Update on the Emissions Reduction Fund

This legal update provides details of the results from the latest Emissions Reduction Fund (ERF) auction and discusses the recommendations from the Climate Change Authority’s (CCA) recent review of the ERF.

The sixth ERF Auction, which was held on 6-7 December 2017, resulted in the Clean Energy Regulator (CER) committing to purchase 7.95 million tonnes of abatement at an average price per tonne of $13.08.  26 contracts covering the same number of projects were entered at a total cost of $104 million. 

The significant majority of contracts were awarded to vegetation projects, which made up 69% of contracted projects and 83% of the contracted abatement volume.

The December 2017 Auction brings the total commitment under the ERF to 191.7 million tonnes of abatement, at an average price of $11.90.

To date, 26.5 million tonnes of abatement have been delivered, at a total value of $337 million against a remaining schedule of 165.2 million tonnes of abatement at a total value of $1.94 million. The remaining funding allocated to the scheme is $265 million.

If a similar volume as the December 2017 Auction is contracted at future auctions, this could mean at least two more auctions will be held.

On 11 December, the CCA released its Review of the Emissions Reduction Fund (Review) which it is required under the Carbon Credits (Carbon Farming Initiative) Act 2011 (CFI Act) to undertake every three years.  The CCA concluded that the ERF is generally performing well overall and no systemic issues were identified. 

The Review has made 26 recommendations to the Australian Government, which are targeted to:

• enhancing environmental integrity and increasing abatement,
• securing permanence,
• strengthening investment and contract delivery,
• enhancing administration and compliance, and
• expanding access and opportunity for new participants.  

The CCA previously considered the role that the ERF will play in meeting Australia’s Paris Agreement obligations in the 2016 report, Towards a Climate Policy Toolkit: Special Review on Australia's climate goals and policies. In that report, the CCA found that the ERF should be built on as part of the policy tool kit Australia needs to meet its Paris Agreement goals, and that ERF crediting should continue, particularly in the land sector. 

Recommendations that we consider are of particular interest to the carbon offsets industry are outlined below.

Over the life of a project crediting period, which may be between 7 and 25 years, technologies, practices and scientific understanding may advance. However, currently, projects have the option of remaining on a superseded method throughout the crediting period.  The Review found that a balance should be struck between ‘the need for continuous improvements in the methods … and providing a degree of certainty for scheme participants’.

R. 4:   The Minister make improvements to methods (in the form of variations) to maintain their alignment with the Emissions Reduction Fund’s offsets integrity standards. Variations should incorporate guidance on the most current emissions estimation techniques, tools and calculators including those used for the national inventory.  Scheme participants must use the varied method and updated tools within two years of the varied method coming into force.

The CCA has identified that a key element of securing emissions reductions from sequestration projects is transparency of any permanence obligations attaching to land. The CCA has made a number of recommendations targeted to improve transparency of any potential permanence obligations attaching to land, as follows:

R. 9 :   The Carbon Credits (Carbon Farming Initiative) Act 2011 (Cth) be amended to remove the ability for a scheme participant to request that the project area be omitted from the project register for new projects.

R. 10:   The Clean Energy Regulator include on their website a search function that allows potential land buyers or other eligible interest holders to search for individual properties and determine if the land is subject to Emissions Reduction Fund permanence obligations.

R. 11:   The Clean Energy Regulator develop guidance for conveyancers and state and territory legal societies on permanence obligations that run with the land.

Carbon service providers (CSPs) develop ERF projects, provide advice on project registration, implementation and management, aggregate projects or contracts or act as designated agents.  Currently, the CER has limited knowledge of firms providing advice to ERF scheme participants, and key checks like the Fit and Proper Person test only apply to scheme participants. The CCA has recommended:

R. 13:   Scheme participants advise the Clean Energy Regulator of individuals and firms they paid to provide advice on the Emissions Reduction Fund when new projects are registered and updated in project reports.

R. 14:   The Carbon Credits (Carbon Farming Initiative) Act 2011 (Cth) be amended so that the Fit and Proper Person requirement is extended to designated agents that act for scheme participants.

R. 15:   The Clean Energy Regulator require a declaration from landholders that they have read the Department’s aggregation agreement resources prior to scheme participants registering a project that involves multiple landholders.

The carbon abatement contracts that scheme participants enter into with the Government provide flexibility for projects to deliver ACCUs from any registered project, not only the project used to bid at auction. This flexibility raised concerns for the CCA about ‘a growing mismatch between contracted projects and ACCUs available to meet ERF contractual obligations.’ The CCA has recommended:

R. 22:   The Clean Energy Regulator require scheme participants to deliver a minimum of 30-50 per cent of Australian Carbon Credit Units from the projects they used to register at auction.

R. 23:   The Clean Energy Regulator publish timely information about the holdings of Australian Carbon Credit Units including ownership, volume and project method and a six monthly ‘statement of opportunities’ that sets out the forward delivery schedule for Australian Carbon Credit Units from Emissions Reduction Fund contracts, the availability of Australian Carbon Credit Units in the secondary market and, to the extent known, indicative demand and prices for Australian Carbon Credit Units.

The CCA considers that while the CER has appropriate tools available to ensure compliance with the scheme, a gap exists with respect to minor infringements. The CCA recommends that the CFI Act be amended to include provisions empowering the CER to issue penalty infringement notices (PINs) for minor breaches of the Act.

R. 25:   The Carbon Credits (Carbon Farming Initiative) Act 2011 (Cth) be amended to expand the Clean Energy Regulator’s regulatory toolkit to include issuing penalty infringement notices (similar to fines) for some specified instances of non-compliance such as non-reporting.

A number of stakeholders to the Review suggested that the private sector or other non-government bodies should be able to development methods for the ERF. The review found that when the original CFI was operating, this approach ‘created a significant resourcing burden for the Government’.  However, the CCA writes that ‘allowing stakeholders to propose new methods or variations could alert the Department to possible new abatement opportunities.’ It recommends that: 

R. 1:   The Department of Environment and Energy (the Department) establish a formal submission process so stakeholders can propose new Emissions Reduction Fund methods. Following assessment of stakeholder proposals by the Department, the Minister would publish priorities for method development every two years.        

The ERF can provide benefits to indigenous communities as project proponents or as eligible interest holders. The requirements to demonstrate legal right and to obtain eligible interest holder right set out in the CFI Act serve to protect the interests of project stakeholders.  The scope of the legal right and the eligible interest holder consent obligations remain contested and unclear in some instances. 

As a result of this, the CER has released draft guidance on legal right and eligible interest holder consent requirements. Feedback can be provided to the CER by email before 9 February 2018.   The CCA recommends as follows:

R. 17:   The Clean Energy Regulator finalise its guidance to clarify expectations on consultation with Indigenous communities; scheme participants to notify and engage with Registered Native Title Body Corporates on project applications on determined Native Title land and other eligible interest holders before projects are registered and provide the Clean Energy Regulator with evidence this consultation occurred; and the Clean Energy Regulator not allow scheme participants to bid at auction until all known eligible interest holder consents have been obtained.

As soon as practicable, the Minister must prepare a statement setting out the Commonwealth Government’s response to each of the recommendations and this statement must be tabled within 6 months of the Review. The Government may have regard to the views of the CCA, the CER and any other person the Minister  considers relevant in formulating its response.

Some of the recommendations would require changes in legislation to be implemented. Others may be implemented immediately by the Department or the CER.

The safeguard mechanism, which is designed to avoid the emissions reduction benefits of the ERF being offset by emissions increases elsewhere in the Australian economy, will be covered in the CCA’s review of the National Greenhouse and Energy Reporting legislation in 2018. 

We are one of the lead law firms advising clients who participate in the ERF. If you consider that the CCA’s recommendations will impact on your activities under the ERF, we would be happy to discuss further with you how we may be able to assist you.

Elisa would like to acknowledge the contributions of Amy Quinton and Francis Meehan in preparing this update.