EMISSIONS REDUCTION FUND – WHAT IT MEANS FOR ABORIGINAL CARBON PROJECTS

Last updated 16 February 2015

ERF - how it happened

ERF - auctions

OVERVIEW

The government has expanded the CFI to become the Emissions Reduction Fund - energy efficiency and industrial projects are now eligible in addition to land sector and landfill projects. Working groups are developing priority methods for these new activities.

Existing Aboriginal carbon projects such as savanna burning can continue and new projects can be lodged and backdated under the old CFI rules until 1 July 2015. However, to sell credits, projects will have to bid into an ERF auction or go to the voluntary market.

Savanna projects now have one 25 year crediting period - this aligns these projects with forestry and other sequestration projects. New requirements asking whether the project has started or is likely to be carried out under another government program have the potential to trip up new projects from being approved.

Only requiring consent, rather than the carbon right, may make it easier to aggregate or pool small sequestration projects into a large one. There is no change to the native title beneficial provisions.

The Clean Energy Regulator's 4 steps to the Emissions Reduction Fund

The Clean Energy Regulator's 4 steps to the Emissions Reduction Fund

ACTIVITIES

Industrial and energy efficiency projects are eligible as well as land sector and landfill projects.

METHODS

The government is developing new priority methods through technical working groups. The new priority methods will focus on industrial and energy efficiency activities. Individuals cannot propose new methods.

The Emission Reduction Assurance Committee will provide expert advice to the Minister.  The Minister must follow the advice of the ERAC but can also make guidelines for the ERAC to follow when considering method proposals.

Comment: A large proportion of Aboriginal land is rangelands which currently has no approved method (apart from savanna, regeneration and nitrate supplement methods). So far there is nothing on importing overseas methods such as rangeland methods developed under the Verified Carbon Standard and the American Carbon Registry that may work in Australia.

ADDITIONALITY

If not covered in the method, additionality is covered at the project approval stage by a three part test:

  • the project has not started
  • the project is not required by law
  • the project would be unlikely to be carried out under another government program if not approved.

Undertaking planning or even doing some sampling does not mean the project has started, but a final investment decision or turning the soil does mean the project has started.

As noted, the methods may override any of these tests. In framing any different approach, methods must conform to a new additionality integrity principle of whether emissions reductions would be “unlikely to occur in the ordinary course of events” (disregarding the ERF).

Comment: The new additionality test seem geared to new industrial projects – in particular the requirements not to have started and be unlikely to be carried out if not declared under the CFI – for example, energy efficiency projects under state schemes.

On the face of it, the new requirements do present a risk to land sector projects like savanna burning. For example, many savanna projects may have ‘started’ in the sense of some work being carried out that could build into a savanna project. Whether carrying out a little burning is the same as starting to turn the soil on a sequestration project remains to be seen. Savanna projects also generally receive support from government funding programs such as Working on Country or the Biodiversity Fund. Helpfully, the explanatory memorandum to the Bill acknowledges it is not the Government's intention to prevent projects obtaining funding from multiple sources and that savanna burning projects may involve rangers involved funded under Government programmes.

On balance, the new law does not seem designed to trip up savanna projects, but we need to keep a close watch, especially as the project has not started requirement. What is clear is that the new way will provide less certainty than before - previously, under the ‘positive list' approach, project developers had a clearer sense if they were in or out before they started putting projects together.

CREDITING PERIODS

ERF projects only have one crediting period - 25 years for savanna and sequestration projects and 7 years for emissions reduction projects (if you had an existing project a fresh crediting period started when the ERF started). However, the start of the crediting period may be delayed by project owners for up to 18 months.

Comment: A crediting period of 25 years for savanna projects means they can still sell credits in markets outside the ERF after an ERF contract finishes (after say 7 years - see below).

NON-KYOTO

Soil carbon, revegetation and forest management projects now count towards Australia's Kyoto target. Non-Kyoto projects are not provided for under the ERF.

Comment: This will help rangeland and soil carbon projects which may have high applicability on Indigenous land be treated the same as other projects. However, it will mean the end for non-Kyoto projects such as feral animals, wetlands restoration and ‘blue carbon’ projects in the sea under the ERF – all projects which have a high applicability to Indigenous land (mangroves and other coastal projects will not be classified as blue carbon projects and will be allowed). These kinds of projects would need to look to international voluntary schemes for credits.

PROJECT PROPONENTS

Project proponents or owners will no longer need to register to be a registered offsets entity, however, ‘fit and proper person’ checking will still take place when a project is registered.

Comment: This removes the previous two stage process to register as an offsets entity before applying to register a project.

LAND REQUIREMENTS

Project proponents will need to have the legal right to carry out project but will not have to hold the carbon right for sequestration projects – proponents will only need the consent of anyone with the carbon right for sequestration projects.

Comment: This provision will help project aggregation because it means that a project aggregator only needs the consent of various landowners rather than having to transfer their carbon rights in land – a much more comfortable position for traditional owners. The native title beneficial provisions have not been changed.

PERMANENCE

Sequestration projects can choose between a permanence period of 100 years or 25 years. If the 25 year option is chosen, a 25% discount will apply instead of only a 5% risk of reversal buffer that currently applies.

Comment: This provides an easier option for anyone worried about the long term commitment of a 100 year sequestration project but it will mean less credits. Such a provision may hurt any future linking of an Australian scheme with overseas schemes because it weakens the integrity of the abatement achieved.

REPORTS AND AUDITS

Reports must be delivered between 6 months and 5 years for sequestration projects and between 6 months and 2 years for emissions reduction projects. Reports will be able to be made on a part of a project.

A risk based approach will be applied to audits, meaning an audit must only accompany a report if required by legislative rules. However, there still must be at least 3 audits in a crediting period, meaning that all projects will still need to be audited regularly.

Comment: Reporting on a part of a project will make it easier to aggregate or pool projects which have different start dates into one project.

PURCHASE

The government has committed $1.1 billion over 4 years to a new purchasing vehicle, the Emissions Reduction Fund. Purchase of credits through the ERF will be through auctions or an alternative process run by the Clean Energy Regulator. The Regulator does not have to follow the normal government purchasing rules, meaning it can purchase directly without having to have an open process such as a tender. 

The first auction will be in April 2015. Bidders must register prior to the auction. A bidder can be excluded based on commercial readiness of technology and capacity to carry out the project. There is a minimum project size of 2000 t/Co2-e per year with the initial exception of transitional CFI projects. The Regulator will select the lowest costs bids in the auction, up to a benchmark price or 80% of the total credits bid, whichever is reached first. Successful bidders will enter standardised contracts for 7 years, although there is provision for shorter or longer contracts up to 10 years. Projects can only receive one contract. At the end of the contract, any excess credits can be sold to the ERF.

Regulator will publish average bid price and successful projects. Contracts will include make good provisions for under delivery of emissions reductions. Projects may be transferred with agreement of the Regulator but not traded for money.

For further information on the auction process see ERF - auctions.

Comment: The auction is not really an auction as there is only one bid! The benchmark price will likely make it harder for small projects, especially at the start when not too many projects are likely to be ready. The door is well and truly open for the Regulator to purchase non-ERF credits from overseas, which may detract from Australian sales. The ERF buying excess credits at the end of contracts will help encourage projects to manage their risks well and sell the bonus credits back to the ERF.

CFI TRANSITION

CFI projects will become ERF projects under the existing method for the current crediting period.

Existing methods will remain until varied or revoked, then new projects can only use the new or varied method.

New projects can continue to be approved until 1 July 2015 under existing rules.

Comment: You have until 30 June 2015 to get your project in and take advantage of any backdating for your project! After that, it's new rules and methods all the way and no backdating.

SAFEGUARDS (PENALTIES)

The safeguard mechanism will commence on 1 July 2016 and will cover the top 130 emitters (about 50% of Australian emissions). For existing facilities absolute emission baselines will be set. For new and facilities expanding, “industry best practice” will be used. Industry best practice will be defined through further consultation.

Comment: Given existing facilities can use their own baselines, it is unlikely the safeguard mechanism will result in more buyers for carbon credits. Waiting for the rules.

RESOURCES

Want to participate in the Emissions Reduction Fund?  Clean Energy Regulator

Clayton Utz analysis