Australia: Emissions Reduction Fund passed by Australian Parliament

Summary

On 24 November 2014 the Australian Parliament passed the Carbon Farming Initiative Amendment Bill 2014 (Bill) which puts in place the Emissions Reduction Fund (ERF). The ERF is the cornerstone of the Australian Government's Direct Action Plan climate change policy for the reduction of greenhouse gas emissions. It will provide AUD2.55 billion in financial incentives over four years for companies to voluntarily reduce emissions. The Government says its Direct Action Plan climate change policy will mean that Australia will meet the five percent emissions reduction target by 2020.

The Bill was passed by the Australian Senate on 31 October 2014. However, as last minute amendments were made before it was passed by the Senate, the Bill had to be returned to the House of Representatives for approval before it could be presented to the Governor-General for assent. Given the large majority held by the Australian Liberal-National Party coalition in the House of Representatives, as expected, the Bill was passed by the House of Representatives without issue. However, the Australian Labor Party reiterated its view that the Bill is flawed, that the best response to climate change would have been an emissions trading scheme and that the Government's policy is inadequate for achieving the abatement required.

How the ERF Works

The ERF is a modified baseline-and-credit scheme. The establishment of the ERF provides businesses with opportunities to enter into contracts with the Government, via the Clean Energy Regulator (CER), under which the business receives payment for undertaking carbon abatement. The contract is described as a Carbon Abatement Contract.

The ERF has three components: (1) crediting emissions reductions, (2) purchasing emissions reductions and (3) safeguarding emissions reductions.

Crediting Genuine Emissions Reductions

In order for a project to be eligible to participate in the ERF it must be declared to be an eligible offsets project, which necessarily involves that:

• the project must be undertaken in Australia
• the project must be undertaken in accordance with a methodology determination¹ which will contain detailed rules for measuring the abatement the project is likely to deliver, such methods being either:
• • activity methods which apply to specific emissions reductions actions
  • or
  • facility methods which apply in relation to multiple activities at large industrial facilities, using data reported under the National Greenhouse and Energy Reporting Scheme (NGERS)
• the project proponent must pass the 'fit and proper person' test
• the project must meet prescribed 'additionality' requirements. Generally, any credited abatement must be additional to business as usual practices. In particular, the project:
• • must be new: it must not have been implemented before it is declared to be an eligible offsets project
  • must not be required to be carried out pursuant to an Australian law
  • must be unlikely to be undertaken pursuant to other government programs if it is not declared to be an eligible offsets project.

Projects will receive one Australian Carbon credit unit (ACCU) for each tonne of carbon dioxide equivalent of sequestered carbon or avoided emissions.

Purchasing Emissions Reductions

Project owners and the CER will enter into a Carbon Abatement Contract under which the CER will purchase the project owner's ACCUs over a period of years. This contract will be a standard form contract on straight forward commercial terms based on payment for delivery against an agreed schedule. Project owners are allowed to deliver ACCUs from any project, not just their own. Accordingly, it is foreseeable that a secondary market will form.

Purchasing will be via a reverse auction process. In order to participate in an auction, project owners will be required to register their projects with the CER on the ERF Register and agree to the Carbon Abatement Contract terms in advance. This allows the CER to assess the credibility of the project's delivery schedule and prevent the auction from being distorted by offers based on highly unrealistic assumptions.

Projects will be selected solely on the basis of bid price such that the lowest cost projects will be successful.

The CER have indicated that initially auctions will be a single-round, pay-as-bid, sealed-bid process. Each auction will have a minimum number of registered bidders and minimum amount of emissions reductions. The project owner will submit an auction bid to enter into the Carbon Abatement Contract, specifying a price per tonne of carbon dioxide equivalent of sequestered carbon or avoided emissions. As the bids will be sealed, project owners will not be able to see the bids submitted by other project owners.

The CER will:

• apply a benchmark price for each auction, which is the maximum amount the CER will pay for emissions reductions, and consider only bids less than the benchmark price
• purchase 80% of the volume of emissions reductions offered at each auction at prices less than the benchmark price.

Project owners report their emissions reductions to the CER and once such emissions reductions are verified they will receive notice of how many ACCUs the project will receive for the reporting period. The CER will then pay project owners for the emissions reductions, as represented by ACCUs, as they are delivered to schedule, at the price specified in the bid.

There are specific provisions applying to major projects, being projects that are able to deliver emissions reductions in excess of 250,000 tonnes of carbon dioxide per year, on average, over the contract period. The CER will be able to enter into out-of-auction contracts with the project owners of major projects.

Safeguarding Emissions Reductions

The objective of the safeguard mechanism is to ensure that emissions reductions secured through the purchasing mechanism of the ERF are not negated by increases in emissions by non-ERF participants.

The safeguard mechanism will apply to businesses that report under NGERS and have direct emissions of 100,000 tonnes per year. These businesses will be required to keep their emissions below a set baseline. They will be able to surrender ACCUs to offset any emissions over the baseline.

The emissions baselines will be set using data reported under NGERS and will reflect the highest level of reported emissions for a facility over the historical period 2009/10 to 2013/14.

Outline of the Bill

The Bill establishes the ERF through amendments to a number of Acts. The most significant amendments are made via the expansion of the current Carbon Credits (Carbon Farming Initiative) Act 2011 (CFI Act). Minor amendments are also made to the National Greenhouse and Energy Reporting Act 2007, the Australian National Registry of Emissions Units Act 2011 and the Clean Energy Regulator Act 2011.

The CFI Act in its current form provides for land-based carbon abatement and sequestration projects to generate tradeable ACCUs. The Bill retains ACCUs and now allows for a broader range of activities to be eligible to earn ACCUs.

The Bill has two Schedules: Schedule 1 Amendments and Schedule 2 Emissions reduction safeguard mechanism. Schedule 2 was introduced as an amendment to the original form of the Bill and was agreed to by the Government in order for the Bill to be passed. We comment on this further below.

Schedule 1 is comprised of the following parts:

• Part 1 which provides for the purchase of emissions reductions by the CER.
• • Division 1 authorises the CER to conduct auctions and enter into contracts to purchase emissions reductions on behalf of the Government.
  • Division 2 provides transitional arrangements relating to the Register of Offset Projects, which will be renamed the Emissions Reduction Fund Register and will include information about contracts to purchase emissions reductions.
• Part 2 expands and streamlines the Carbon Farming Initiative to enable crediting of emissions reductions across the economy.
• • Division 1 sets out the amendments to the CFI Act to extend and streamline its crediting provisions to industrial sectors. Part 2, Division 1 also contains minor amendments to the related acts.
  • Division 2 provides transitional arrangements for existing Carbon Farming Initiative projects and methodologies, applications for new projects that are being prepared, or applications that have been submitted and not yet processed under existing legislation. It also deals with transitional issues arising from other changes to the existing legislation.
• Part 3 sets out amendments to ensure that provisions which provide the Minister for the Environment (Minister) with power to make legislative rules are fully operative.

Amendments Implemented to Enable the Bill to be Passed

The Government struck a deal with a number of crossbench Senators under which it agreed to make certain amendments to the Bill in exchange for securing the passage of the Bill through the Senate. The Government also agreed:

• to withdraw legislation which would have abolished the Clean Energy Finance Corporation (CEFC) and the Australian Renewable Energy Agency (ARENA)
• to reverse its decision to abolish the Climate Change Authority (CCA)
• to instruct the CCA to carry out an 18 month study of international emissions trading schemes (ETS) to assess whether Australia should have an ETS in the future.

We detail the more significant amendments agreed to by the Government below.

Safeguard Mechanism (new Schedule 2)

The safeguard mechanism was not originally proposed within the Bill and the Government had indicated that any emissions safeguard mechanism would not commence until 1 July 2015 at the earliest. Accordingly, given the repeal of the carbon pricing mechanism on 1 July 2014, emitters would not face any constraints on their emissions until at least 1 July 2015. Consequently, this delay may have acted as an incentive to increase emissions until the safeguard mechanism commenced, thereby increasing the historical baseline level such that the safeguard level was more difficult to breach.

Therefore of particular importance was the insertion in the Bill of Schedule 2 Emissions reduction safeguard mechanism. The amendments to the Bill contained in this schedule:

• provide for the commencement of the safeguard mechanism on 1 July 2016
• set out the framework for the operation of the safeguard mechanism, which are broadly consistent with market-based baseline and credit design principles
• provide for the imposition of fines if large emitters do not reduce greenhouse gas emissions. However in this regard, we note that no limits or penalties have as yet been determined.

Duration of Carbon Abatement Contracts

The duration of a Carbon Abatement Contact for the purchase of ACCUs generally should be no longer than seven years (in line with the crediting period). This is an increase from the five year contracting period first contemplated. However, longer contract duration may be appropriate for projects with longer crediting periods (in particular, Savanna burning projects are proposed to have a 25 year crediting period). These provisions are stated to provide greater certainty to project proponents wishing to enter into a contract, and to encourage capital intensive abatement projects.

Crediting Period Extension Review

The Bill now requires the Emissions Reduction Assurance Committee to undertake a review of the crediting period applicable to each project methodology, and advise whether an extension to the crediting period should apply. This review must occur before the first project registered under the methodology starts the last 12 months of its crediting period. This review process, and any subsequent extension, can occur only once. This amendment is stated to balance the integrity of the scheme and protect additionality, while providing project proponents with greater certainty, and to support and encourage projects capable of longer term abatement.

Objects of the Act

The object of the CFI Act now includes specific references to Australia's obligations under any future international agreements to reduce greenhouse gas emissions, to ensure these obligations are taken into account in the operation of the CFI Act.

How to Participate in the ERF

The Minister, Greg Hunt, has indicated that the ERF will commence in the first quarter 2015. The CER has stated that it will provide at least six weeks' notice of the auction date and eligibility requirements.

It is prudent for businesses to consider whether they should be preparing for participating in the ERF, including but not limited to:

• assessing opportunities to become an ERF participant, either directly or through an aggregator for smaller projects
• submitting to the CER a 'Notice of Intent' which informs the CER that the project owner intends to make an application to have the project declared to be an eligible offsets project. This notice allows potential applicants with new projects to begin preparation for their projects before the draft legislation is passed, while still satisfying the requirement that the project be new
• applying to become an ERF participant
• registering projects to receive credits under the ERF
• opening an account in the Australian National Registry of Emissions Units (ANREU).

Footnotes

¹Emissions reductions methods will be legislative instruments.

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.