Introduction

On 7 October 2014, Senator Nick Xenophon released a set of amendments to the Carbon Farming Initiative Amendment Bill 2014 (CFI Amendment Bill) and the National Greenhouse and Energy Reporting Act 2007 (NGER Act). This legal update summarises those amendments and provides an update of recent activity under the Carbon Farming Initiative (CFI) and the Government’s proposed Emissions Reduction Fund (ERF).

The CFI Amendment Bill, which will implement the ERF, was passed by the House of Representatives on 26 June 2014 and it is currently anticipated that the Bill will be tabled in the Senate during the sitting week of 27 October.  If the Bill does not get tabled during this week, the last opportunity before the end of the year will be the two sitting weeks commencing on 24 November.

Xenophon’s amendments

The amendments to the CFI Amendment Bill and NGER Act were released by Senator Xenophon on 7 October 2014 (Amendments). In summary, the Amendments cover:

  • establishment of a strategic reserve;
  • setting out the framework for the Safeguard Mechanism;
  • expanding the objects of the CFI Act to include compliance with obligations established under any future international climate change agreement;
  • matching the term of the carbon abatement contracts to the crediting period for emissions reduction projects (i.e. 7 years); and
  • the possibility of crediting period extensions.

Further details of the ERF and the CFI Amendment Bill can be found here.

Strategic reserve

The Amendments envisage the establishment of a strategic reserve fund in the amount of $500 million. This amount will come out of the $2.55 billion allocated to the ERF. 

The Clean Energy Regulator (Regulator) will be given the power to enter contracts to purchase Kyoto units1using funds from the strategic reserve. However, this power can only be exercised if a direction is given to the Regulator by the Minister for the Environment (Minister). In considering whether to issue such a direction, the Minister is required to have regard to:

  • Australia’s obligations under international climate change agreements;
  • Australia’s undertakings that concern the reduction of greenhouse gas emissions under any international climate change agreements;
  • the total amount of domestic carbon abatement that would result from the purchase of eligible carbon credit units under the ERF;
  • Australia’s current and future climate change targets;
  • the need to ensure value for money of expenditure used in buying units under the strategic reserve; and
  • any other matters the Minister considers relevant.

The Regulator will be required to report annually on the total amount of Kyoto units purchased in a financial year.

It is worth noting that the Minister’s direction cannot be disallowed by Parliament. There is no further guidance in the Amendments or the accompanying Explanatory Note about when or the circumstances in which, the Minister is likely to issue such directions.

Safeguard Mechanism

The Amendments establish the overarching framework for the operation of the Safeguard Mechanism (which can be viewed as the ‘compliance arm’ of the ERF). This mechanism will be incorporated into the NGER Act.

In simple terms, the Amendments provide that:

  • the operator of a ‘designated large facility’ will be a ‘responsible emitter’;
  • a ‘responsible emitter’ will need to ensure that the emissions from its facility (‘net emissions’) do not exceed its ‘baseline emissions’;
  • if the ‘net emissions’ will exceed the ‘baseline emissions’, the responsible emitter will be able to reduce these emissions by surrendering ‘prescribed carbon units’;
  • ‘prescribed carbon units’ will include ACCUs or other units (which may include Kyoto units);
  • the compliance period will be a financial year, unless a responsible emitter is allowed by the Regulator to use a multi-year compliance period; and
  • if the net emissions of a responsible emitter exceed its baseline emissions, a civil penalty will apply.

A number of matters will be determined in safeguard rules, including the threshold of a designated large facility, the emissions baseline applicable to such a facility, what units will be classified as prescribed carbon units and the level of penalty that will apply for non-compliance.

Responsible emitters will be required to register and report under the NGER Act, as liable entities were required to do under the Carbon Pricing Mechanism.

It is proposed that establishment of the Safeguard Mechanism will be delayed by a further year to 1 July 2016. In justifying the basis for this further delay, Senator Xenophon notes that it will take some time to work through all matters which are required to be dealt with through the safeguard rules. The Amendments provide that these safeguard rules are to be put in place prior to 1 October 2015.

Crediting period extensions

The crediting periods for registered abatement projects determines the period of time during which a project can generate Australian Carbon Credit Units (ACCUs). Under the ERF it is proposed that projects will only receive one crediting period. This is different to the arrangements under the CFI where it is possible for registered projects to apply for subsequent crediting periods.

The Amendments propose that the crediting period for a particular project may be extended through the relevant methodology determination if the Emissions Reduction Assurance Committee has advised the Minister that such an extension should be granted.  Any such extension would be considered before the last crediting year of the first project registered under that particular methodology determination. 

It remains to be seen whether this prospect of a further crediting period for particular activities will be sufficient to drive additional investment in ERF projects, particularly in a context where it will be unknown what the market opportunities will be for project developers at the end of the ERF contract periods.

Transition of CFI projects into the ERF

Existing approved CFI projects will automatically transition into the ERF. The ERF will allow a project’s first report to the Regulator to include abatement generated during both the CFI and ERF crediting periods, so that ACCUs will not be lost when transitioning from the CFI to the ERF. Further information on transitioning is available on the Regulator’s website.2

Once the CFI Amendment Bill has passed, the CFI crediting period will terminate and a new crediting period will commence.   The new crediting period for emissions avoidance projects will remain the same as that under the CFI (i.e. 7 years), but for sequestration projects it will expand from 15 years to 25 years.

Currently, all projects under the CFI that store and/or sequester carbon in plants or soil must meet permanence obligations. The permanence period essentially means that carbon must be retained and stored for 100 years. However, under the ERF, there is an option of shortening the permanence period to 25 years and project owners can transfer to this shorter period within the first 2 years of the commencement of the ERF. Opting for the shorter permanence period is irreversible so project owners cannot revert to the 100 year permanence period.

It is important to note that the 25 year permanence period will result in a 20% deduction in the number of ACCUs that are issued and will also require 20% of the ACCUs that have been received for a project to date to be relinquished. The reasoning behind this is that the shorter permanence period will ultimately reduce the level of carbon that is stored. Further, notwithstanding the permanence period which is chosen, the ‘risk of reversal buffer’ is still applicable to all sequestration projects.

New CFI Methodology Determinations

4 new methodologies have recently been released under the CFI, which means there are now 26 methodologies in total. Each of these new methodologies is explained in further detail below.

Storing carbon in soil

This methodology covers sequestering carbon in soil in grazing systems. Projects that utilise this methodology can earn ACCUs for replenishing stores of carbon in the soil whilst at the same time, enhancing the health of the soil, the management of vegetation and productivity. This methodology is for projects that store carbon on grazing land by undertaking activities that: 1) increase the volume of carbon input on the soil; 2) minimise the loss of carbon from the soil; or 3) do both 1) and 2) above. In order to estimate sequestration, this method relies upon the direct measurement of soil carbon.

Feeding nitrate supplements to beef cattle

This method will assist the beef industry to reduce emissions for their herds and is useful as the agriculture sector produces in excess of 16% of Australia’s greenhouse gas emissions (primarily from cattle). The method works by replacing urea lick blocks with nitrate lick blocks for pasture-fed cattle, which in turn minimises the methane emissions that are caused by enteric fermentation.

Farm Forestry

This farm forestry method allows entities to earn ACCUs from farm forestry projects and projects involving permanent plantings. Through this method, farmers can establish small tree plantations for the purposes of carbon storage and growing merchantable timber.

Reforestation by environmental or mallee plantings

Projects using this method are required to establish and maintain either a permanent mixed-species or mallee tree planting. Under this method, abatement is calculated using output data from the Full Carbon Accounting Model (FullCAM). The relevant piece of land must have been clear of forest cover for 5 years prior to the planting and this applies to both mixed-species and mallee plantings. In addition, trees planted in the relevant project area need to have the potential to reach at least 2 metres in height. There are further restrictions with this methodology, for instance, mallee plantings need to be in an area that receives an annual rainfall of no more than 600mm unless they meet the specific criteria set out within FullCAM in relation to the location of the actual planting.

New projects and ACCUs

During the month of September, ACCUs were issued to a large number of waste sector projects. In total, the number of ACCUs that have been issued to waste sector projects since the commencement of the CFI is 5,859,675 ACCUs (approximately 68% of the total ACCUs that have been issued under the CFI).

Snapshot summary

  • 7 projects were approved during September 2014 (6 savanna burning projects and 1 vegetation project);
  • 166 projects have been approved under the CFI to date; and
  • a total of 749,978 ACCUs were issued during September 2014 (these were issued to 2 organisations for 15 waste projects).

Finally, the total number of ACCUs that had been issued under the CFI as at 30 September 2014 was 8,652,761.

Proposed ERF methodologies

Notwithstanding that the CFI Amendment Bill has not yet been passed, the Department has been working on the development of methodologies that will facilitate ERF projects. 

To date, seven draft ERF methodology determinations have been released for public comment:

  • capture of emissions from coal mining;
  • alternative waste treatment;
  • landfill gas; 
  • energy efficiency from commercial buildings;
  • NGERS facilities;
  • wastewater treatment; and
  • transport.

The consultation period for the first three methodologies has closed.  The consultation period for the commercial buildings methodology will close on 23 October 2014 and for the NGERS facilities, wastewater treatment and transport methodologies will close on 12 November 2014.  Copies of the draft methodology determinations and explanatory statements can be found here: www.environment.gov.au/climate-change/emissions-reduction-fund/methods.