Carbon Farming Initiative legislation tabled

Yesterday, the Government tabled the legislation which will support the introduction of the Carbon Farming Initiative (CFI). The CFI is a market mechanism which will allow abatement activities from the land sector to generate carbon credits which can be used in the international and domestic compliance and voluntary carbon markets. This legal update provides a brief overview of the main aspects of the scheme and an explanation of the key changes between the tabled legislation and the exposure draft legislation (which was released for consultation in January 2011). Further background information on the CFI can be found in our legal update on the consultation paper.

Overview

Three bills were tabled in Parliament:

• Carbon Credits (Carbon Farming Initiative) Bill 2011 (CFI Bill)
• Carbon Credits (Carbon Farming Initiative) (Consequential Amendments) Bill 2011 (Consequential Amendments Bill), and
• Australian National Registry of Emissions Units Bill 2011 (Registry Bill).

Carbon Credits (Carbon Farming Initiative) Bill 2011

The intent underlying the CFI is to give farmers, forest growers and landholders access to domestic voluntary and international carbon markets and to begin to unlock abatement opportunities in the land sector, which currently makes up 23 per cent of Australia's emissions. The objects of the CFI Bill include to implement Australia's obligations under the Kyoto Protocol, create incentives for people to carry on certain offsets projects and increase carbon abatement in a manner that is consistent with the protection of Australia's natural resources and improves Australia's resilience to the effects of climate change.

What is covered?

Land based activities which achieve greenhouse gas abatement will be able to participate in the CFI, even if the particular activity is not recognised under the Kyoto Protocol. Abatement activities will include:

• reducing or avoiding emissions (for example, through capture of methane emissions from landfills, reducing emissions from savannah burning or reducing emissions from livestock production and fertiliser use), or
• removing carbon from the atmosphere through bio-sequestration (for example, growing trees) or sequestration within the ground (for example, soil carbon).

The CFI will also cover projects to protect native forests from clearing or clear felling.

What is not covered?

It is proposed to have a "negative list" to exclude certain types of projects which may otherwise be eligible under the scheme. In particular, projects which will have a significant adverse impact on the availability of water; biodiversity conservation; employment; or the local community will be included on this list. Projects involving the conversion of harvest plantations into permanent carbon sinks will also be included on the negative list.

Participating in the CFI

There are a number of prerequisites for offset projects to participate in the CFI and generate Australian Carbon Credit Units (ACCUs), which are the units created under the CFI. These include:

• there needs to be an approved methodology for the particular type of offset project
• the project needs to be undertaken in accordance with the methodology and any other eligibility requirements
• the project needs to be approved by the Carbon Credits Administrator (Administrator). The criteria required for the Administrator to approve an offsets project include that the project is being undertaken in Australia; it is covered by an applicable methodology determination; it passes the additionality test (see below); the applicant is the project proponent and is a recognised offsets entity; and the project does not involve the clearing of native forest or the using of material obtained as a result of harvesting or clearing a native forest.
• in order to receive ACCUs, reporting needs to be undertaken for the project and on the basis of these reports the Administrator will issue a "certificate of entitlement", which will specify the number of ACCUs that the project proponent is entitled to receive for that reporting period, and
• the project proponent (ie. the person seeking issuance of the ACCUs) needs to be a recognised offsets entity. Generally, a person can be accredited as a recognised offsets entity if they satisfy the "fit and proper person" test. The project proponent will need to hold the relevant carbon sequestration right in relation to the project area (if the project is a sequestration project) as well as being responsible for the project and having the legal right to carry out the project (for example, as land owner).

Projects approved under other schemes, such as the Greenhouse Gas Reduction Scheme or Greenhouse Friendly" may also be able to participate in the CFI, however the transition must be made within two years of commencement of the CFI.

Main Changes

The main changes between the exposure draft version of the legislation and the Bill tabled yesterday are:

• An amended test for additionality of projects (additionality is the requirement that all emissions abatement or sequestration be above and beyond 'business as usual'). The additionality test has been sought to be simplified, such that projects will be deemed to be additional if they are specified in regulations and are not required to be undertaken due to any Commonwealth, State or Territory Law. This approach is referred to as a "positive list". Previously there had been an alternative test of additionality for projects not on the "positive list", which required the case by case application of the common practice test and the financial viability test. This project level additionality test has been removed. The criteria guiding the Minister to place a kind of project within the regulations includes consideration of whether that kind of project is "common practice" or would be in the absence of the CFI, and also consideration of any recommendations made to the Minister by the Domestic Offsets Integrity Committee (DOIC).
• The first crediting period (the period for which a project is initially approved) has been increased from 3 years to 7 years for offset projects, other than native forest protection projects and 15 years for reforestation projects, with the ability to specify in the regulations longer or shorter crediting periods for particular project activities. Native forest protection projects will have a first crediting period of 20 years, so that credits will be issued during the course of the 20 year period rather than at the outset of the project when the forest is initially protected from clearing or clear felling. Subsequent crediting periods would be 7 years for all projects, except native forest protection projects.
• The tabled Bill specifies that avoided deforestation projects will only be available for native forests.
• The definition of "legacy waste" has been amended such that the cut-off date for legacy waste will be determined later by the Minister (it is anticipated that this date will match the start date of the proposed carbon pricing mechanism).
• Previously the draft legislation required all regulatory approvals to be obtained before a project could be approved by the Administrator. Under the tabled legislation, there will be the ability for the Administrator to issue a declaration of approval which is conditional upon the project obtaining the necessary approvals before the end of the first crediting period. Hence, project proponents will be able to achieve certainty that their project is approved before going through the time and cost of obtaining the relevant regulatory approvals.
• Project proponents will have the ability to choose a reporting period between 12 months and 5 years. Previously it was anticipated that reporting would be required on an annual basis. Audit reports by a registered greenhouse gas and energy auditor will also be required, although the regulations may exempt certain types of projects from this requirement (for example, small projects).
• New provisions have been included entitling registered native title bodies corporate who have exclusive possession to native title land to be project proponents. This will only be the case however where no other person holds the legal right to carry out the project or holds an applicable carbon sequestration right in relation to the land.

Australian National Registry of Emissions Units Bill 2011

The Registry Bill provides for the recognition in Australian legislation of emissions units created under the Kyoto Protocol and how those units can be created and traded (previously Australia's registry was not legislatively recognised yet had been created in 2008 in order to comply with Australia's obligations under the Kyoto Protocol). The Registry Bill also recognises ACCUs. The Registry Bill sets out the purpose and function of the Australian National Registry of Emissions Units (the Registry), the rules for opening and closing accounts in the Registry, the different types of accounts that may be held in the Registry, and the rules surrounding issuance and transfer of units within the Registry. The Registry Bill also includes transparency, administrative review and compliance provisions in relation to the Registry.

Carbon Credits (Consequential Amendments) Bill 2011

The purpose of the Consequential Amendments Bill is to amend existing legislation to ensure that the CFI is a workable scheme within the existing legal rubric. The amendments apply existing obligations in relation to the provision of financial services, anti-money laundering and counter terrorism financing to units held in the Registry. The amendments are intended to provide safeguards to protect the interests of holders of ACCUs and also to provide deterrence against the use of the CFI for the purposes of criminal activity.

Next Steps

The Government anticipates having the scheme in place and operating by 1 July 2011, and significant work has already been undertaken between different industry sectors and the Department of Climate Change and Energy Efficiency on developing the necessary methodologies to support the different types of offset projects. In general terms, the process for approval of a methodology is that the methodology is submitted to the DOIC for endorsement, it is subject to a period of public consultation and the DOIC has the ability to request further information. If the methodology is endorsed by the DOIC it will then be approved by the Minister and be published as a methodology determination on the Federal Registry of Legislative Instruments. Methodology determinations must meet the integrity standards (see our earlier legal update)

The Greens have signalled that they may seek support for a Senate Inquiry into the CFI legislation, which would have the effect of holding up its passage through Parliament and possibly delay the introduction of the CFI. The Greens are principally concerned with whether the CFI may distort water and food markets due to changes in land use under the Initiative.

If you would like any further information about the detail of the CFI or the opportunities it presents, please do not hesitate to 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.