Introduction
On 18 June, the Government tabled the legislation which will implement their Emissions Reduction Fund (ERF). The ERF comprises a Government fund which will be used to purchase carbon abatement (i.e. emissions reductions or carbon sequestration).
The Carbon Farming Initiative Amendment Bill 2014 (CFI Amendment Bill) will amend the Carbon Credits (Carbon Farming Initiative) Act 2011 and implements the policy design principles set out in the Emissions Reduction Fund White Paper (White Paper) which was released on 24 April 2014 (see our legal update for an overview of the White Paper).
This legal update provides a brief overview of the main aspects of the CFI Amendment Bill and highlights the key differences between the Bill and the Exposure Draft Carbon Credits (Carbon Farming Initiative) Amendment Bill 2014 (Exposure Draft) which was released for consultation on 9 May 2014.
We have also included in this legal update a brief summary of the main changes to the Carbon Farming Initiative (CFI) since our last CFI update in October 2013.
CFI Amendment Bill
The CFI Amendment Bill amends the Carbon Credits (Carbon Farming Initiative) Act 2011 (CFI Act) to specifically provide the Clean Energy Regulator (Regulator) with the power to purchase abatement from registered projects. Instead of projects being limited to the land sector (as is currently the case with the CFI) in theory, any project that can reduce emissions or sequester carbon can participate in the ERF.
Projects will need to be undertaken in accordance with a methodology and will need to satisfy eligibility requirements in order to obtain registration from the Regulator. Once registered, a project will generate Australian Carbon Credit Units (ACCUs) and it is these ACCUs that the Regulator will contract to buy.
The intent is that the Regulator will hold reverse auctions as its purchasing mechanism, but the legislation also gives it the power to use tenders or "any other process".
Bidders who are successful at auctions (or through another process) will enter into a carbon abatement contract with the Regulator requiring delivery of ACCUs during the contract term. At present, it is intended that these contracts will cover a 5 year period, but the Government has commissioned market testing to ascertain whether longer contract terms may be required for certain types of projects.
In terms of project eligibility, the CFI Amendment Bill removes the current additionality test within the CFI Act (which requires that a project not be 'common practice' or required to be undertaken by law). The new eligibility requirements require that a project be "new", not be funded by another Government program and not be required as a matter of law.
Changes from Exposure Draft
The tabled version of the CFI Amendment Bill differs from the Exposure Draft in the following ways:
- There is greater clarity around the "newness" eligibility requirement, with the CFI Amendment Bill setting out lists of what are considered to be actions to implement a project and what are not considered to be implementation actions.
- To address the "newness" requirement and the delays this may cause to project activity, the CFI Amendment Bill provides an early notification process. Project proponents will be able to notify the Regulator that they intend to commence a project after 1 July 2014, and the Regulator can treat the project as "new" when an application is made for registration, as long as the project commences after this notification. This arrangement will be in place for an interim period of one year.
- The crediting period for sequestration projects has been extended to 25 years (from the current 15 years). All emissions reduction projects will receive a 7 year crediting period. All ERF projects will only receive one crediting period.
- Ordinarily the crediting period commences on the date of the project declaration (ie when the project is registered). The CFI Amendment Bill enables the project proponent to choose a later start date for the crediting period, as long as it is within 18 months from the project registration date. This is to cover projects which may have a longer commencement period.
- Under the CFI Act, the minimum reporting period is currently one year. The Exposure Draft proposed to reduce this period to 6 months. The CFI Amendment Bill now includes the ability for an even shorter reporting period, if this is provided for in a legislative instrument.
- Instead of providing detailed rules for the estimation of emissions reductions, methodologies will have the ability to provide high-level guidance.
- Waste diversion projects will be given an extended accounting period which means although the crediting period will be limited to 7 years (as with other emissions reduction projects), there will be the ability to generate credits for an additional 7 years.
- The explanatory memorandum for the CFI Amendment Bill confirms that the Government's current intention is not to allow the Regulator to purchase international units, nor to enable project proponents to use international units to satisfy any make-good requirements that may arise under the carbon abatement contract.
- The CFI Act currently allows CFI projects to apply for subsequent crediting periods (with no limit on the number of crediting periods which may be approved). Under the Exposure Draft, existing CFI projects could apply for a second crediting period (subject to not being considered common practice). The CFI Amendment Bill now provides that CFI projects will automatically be eligible for a second crediting period.
- The explanatory memorandum for the CFI Amendment Bill has confirmed that emissions reduction from non-legacy waste deposited after the end of the carbon price (likely to be 1 July 2014) will be eligible to participate in the ERF, and this will be facilitated through amendments to existing methodologies.
- Verified Carbon Standard projects will be allowed to transition into the ERF.
Draft soil carbon Methodology Determination released
The Government has previously indicated that it expects to generate significant carbon abatement through sequestering carbon in the soil. Since the introduction of the CFI in 2011, the Department of the Environment (and its predecessors), plus other stakeholders having been working on a methodology to cover soil carbon.
The output of this work is the recently released methodology proposal1 which applies to soil carbon sequestration projects in grazing systems. This methodology relies on the direct measurement of soil carbon to estimate sequestration and incorporates the Soil Sampling and Analysis Method and Guidelines.2
Under the methodology proposal, the land on which the project is carried out must be permanent pasture or being converted into permanent pasture as part of the project. Projects using the methodology would need to directly measure changes in soil carbon levels to be eligible. They must also undertake a new management activity on the land (such as converting from cropland to permanent pasture) to be able to earn credits.
The methodology excludes certain types of tillage practices that would result in significant greenhouse gas emissions, undermining any increase in soil carbon levels.
The Department of the Environment notes that whilst projects can be implemented on all farms providing they meet the eligibility criteria, it is not likely to be cost effective to adequately sample very large farms in areas where rates of soil carbon sequestration are low.
Three new methodology determinations endorsed by DOIC
In March 2014, the Domestic Offsets Integrity Committee (DOIC) endorsed the following new methodology proposals:
- Reducing greenhouse gas emissions in beef cattle through feeding nitrate containing supplements - this methodology proposes to generate abatement by replacing urea lick blocks with nitrate lick blocks for pasture-fed beef cattle, which has the effect of reducing methane emissions from enteric fermentation.3 To be eligible, a proponent must demonstrate historic urea supplementation within the project area;
- Quantifying carbon sequestration by permanent native mixed species environmental or mallee plantings using the Full Carbon Accounting Model - this methodology proposes to generate abatement from the sequestration of carbon dioxide from the permanent plantings of native tree species. Abatement is calculated using output data from the Full Carbon Accounting Model (FullCAM)4; and
- Measurement based methodology for reforestation projects - this methodology proposal provides procedures for estimating abatement achieved through carbon sequestration from permanent plantings or for-harvest plantings on land previously managed for agricultural purposes and clear of forest.5
None of these have been made into law (ie Methodology Determinations) by the Minister at the time of writing.
Addition of three new positive list activities
On 13 June 2014, the Carbon Credits (Carbon Farming Initiative) Amendment Regulation 2014 was made. The regulation adds the following three new activities to the 'positive list' of eligible activities under the CFI:
- sequestering carbon in soil in grazing systems;
- early finishing of beef cattle; and
- phytocaps on landfills.
As discussed above, a draft methodology for sequestering carbon in soil in grazing system has already been released.
'Early finishing' of beef cattle refers to the reduction of the time taken for beef cattle to reach a weight that is suitable for sale. This activity reduces emissions because younger cattle emit less methane than older cattle.
The third activity involves the installing of a 'phytocap' on landfills, which is a layer of organic material planted with vegetation that encourages methane-destroying bacteria.
The regulation also amends the positive list entry for projects which capture and combust methane from livestock manure so that in order to be eligible, projects must have installed or upgraded their combustion equipment on, or after, 1 July 2007. This amendment is in response to the AAT decision of Charles IFE Pty Ltd v Domestic Offsets Integrity Committee [2014] AATA 33 and the Ministers decision dated 28 March 2014 regarding the proposal to vary the Carbon Credits (Carbon Farming Initiative) Destruction of methane from Piggeries Using Engineered Biodigesters) Methodology Determination 2013.
Regulator's regulatory guidance
The Regulator has been issuing regulatory guidance on a number of areas including:
- backdated projects where the proponent was not responsible for backdated activity;
- regulatory baselines in NSW for CFI projects;
- demonstrating applicable carbon sequestration right for projects in WA where a proponent has changed their name;
- meeting the requirements of 'additionality' with conservation covenants; and
- how to show a project area had trees at 31 December 1989 with potential to become forest.
If you require further details on any of the above, check the Regulator's website here.
How can we help you?
Norton Rose Fulbright has worked closely with both the Department and the Clean Energy Regulator throughout the lifespan of the CFI and has been heavily involved in the development of the new ERF legislation.
We would be happy to assist if you would like our help in transitioning your existing CFI project to the new ERF scheme or are looking to undertake a new project under the ERF.
Footnotes
1 The methodology proposal is available at: http://www.climatechange.gov.au/sites/climatechange/files/files/reducing-carbon/cfi/methodologies/cfi-sequestering-carbon-1.pdf
5 Refer to: http://www.climatechange.gov.au/sites/climatechange/files/files/reducing-carbon/methodologies/2012rf022.pdf
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
