The Carbon Farming Initiative – what has been happening?

Introduction

Things have been happening in the CFI space! Four methodology determinations have now been made, the first four projects have been approved by the Clean Energy Regulator and the application period for grant funding of new methodologies has commenced. This legal update provides a snapshot of these and other recent developments.

For an overview of the CFI, please refer to our previous legal updates which can be found here or the Carbon Market Institute publication " The Carbon Farming Initiative: An Introduction to Participation", co-authored by Norton Rose Australia and RAMP Carbon.

Impact of linking to European Union Emissions Trading Scheme

Last week took the emerging Australian carbon market by surprise with the announcement of the linking to Europe's emissions trading scheme (EUETS), the dropping of the price floor of $15 and the limit on the import of Kyoto units¹ ( see our previous legal update).

The implications of this announcement are still being analysed but initial indications from the Department of Climate Change and Energy Efficiency (Department) are that there should be no negative impacts on the CFI market. In particular, the expectation is still that compliance CFI credits (ie Kyoto credits) should trade close to the price of Australia's carbon unit, which in turn is expected to match the price of the EUETS allowance.

The Department has indicated that in reaching the linking decision, the Australian Government made it clear to the European Commission that CFI credits were a key part of the compliance options for liable entities under the Carbon Pricing Mechanism. The more difficult issue may be what the European Commission is prepared to accept post 2018 when full linking is due to commence. We shall continue to report on any developments in this context.

First CFI projects declared

Although the CFI formally commenced nearly nine months ago, the Clean Energy Regulator (Regulator) has only recently declared the first "eligible offsets projects" under the Carbon Credits (Carbon Farming Initiative) Act 2011 (CFI Act). An offsets project must be declared eligible before it can be carried out under the CFI Act and generate Australian Carbon Credit Units (ACCUs).

Part of the reason for the delay in getting projects approved was the delay in preparing methodology determinations, which are a pre-requisite for project approval. Although methodologies had received approval from the Domestic Offsets Integrity Committee (DOIC) and the Minister, they then needed to be turned into determinations (which is the formal statutory instrument). This process has taken more time than anticipated.

The first four declared eligible offsets projects will be carried out by LMS Energy Pty Ltd at landfill sites in the Northern Territory, Western Australia and Queensland.

All projects which are declared eligible under the CFI Act are published on the Register of Offsets Projects, which is available on the Regulator's website.

Methodology determinations

There are now four methodology determinations covering:

1. environmental plantings: The Carbon Farming (Quantifying Carbon Sequestration by Permanent Environmental Plantings of Native Species using the CFI Reforestation Modeling Tool) Methodology Determination 2012
2. savanna burning: The Carbon Farming (Reduction of Greenhouse Gas Emissions through Early Dry Season Savanna Burning) Methodology Determination 2012
3. destruction of methane generated from manure in piggeries: The Carbon Farming (Destruction of Methane Generated from Manure in Piggeries) Methodology Determination 2012; and
4. capture and combustion of landfill gas: Carbon Farming (Capture and Combustion of Methane in Landfill Gas from Legacy Waste) Methodology Determination 2012

This means it is now possible to get projects for the above activities approved, provided that they comply with the particular requirements of the relevant methodology determination.

Certificate of Entitlement form available

The pre-requisite to receiving ACCUs is to obtain a Certificate of Entitlement. The application form for these certificates is now available on the Regulator's website. Download the " Certificate of Entitlement Application including the offsets report" form.

The application form combines the requirements to submit an offsets report, a prescribed audit report and an application for a Certification of Entitlement into the one form.

The application form and its attachments are considered the "offsets report" for a project and must be submitted within three months after the end of the relevant reporting period for the project. In most cases, the application form must also be accompanied by a prescribed audit report.

The Certificate of Entitlement will specify the number of ACCUs which will be issued for the project for that reporting period. The Regulator is required to make a decision on an application for a Certificate of Entitlement within 90 days after the application is made.

New project types being considered for the positive list

The Department of Energy Efficiency and Climate Change (Department) is currently considering five new activities which have been proposed to be added to the "positive list" (which is contained in regulation 3.28 of the Carbon Credits (Carbon Farming Initiative) Regulations 2011 (Regulations)). Inclusion of an activity on the positive list means the activity is considered "additional" and is not common practice. Projects are only eligible to participate in the CFI if, amongst other things, they fall within an activity on the positive list.

The activities which are currently being considered by the Department are:

1. Farm forestry;
2. Conversion of existing grazing land to intensive rotational grazing;
3. Passive oxidation of small landfills;
4. Waterponding; and
5. Selective breeding for residual food intake.

Public consultation on these activities has now closed and the Department will seek advice from the DOIC and the Australian Bureau of Agricultural and Resources Economics and Science (ABARES) before making a decision on whether or not to add the proposed activities to the positive list.

There is no time limit within which the Minister must make a decision on whether to amend the Regulations.

ABARES proposed framework for assessing additionality

The main prerequisite for an activity to pass the first limb of the additionality test under the CFI² and be included on the positive list is that it is not considered to be "common practice". ABARES has recently published a technical report which proposes a consistent approach to the CFI common practice test used to determine additionality (Proposed Framework). Download " The Carbon Farming Initiative: A proposed common practice framework for assessing additionality" (August 2012).

The Proposed Framework recommends (subject to obtaining one year of survey data for the activity) the use of default thresholds - which are a fixed proportion of the "target population" which has adopted the activity - to approximate whether the activity is likely to have reached a "take-off" point3 and therefore be considered non-additional.

The recommended default thresholds are as follows:

1. if the number of adopters of an activity falls below 5 per cent of the target population, the activity is likely to be considered additional;
2. if the number of adopters of an activity is between 5 per cent and 20 per cent of the target population, the activity requires a more rigorous threshold analysis using additional data;
3. if the number of adopters of an activity is above 20 per cent of the target population, it is likely that activity may be considered non-additional (although the Department may still determine that other factors need to be considered for activities which meet this threshold).

Methodology Grant Program

The Department has recently sought expressions of interest for grant funding to develop new methodologies. Approximately $7.2 million of funding has been allocated for collaborate grants to support projects to prepare new methodologies, measurement techniques or models. In the first year (2012-2013), approximately $1.3 million is available.

Further details about the Methodology Grant Program can be found here and the Expression of Interest Application form can be found here.

CFI Methodology Development Forum

Norton Rose, in conjunction with NetBalance and URS will be holding a Methodology Development Forum on 2 October 2012. Members of the Department's CFI team will be attending this Forum to provide an insight on the process of preparing a methodology in line with the revised Methodology Guidelines, which are due out shortly. This Forum will provide an opportunity for project proponents, methodology developers and intermediaries to share their experiences of participation in the CFI over the last nine months.

If you would like to register your interest in attending this Forum, please email Leanne Currie.

If you would like further detail on any aspect of the CFI, or would like to better understand the opportunities that arise from it in light of the recent linking announcement, please contact a member of our Climate Change team.

Footnotes

¹Kyoto units include emissions units created from emissions reduction projects certified under the Kyoto Protocol, such as the Clean Development Mechanism.

²Section 41 of the CFI Act sets out the requirements of the additionality test: (a) it is a project of a kind specified in the regulations (ie it is on the positive list), and (b) the project is not required to be carried out by or under a law of the Commonwealth, State or Territory.

³The take-off point of an activity is where the rate of adoption of the activity in the relevant comparison group reaches maximum acceleration.

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.