which the ERF Bill proposes to the CFI Act include:

  • the exclusion of "non-Kyoto offsets projects";
  • the opportunity for proponents of sequestration projects to reduce the permanence obligation from 100 years to 25 years, with a corresponding 20% reduction in recognised carbon abatement;
  • measures to facilitate aggregation of projects, such as removal of the requirement that the project proponent for sequestration projects hold the sequestration right for each project; and
  • streamlining of methodology approval processes, and an opportunity for broad-based "facility" methodologies.

The ERF Explanatory Memorandum also confirms the Government's current intention is that the CER will not purchase international units and will not allow sellers under its ACCU purchase projects to supply international units instead of ACCUs.

Next steps

The ERF Bill is currently the subject of Parliamentary inquiry by the Environment and Communications Legislation Committee. The Committee will accept submissions on the ERF Bill until 26 June 2014 and will provide its report by 7 July 2014.

The Government is continuing consultations on aspects of the ERF, particularly the ACCU acquisition process which the ERF Bill gives the CER discretion to determine.

The ERF Bill faces an uncertain passage in the Senate, but the Government is confident the newly-constituted Senate will pass it in the mid-July sittings.