Carbon Farming Initiative (CFI) open for business

Introduction

The Carbon Farming Initiative (CFI) officially commenced yesterday (8 December 2011) although applications to become recognised offsets entities under the scheme will not be processed by the Administrator until after 6 January 2012.

The supporting regulations to the Carbon Credits (Carbon Farming Initiative) Act 2011 (Act) were published yesterday, in conjunction with the Carbon Credits (Carbon Farming Initiative) – Landfill Legacy Emissions Avoidance Project Specification 2011 and the Carbon Credits (Carbon Farming Initiative) – Kyoto Australian Carbon Credit Unit Specification 2011. The first Specification confirms that 1 July 2012 is the legacy waste emissions cut off date and the second Specification sets out the requirements of a Kyoto Australian carbon credit unit. Of note, the reporting period for the relevant Kyoto project must end on or before the Kyoto abatement deadline, which has been changed to 31 December 2012, instead of 30 June 2012.

The Carbon Credits (Carbon Farming Initiative) Regulations 2011 (Regulations) provide the administrative detail underlying the operation of the CFI and, most importantly, set out the final versions of the "positive" and "negative" lists.

For an introduction to the CFI, please refer the Carbon Market Institute publication " The Carbon Farming Initiative: An Introduction to Participation", co-authored by Norton Rose Australia and RAMP Carbon.For further details of the CFI, please also refer to our previous legal updates:

• The Carbon Farming Initiative is legislated
• Carbon Farming Initiative
• Carbon Farming Initiative legislation tabled

This legal update outlines the key aspects of the supporting Regulations, including:

• Kyoto and non-Kyoto offsets projects;
• the positive list;
• the negative list; and
• further administrative matters.

Types of offsets projects

Projects under the CFI can be either Kyoto offsets projects or non-Kyoto offsets projects. Kyoto projects are those projects that reduce emissions in sectors that count towards Australia's international commitments under the Kyoto Protocol or a subsequent binding international agreement. Non-Kyoto projects are projects that reduce emissions in sectors outside of those sectors that count towards Australia's international commitments.

Recognition as a Kyoto offsets project is significant because the Australian carbon credit units (ACCUs) that can be issued for these projects (called "Kyoto ACCUs") may be used for compliance in the domestic carbon pricing mechanism (to be established under the Clean Energy Bill 2011) and in any international compliance carbon markets that accept the units. This will mean that Kyoto ACCUs will be more valuable than non-Kyoto ACCUs which may only be sold into voluntary markets.

Regulation 3.35 lists the kinds of projects that will be Kyoto offsets projects, being:

1. reforestation projects;
2. the protection of native forest from deforestation;
3. the establishment of vegetation on land that was subject to deforestation, by:

These projects are in addition to agricultural emissions avoidance projects and landfill legacy emissions avoidance projects which are also deemed to be Kyoto offsets projects under section 55 of the Act.

All other project types under the CFI (such as enhanced soil carbon projects) are automatically classified as non-Kyoto offsets projects.

The positive list

One of the key concepts underpinning the CFI is that the emissions reductions that result from projects must be additional to, or beyond, "business as usual" emissions. The test for "additionality" in the Act is that the project's activities must be of a kind that is set out in the Regulations on a "positive list" and must not already be required to be undertaken by a law of the Commonwealth, State or Territory or Local Government.

The Regulations set out the positive list of project types as including:

• the establishment of permanent plantings on or after 1 July 2007;
• the human-induced regeneration, on or after 1 July 2007, of native vegetation, on land that is not conservation land, by:
  • the exclusion of livestock; or
  • the management of the timing and the extent of grazing; or
  • the management, in a humane manner, of feral animals; or
  • the management of plants that are not native to the project area; or
  • the cessation of mechanical or chemical destruction, or suppression, of regrowth;
• the restoration, on land that is not conservation land, of natural wetlands that had been drained;
• the application of biochar to soil;
• the capture and combustion of methane from livestock manure;
• early dry season burning of savannah areas greater than 1 km²;
• the reduction of methane emissions through the management, in a humane manner, of feral goats, feral deer, feral pigs or feral camels;
• the reduction of emissions from ruminants by manipulation of their digestive processes;
• the application of urease or nitrification inhibitors to, or with, livestock manure or fertiliser;
• the capture and combustion of methane from waste deposited in a landfill facility before 1 July 2012;
• a forestry project accredited under the Commonwealth Government's Greenhouse Friendly" program;
• until 1 July 2012, a waste diversion project accredited under the Commonwealth Government's Greenhouse Friendly" program;
• permanent plantings accredited under:
  • the New South Wales Government's Greenhouse Gas Reduction Scheme; or
  • the Australian Capital Territory Government's Greenhouse Gas Abatement Scheme; and
• permanent plantings established before 1 July 2007 for which there is documentary evidence in accordance with the Regulations that demonstrates, to the satisfaction of the Administrator, that the primary purpose of the plantings was generation of carbon offsets.

The negative list

Section 56 of the Act lists a number of criteria under which certain kinds of projects may be specified as "excluded offsets projects". These project types are expressly excluded from participating in the CFI.

The Regulations specify that the following kinds of projects are excluded offsets projects:

• a project that:
  • was mandated under a law of the Commonwealth or a State or Territory; and
  • is no longer mandatory because the law was repealed after 24 March 2011;
• the planting of a species in an area where it is a known weed species;
• the establishment of a forest under a forestry managed investment scheme for Division 394 of Part 3-45 of the Income Tax Assessment Act 1997;
• the cessation or avoidance of the harvest of a plantation;
• the establishment of vegetation on land that has been subject to illegal clearing of a native forest, or illegal draining of a wetland;
• the establishment of vegetation on land that has been subject to clearing of a native forest, or draining of a wetland (that was not an illegal clearing or draining), within:
  • seven years of the lodgement of an application for the project to be declared an eligible offsets project; or
  • if there is a change in ownership of the land that constitutes the project area, after the clearing or the draining — five years of the lodgement of an application for the project to be declared an eligible offsets project;
• planting of trees in an area that, according to the CFI rainfall map, receives more than 600 mm long-term average annual rainfall, unless:
  • the project is a planting that is a permanent planting that is also an environmental planting (that is, native to the area);
  • the project proponent demonstrates that the planting contributes to the mitigation of dryland salinity in accordance with the Salinity Guidelines (these are new Guidelines published by the Department of Climate Change and Energy Efficiency);
  • the project is in a region in relation to which the National Water Commission has determined that the commitments by the relevant State and Territory government under the National Water Initiative to manage water interception by plantations have been adequately implemented;
  • the project proponent holds a water access entitlement that meets the criteria specified in the Regulations (which generally seek to ensure that a water entitlement is held to offset the water intercepted by the forest); or
  • the project area is in a region in which it is not possible to obtain a water entitlement (unless this is because water entitlements are already fully allocated in the region) and the Administrator of the CFI is satisfied, after seeking the advice of the relevant State or Territory agency, that there is no material impact on water availability or the reliability of existing water entitlements.

Further administrative matters

In addition to the key substantive matters set out in the Regulations as summarised above, the Regulations provide details for a range of administrative matters that are required for the implementation and management of the CFI. These administrative matters include providing the rules for:

• the documentation and information to be provided in an application to become recognised as an offsets entity, including the different information requirements for individuals, Aboriginal person or Torres Straight Islander, bodies corporate and trusts;
• the required documentation and information to be provided in an application for a declaration that a project is an eligible offsets project, as well as setting out additional information to be provided where an existing project under a prescribed scheme is to be transitioned across into the CFI;
• the details to be provided for the designation of a nominee account where there are multiple project proponents for the one project;
• the classification of prescribed non-CFI offsets schemes and the relinquishment requirements surrounding their transition into the CFI (prescribed non-CFI offsets schemes are defined to include Greenhouse Friendly", NSW GGAS, ACT GGAS and the Verified Carbon Standard); and
• the mechanical requirements and procedures for meetings and decisions of the Domestic Offsets Integrity Committee.

The forms to apply to be a recognised offsets entity and open a Registry account are now on the Department's website and include:

• personal particulars
• application for recognition as an offsets entity
• Australian Federal Police national police check application form

Implications for the CFI market

The release of the Regulations and the proclamation of the Act are important milestones. Market participants in the CFI can now plan their projects with confidence and clarity as to the rules and requirements for participation. However, a remaining barrier to participation is the limited availability of methodologies under which projects can be designed and implemented. To date, only two methodologies have been formally approved: the destruction of methane from manure in piggeries and the capture and combustion of landfill gas.

Prospective project proponents will need to carefully consider the positive list of projects and the excluded project types at an early stage in the project feasibility analysis. Without fully understanding the eligibility of a project, significant start up capital can be wasted.

Other issues that project proponents should consider at an early stage in the project feasibility analysis include consideration of:

• who holds the necessary legal rights to carry out the project
• the proper legal and financial structure under which to carry out the project
• any environmental and other further approvals required before the project can be carried out; and
• the contractual arrangements with land-owners and those with an interest in the land (if the project proponent is not the owner or does not own the land unencumbered) and with the end purchasers of the ACCUs that will result from the project.

Norton Rose Australia, in conjunction with RAMP Carbon, is currently finalising a detailed Guide for Business in relation to participation in the CFI on behalf of the Carbon Market Institute which will be available shortly. In the meantime, if you require any further information about opportunities under the CFI, please contact a member of our Climate Change team.

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.