Introduction of the Emissions Reduction Fund Bill

In brief

The Federal Government has introduced into Parliament legislation for the establishment of its proposed Emissions Reduction Fund, which will provide businesses with opportunities to enter into contracts under which the Government pays them for undertaking carbon abatement. Partner Grant Anderson and Lawyer Albert Yu report. 

Background

After considering the 49 submissions that were made on the exposure draft legislation released for consultation on 9 May 2014 (see Focus: Emissions Reduction Fund Exposure Draft Legislation Released), the Federal Government has introduced into the House of Representatives the Carbon Farming Initiative Amendment Bill 2014 (Cth) (the Bill), which, if passed, will establish the Emissions Reduction Fund (the ERF). As discussed in our earlier Focus, the ERF is to be established by expanding the existing Carbon Farming Initiative (the CFI), which is set up under the Carbon Credits (Carbon Farming Initiative) Act 2011 (Cth) (the CCA)¹ and currently enables land-based carbon abatement and sequestration projects to generate tradeable carbon credits (emission reductions) in the form of Australian carbon credit units (ACCUs). The primary remit of the ERF is to forward-contract for the purchase of ACCUs from qualifying emissions reduction projects, with the ERF selecting the emissions reductions that it will purchase on the basis of least cost as determined by periodic reverse auctions or other competitive tendering processes.

The principal differences between the exposure draft legislation and the Bill are as follows:

• qualifying projects may commence from 1 July 2014, even if the ERF has not commenced by that date;
• projects that receive limited or in-kind support from other government programs may still be eligible for support under the ERF;
• most projects transitioning from the CFI (including savanna burning projects) will automatically receive a new crediting period beginning on the commencement of the ERF;
• the standard crediting period for carbon sequestration projects has been extended to 25 years (from 15 years in the exposure draft legislation);
• project proponents are to be given the flexibility to align their crediting period with the time that the project starts; and
• project proponents may be able to report more frequently than every six months, thereby improving their cash flows from the more frequent generation and sale of ACCUs.

These matters are discussed in more detail below.

Qualifying projects

For a project to be able to generate carbon abatement that may be used in the ERF, it must be declared by the Clean Energy Regulator (the Regulator) to be an 'eligible offsets project'. Two of the requirements for an eligible offsets project are that:

• it must result in carbon abatement that can be used to meet Australia's climate change targets under the Kyoto Protocol or any successor international agreement; and
• it must meet prescribed 'additionality' requirements.

The Bill provides that the second commitment period under the Kyoto Protocol is taken to be in force for Australia even if the treaty establishing the second commitment period is not yet in force for Australia.² This ensures that Kyoto-compliant carbon abatements can continue to be bid into the ERF even if the entry into force of that treaty is delayed.³

As was the case in the exposure draft legislation, the Bill provides that the additionality requirements (which the project must meet in order to be an eligible offsets project) comprise the following three elements:⁴  

• a 'newness requirement' – the project must not have begun to be implemented before it has been declared to be an eligible offsets project;
• a 'regulatory additionality requirement' – the project must not be required to be carried out under an Australian law; and
• a 'government program requirement' – the project must be unlikely to be carried out under another Australian government program or scheme if it was not declared to be an eligible offsets project.

In relation to the 'newness requirement', the Bill clarifies that a project is not taken to have begun to be implemented simply because one of the following activities has been undertaken in relation to the project:⁵  

• conducting a feasibility study for the project;
• planning or designing the project;
• obtaining regulatory approvals for the project;
• obtaining consents relating to the project;
• obtaining advice relating to the project;
• conducting negotiations relating to the project; or
• sampling to establish a baseline for the project.

The Regulator is to provide further guidance on the types of project preparation activities that do not indicate that a project has commenced.⁶ The Bill also provides a non-exhaustive list of examples of actions that will be taken as evidence that the project has commenced, such as making a final investment decision in relation to the project, installing equipment and commencing construction work for the purposes of the project.⁷  

In addition, project proponents will be permitted to commence their projects from 1 July 2014 onwards (even though the ERF legislation will not have been passed by then) without breaching the 'newness' requirement. Project proponents may do this by notifying the Regulator during the period between 1 July 2014 and the date of the commencement of the ERF that they intend to make an application to the Regulator to have their projects declared as 'eligible offsets projects' under the CCA. Upon this pre-registration notification, the project proponent will have until 1 July 2015 to formally register its project.⁸  

In so far as the 'government program requirement' is concerned, the Government has clarified that its intention is not to prevent proponents from obtaining funding or in-kind support from multiple sources where this is necessary for the project. For example, the Government anticipates that environmental planting projects could receive assistance from the Green Army and that fire management projects may involve rangers who are supported under Indigenous ranger programs.⁹ The Regulator is therefore to issue guidelines that list government programs that typically provide sufficient funding for emissions reductions activities, and that consequently would cause a project not to satisfy the 'government program requirement' if it receives funding under those programs. The Government has cited the New South Wales Energy Savings Scheme as an example of such a government program.¹⁰  

Crediting periods

As under the exposure draft legislation, new eligible offsets projects will only have one crediting period and existing projects will be entitled to a second crediting period.¹¹ However, unlike the exposure draft legislation, the Bill provides that the second crediting period for existing CFI projects (including savanna burning projects) will generally be automatic.¹²  

Also, the general crediting period for sequestration offsets projects has been increased from 15 years to 25 years.¹³  

Finally, the Bill allows project proponents to nominate the start of the crediting period for their project, which must be within 18 months of project registration.¹⁴ This is designed to enable proponents to align the start of their crediting period with the start of their project, given that there could be a significant period between project registration and commencement (particularly for large or complex projects).¹⁵  

Reporting

Project proponents must provide offsets reports to the Regulator for every reporting period, with the reporting period generally being between six months and five years.¹⁶ However, unlike the exposure draft legislation, the Bill caps the maximum reporting period for emissions avoidance projects at two years.¹⁷ In addition, the Bill permits project proponents to submit offsets reports more frequently than six months where they are allowed to do so under a legislative instrument.¹⁸ This is designed to assist project proponents to improve cash flows by receiving ACCUs more frequently. However, when making this legislative instrument, the Government will consider the administrative costs of allowing more frequent reporting, and may restrict more frequent reporting to medium and large projects.¹⁹  

Other matters – purchase of emissions reductions

The Bill authorises the Regulator (on behalf of the Commonwealth) to enter into carbon abatement contracts for the purchase of eligible carbon credit units as a result of a carbon abatement purchasing process conducted by the Regulator.²⁰ The Bill clarifies that the Regulator may only enter into such a carbon abatement contract with a project proponent – that is, the person who is responsible for carrying out the project and has the legal right to carry out the project.²¹

The Government has also indicated that, contrary to the White Paper, it will allow any additional carbon credit units earned by a project to be purchased after the total contract volume has been fulfilled.²² Presumably, this is a matter that will be addressed in the bidding rules.

Next steps

As stated in our earlier Focus: Emissions Reduction Fund Exposure Draft Legislation Released, much of the detail (such as setting of baselines) has been left to legislative rules, Ministerial directions, auction rules and methodology determinations. Accordingly, while the introduction and passage of the enabling legislation for the ERF is an important first step, more work still needs to be done to operationalise the ERF.