On 25 November 2014, the Parliament of Australia assented to the Carbon Farming Initiative Amendment Act 2014 (Cth) (Amending Act). The Amending Act provides for the establishment of the Emissions Reduction Fund (ERF), implements the Coalition’s Direct Action Policy and replaces the repealed carbon tax. The primary objective of the ERF is to reduce Australia’s greenhouse gas emissions by 5 per cent below 2000 level by 2020. 

The ERF has the following three elements:

1. Crediting emissions reductions - The Clean Energy Regulator (Regulator) will issue Australian carbon credit units (ACCUs) for emissions reductions that are estimated and audited using approved methods for particular activities, such as energy efficiency projects, land sector projects and large industrial facilities.

2. Purchasing emissions reductions – The Regulator will purchase emissions reductions at the lowest available cost, generally through reverse actions with successful bidders entering into standardised contracts for payment on delivery of emissions reductions.

3. Safeguarding emissions reductions, which will ensure that emissions reductions paid for by the ERF are not displaced by a significant rise in emissions elsewhere in the economy. The safeguard mechanism will not commence until 1 July 2016 with the detailed design of the mechanism being implemented through a separate legislative package following further consultation with stakeholders.

On 5 December 2014, the Department of Environment (Department) also released the Draft Carbon Credits (Carbon Farming Initiative) Rule 2015 (Draft Rule).  Over time, the existing Carbon Credits (Carbon Farming Initiative) Regulations 2011 (Cth) will be transferred to create a new rule set. The Department is accepting submissions on the Draft Rule received before 5pm on 19 December 2014.          

Crediting Emissions Reductions

The ERF will build on the existing Carbon Farming Initiative (CFI) framework under the Carbon Credits (Carbon Farming Initiative) Act 2011 (Cth) (CFI Act) for crediting emissions reductions by:

• Expanding the current land-based scope of the CFI Act to enable any type of emissions reduction project to be an eligible offsets project. It is anticipated that this expansion will enable the ERF to unlock emissions reduction opportunities across the economy.
• Making project registration a precondition for participation in the ERF auction or other purchasing process. The first auction is expected to be held in the first quarter of 2015.
• Removing the common practice test and introducing a requirement that projects must be new and unlikely to occur as a result of another government programme. However, the common practice test will continue to be relevant in the context of methodologies made under the ERF.
• Removing a number of barriers to project aggregation under the existing law. It is expected that this change will make it easier for businesses to find innovative ways to reduce costs and increase participation by small companies, landholders and households in emissions reduction projects.
• Removing unnecessary requirements for project registration to make participation in the ERF easier than under the existing CFI framework.

As under the existing CFI framework, the Regulator will issue ACCUs to registered projects for each tonne of carbon dioxide equivalent reduced and stored in the land.  These units will be issued once emissions reductions have been estimated and reported using approved methodologies and, where necessary, independently audited. 

The process for proposing, assessing and making methodologies will focus on opportunities that generate the largest volume of general abatement and are likely to encourage the most participation.  The Minister for Environment (Minister) will continue to assess and approve methodologies on advice from the Domestic Offsets Integrity Committee (which will be renamed the Climate Change Emissions Reduction Assurance Committee (ERAC)).

Purchasing Emissions Reductions

The Regulator will conduct purchasing processes to select eligible proponents of registered projects from whom eligible emissions reductions will be purchased. Generally, the Regulator will purchase emissions reductions by conducting reverse auctions and at lowest available cost.  However, the Regulator will also be able to purchase emissions reductions through other purchasing processes, such as a tender.

Following a purchasing process, the Regulator will enter into a standardised contract with a successful seller for the purchase of carbon abatement.  The Regulator has recently released the draft contract for ERF auctions to provide guidance to eligible proponents to submit ERF bids.  Although the Regulator has not ruled out making further changes to the draft contract, it does not expect to make any significant changes to the draft contract.  It is anticipated that the standardisation of the ERF contract will result in a reduction in transaction costs and increased transparency, and ensure projects compete for funding at auctions on equal terms.

Safeguarding Emissions Reductions

The safeguard mechanism will be introduced to ensure that emissions reductions paid for by the ERF are not displaced by a significant rise in emissions elsewhere in the economy. The design will be finalised through further consultation with stakeholders, and the detailed design will be implemented through a separate legislative package.

What are the key changes since the White Paper?

We have previously released an update outlining the key elements and opportunities arising from the design of the ERF as set out in the White Paper.  The main changes to the ERF in the Act from the scheme contemplated by the White Paper are as follows:

• allow the standard purchasing contract between the Regulator and participants bidding into the ERF to be 7 years;
• give the ERAC an additional review function around whether to increase crediting periods;
• expand the role of the ERAC in making, carrying and suspending methods and enable the public to ask the ERAC to review methods;
• establish a framework for the safeguard mechanism to commence on 1 July 2016. The details of the safeguard mechanism will be developed by the Government in consultation with business and other stakeholders;
• expand the objects of the CFI Act to incorporate future international climate change agreements, if any;
• give savanna burning projects a 25 year crediting period; and
• reinstate natural resource management plan requirements.

Key Actions for Business

Proponents of emission reductions projects in the waste, mining, electricity, manufacturing and land sectors should be repositioning themselves now to benefit from the $2.55 billion funding of the ERF.

The Bill complements the increasing number of methodologies by expanding the existing CFI  framework and streamlining processes. Businesses should identify the best use of the ERF funds to maximise their competitive positions in the ‘carbon constrained’ Australian environment.

Draft Rule

The Draft Rule released by the Department seeks to:

• ease audit requirements through the implementation of a risk-based approach to auditing to minimise the such as how ERF funds will be awarded, participation requirements at auctions and procedures for cancelling bids or auctions.

Submissions in relation to the Draft Rule must be received by 5pm on 19 December 2014.

Next Steps

On the one hand Prime Minister Tony Abbott says coal is the future. On the other hand, Australia's Environment Minister, Greg Hunt, says he is putting his faith in technologies like carbon capture and storage to reduce the carbon footprint of coal-fired power stations. Although carbon regulation in Australia is still uncertain, the passing of the Bill is a positive step for the carbon offsets sector.

In our view, a commitment and expertise in best practice sustainability will remain integral for businesses to benefit from the ERF for greenhouse gas emitting projects – regardless of the current political landscape surrounding carbon regulation in Australia.

Key Dates

• The final surrender by Australia’s liable entities under the carbon pricing mechanism is 2 February 2015. Businesses looking to have Australian Carbon Credit Units issued before this date need to apply as soon as possible.
• For a transitional period until 1 July 2015, applications for project registration will be able to be made under the eligibility rules and methodologies which are in place prior to the start of the ERF.
• After 1 July 2015, the project eligibility rules that will be established through this Bill will apply to all new projects. These rules require that a project cannot have commenced before it is approved by the Regulator. In other words, project applications cannot be backdated as under the Carbon Farming Initiative.
• The commencement date for the safeguard mechanism is 1 July 2016. The Minister will undertake public consultation on safeguard mechanism legislative rules by 1 October 2015 and the mechanism will be implemented through a separate legislative package.