Bills Digest no. 5 2011–12
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WARNING:This Digest was prepared for debate. It reflects the legislation as introduced and does not canvass subsequent amendments. This Digest does not have any official legal status. Other sources should be consulted to determine the subsequent official status of the Bill.
Anita Talberg, Science, Technology and Environment and Resources Section
John Gardiner-Garden, Social Policy Section
Juli Tomaras, Bills Digest Service
1 July 2011
24 March 2011
House of Representatives
Climate Change and Energy Efficiency
Sections 1 and 2 commence on the day of Royal Assent. Sections 3 to 307 commence on a day to be fixed by Proclamation but no later than six months and a day after the Australian National Registry of Emissions Units Act 2011
and the Carbon Credits (Consequential Amendments) Act 2011
receive Royal Assent, provided they do so.
Links: The links to the Bill, its Explanatory Memorandum and second reading speech can be found on the Bill's home page, or through http://www.aph.gov.au/bills/. When Bills have been passed and have received Royal Assent, they become Acts, which can be found at the ComLaw website at http://www.comlaw.gov.au/.
This Bills Digest addresses the issues and state of the debate as at 31 May 2011.
The Carbon Credits (Carbon Farming Initiative) Bill 2011 (the Bill) is one of a package of three related Bills which establishes a voluntary carbon offset scheme with the purpose of creating incentives for carbon abatement or avoidance projects in land-use sectors. According to proposed section 3 the Bill has three stated objectives:
- to implement certain commitments Australia has under the United Nations Framework Convention on Climate Change (UNFCCC) and the Kyoto Protocol to it
- to create incentives for carbon-abatement projects
- to increase carbon abatement while still protecting Australia’s natural environment and enhancing resilience to climate change impacts.
The Carbon Farming Initiative (CFI) was a Government election commitment. It is a voluntary scheme that aims to provide incentives for the agricultural and forestry sectors to minimise carbon emissions or maximise carbon sequestration by altering their forestry and agricultural practices. The plain English meaning of the term ‘sequestration’ is storage. The proposed scheme fills a policy gap that has existed between Australia’s engagement with the Kyoto Protocol and with voluntary carbon markets, since the termination of the Greenhouse Friendly Scheme (GFS) in July 2010 (discussed further below).
The Australian Government ratified the Kyoto Protocol to the UNFCCC in December 2007, requiring Australia to maintain its national greenhouse gas emissions at or below 108 per cent of its 1990 emission levels for each year from 2008 to 2012. Australia must report on its own emissions and demonstrate that it has met its commitment by either reducing national emissions, buying surplus emissions credits from other countries, or funding emissions reduction projects in other countries.
The reporting and accounting rules which Australia must abide by treats LULUCF activities separately to other sectors. Under article 3.4 of the Kyoto Protocol, each country must either opt in or out of accounting responsibilities with regard to revegetation and forest, cropland and grazing land management. Australia has opted out of article 3.4, choosing not to report on emissions resulting from land-use management, as such carbon reductions from land-use activities do not contribute to Australia’s national greenhouse gas accounts. Australia made this choice because of the country’s high risk of drought and bushfires which can release large quantities of carbon dioxide (the burning of wood releases carbon, as does the decay of plants during times of drought). Australia’s decision on article 3.4 has meant that the Kyoto Protocol provides no incentives for the Australian agricultural and forestry sectors to alter their land management practices to reduce greenhouse gas emissions.
Forests, for the purposes of the Kyoto Protocol carbon accounting, are defined by each country under article 3.3. Australia has defined a forest as a minimum land area of 0.2 hectares with tree crown cover of 20 per cent canopy and minimum tree height of two metres. Also, for forestry activities to count towards article 3.3, they have to alter the land in question from what it was on 1 January 1990. Australian landholders with forests or forestry activities that do not meet this definition have no incentive to increase the carbon stock of their land. By creating a legitimate platform for farmers and foresters to generate carbon credits, the CFI fills the policy gap generated from Australia’s choices under articles 3.3 and 3.4. It removes some of the uncertainty for land users wanting to invest in long-term carbon sequestering activities, such as planned reforestation. It also opens up the possibility of selling those carbon credits either on the voluntary domestic and international markets, through the more formal Emissions Trading mechanism established under the Kyoto Protocol to the UNFCCC, or under any eventual Australian carbon price framework.
The Greenhouse Friendly Scheme (GFS) was established in 2001, before the start of the Kyoto Protocol, as an Australian carbon abatement standard to provide offsets or credits with credibility in the international voluntary carbon market. It was a scheme that allowed companies undertaking carbon abatement projects, such as biodiversity forest projects, to become accredited and sell carbon offset credits on the voluntary market. The GFS was terminated in July 2010 as part of the Government's planned Carbon Pollution Reduction Scheme (CPRS) introduction to avoid any double counting between the two schemes.
Coinciding with the end of the GFS, the Government introduced the National Carbon Offset Scheme (NCOS) as a carbon offset standard. Originally NCOS was only for those sectors not covered by the proposed CPRS. However, the Government subsequently ruled that proposed CPRS units would be eligible under NCOS.
The Government’s approach to climate change is a ‘three pillar strategy’ comprising mitigation (reducing greenhouse gas emissions), adaptation (preparing for and adjusting to the unavoidable impacts) and a global solution (helping negotiate a beneficial global outcome). Data from the 2009 National Greenhouse Gas Inventory reveal that Australian emissions from agriculture, waste, and forestry account for 23 per cent of national emissions of carbon dioxide equivalent (CO2e). As the Government has committed to reducing these national emissions by at least 5 per cent from 2000 levels by 2020, the CFI is an important policy instrument under the ‘mitigation’ plan. Although there is bipartisan support for the 5 per cent emissions reduction target there is disagreement between the Government and the Opposition over how it should be achieved. Also, under the Kyoto Protocol to the UNFCCC, Australia has committed to restricting its national greenhouse gas emissions to below 108 per cent of its 1990 emission levels for each year from 2008 to 2012. The CFI is also aimed at helping honour this commitment.
The CFI was first announced in August 2010. On 22 November 2010, the Government released a consultation paper outlining the design of the CFI, and called for stakeholder feedback. An exposure draft of the Bill was released just over a month later on 4 January 2011. Nearly 280 submissions were received on the shape and detail of the draft legislation. Some important changes were made to the legislation based on the consultation process. The amended legislation was subsequently introduced into Parliament on 24 March 2011.
A carbon offset is a reduction in greenhouse gas emissions from a project, to indirectly compensate for emissions produced elsewhere. Carbon offsets are measured in metric tons of CO2e where one offset is equivalent to one ton of CO2e. There are broadly two types of carbon markets:
- compliance or regulatory markets exist so that governments, companies and individuals can buy and sell offsets in order to meet targets for emissions reductions, or reduce liability towards a carbon tax. By definition, an offsets project must not be covered by the scheme that imposes the price on carbon otherwise it cannot offset the emissions from those activities that are covered by the scheme
- voluntary markets create a platform for governments, companies, and individuals to buy offsets to balance their emissions out of social diligence or for marketing reasons.
For a carbon offset market to function effectively and efficiently, there must be confidence that the offsets projects are bona fide and deliver what they promise. To this end, a multitude of certification systems have emerged for various offset types. The GFS was one such system developed primarily for an Australian voluntary market. NCOS is another. Internationally, the Voluntary Carbon Standard (VCS) and the Gold Standard are examples of systems implemented to provide third-party verification of carbon offsets projects, but there are also others. Under the Kyoto Protocol compliance regime, developed countries can buy offsets from carbon-reduction projects in developing countries—an offset mechanism known as the Clean Development Mechanism (CDM)—or other developed countries—an offset mechanism known as Joint Implementation (JI). Accredited offsets from these mechanisms are called ‘certified emission reductions’ (CERs) and ‘emissions reduction units’ (ERUs), respectively.
The CFI creates a new certification or standard to operate in conjunction with NCOS and in both compliance and voluntary offsets markets internationally and domestically. It also establishes a legislative platform for a credible domestic offset market.
In 2009, carbon offset suppliers globally transacted US$387.4 million. Projects related to landfill waste gas reduction activities represented about a third of all projects. However, forestry, agricultural soil, and other such land-based activities accounted for just one a quarter of all projects, and just 10 432 kilotonnes of CO2e.
The under-representation of farming and forestry activities is due to a number of difficulties and complexities associated with the monitoring and verification of such projects. The European Union Emissions Trading Scheme (EU ETS) in fact does not allow any offsets from LULUCF projects. Nevertheless, since 2008, credits from forestry projects globally have attracted a growing market share, mainly in response to the recent importance of such issues in international UNFCCC negotiations.
Agricultural soil projects, on the other hand, have remained few, and their credits relatively cheap. Because of uncertainty in the science of soil carbon the only offset market that would verify and accept those credits was the Chicago Climate Exchange (CCX). Since the closure of the CCX in December 2010, there has been no accredited platform for the creation and trading of soil carbon credits. A number of offset providers are currently considering methodologies for various soil carbon-related carbon abatement activities but when a decision may be reached is unknown. Soil carbon projects are not included under the Kyoto Protocol’s CDM and JI offset mechanisms.
As part of its mandatory emissions-intensity reduction scheme, the Canadian province of Alberta has enacted legislation to allow offset credits. These credits must comply with approved quantification protocols developed by the government in consultation with stakeholders. The CFI in many ways resembles the Alberta-based Offset Credit Scheme which is the only legislation of its kind and has been deemed relatively successful, although with a somewhat modest uptake to date.
The Bill creates a new form of personal property, known as an Australian carbon credit unit (ACCU). The scheme is targeted at farmers and landholders who can generate and hold ownership of ACCUs by undertaking eligible offsets projects. The Bill defines offsets projects as either a sequestration offsets project or an emissions avoidance offsets project. Broadly speaking, such projects either reduce or avoid greenhouse gas emissions from agriculture, landfill or feral animals, or sequester atmospheric greenhouse gases in forests or soil. More specifically, these might include:
- reforestation and revegetation
- avoided deforestation
- reduced methane emissions from livestock
- reduced fertilizer emissions
- manure management
- reduced emissions of nitrous oxide or increased sequestration of carbon in agricultural soils
- savannah fire management
- removal of feral animals
- reduced emissions from field burning residues
- reduced emissions from rice cultivation, or
- reduced emissions from legacy landfill waste from before 1 July 2011.
For ACCUs to be deemed genuine and credible, the abatement projects must be defined by certain rules that ensure scientific and administrative integrity. Every offsets project must follow a prescribed methodology specific to the type of project. If a methodology for a type of project does not already exist, the participant can propose and must gain approval for a new methodology. Project methodologies are legislative instruments, and therefore subject to Parliamentary scrutiny. The approval process for new methodologies includes scrutiny from a scientific body established through the Bill—the Domestic Offset Integrity Committee (DOIC).
There are some difficulties associated with defining which projects and project-types are scientifically, environmentally and administratively acceptable. For a project to deliver genuine carbon abatement, it must result in a reduction in atmospheric greenhouse gas that is additional to what would have occurred in the absence of the project (and in absence of the CFI scheme as a policy instrument). This is known as ‘additionality’. For the credibility of ACCUs, the Bill also requires that a sequestration project be permanent, meaning it must be maintained on a net basis for around 100 years. This is referred to as ‘permanence’. Both these terms are discussed in further detail below under the heading ‘Main issues’.
Without additionality, offset credits are worthless. In broad and general terms, the additionality concept is fairly straight-forward, but applying the theory to each project on a case-by-case basis is less clear-cut and often subjective. To manage this, the Bill provides that, through legislative instrument, a ‘positive list’ of projects will be detailed. Only project types on the positive list will be considered for the proposed CFI. However, projects on the positive list will still need to be assessed as being beyond ‘common practice’ to be considered additional. The positive list is matched by a ‘negative list’. Projects on the negative list will have been deemed to have adverse environmental or social impacts and are not eligible offsets projects.
Projects have differing ACCU crediting periods based on the relevant science and depending on the project type. For most agricultural projects, the ACCUs generated are issued immediately after a reporting period, as a lump sum. For native forest projects, the ACCUs generated are issued over a longer (usually 20-year) period. All sequestration projects have a small percentage of ACCUs deducted from their total to insure against temporary carbon losses after certain natural or human‑induced events. This percentage is referred to as the ‘risk of reversal buffer’ and has been set at 5 per cent.
ACCUs are held in a Registry that is defined in another Act, the Australian National Registry of Emissions Units Act 2011. This Registry is an electronic database. As well as recording ownership of ACCUs under the proposed CFI, the Registry records ownership of CERs, ERUs, and other units defined by the Kyoto Protocol, such as Assigned Amount Units (AAUs).
Under the proposed CFI, two types of ACCUs will be created: Kyoto-ACCUs and non-Kyoto ACCUs. They are distinguished by whether the project from which they derive is compliant or not with the Kyoto Protocol accounting system. Because they are compliant with the Kyoto Protocol accounting system, Kyoto-ACCUs can be used by Australia to meet its Kyoto Protocol obligation. The holder of Kyoto-ACCUs can apply to have them exchanged within the Registry for certain Kyoto units, such as ERUs or AAUs. AAUs, ERUs and other Kyoto units can be traded amongst those Kyoto countries that have agreed to binding targets (of which Australia is one). So a holder of Kyoto-ACCUs is likely to exchange these for AAUs, ERUs or other Kyoto units.
Currently, non-Kyoto ACCUs would only be able to be traded on the voluntary market internationally or domestically. For example, if an Australian business has made a company commitment to achieve carbon neutrality, it may wish to offset its emission by purchasing ACCUs (regardless of whether they are Kyoto compliant or not) from a CFI participant. However, if an Australian compliance market was to be established through an ETS, or a carbon price were rolled out through a tax, ACCUs might also be purchased to offset the requirements or liabilities under such schemes.
Finally, the proposed scheme outlines reporting, auditing and compliance rules to support the ongoing credibility of the credits. An administrative body, the Carbon Credits Administrator, is established to manage the scheme more generally.
The Bill was referred to the Senate Standing Committee on Environment and Communications for inquiry. In its report, the Committee recommended, subject to the other recommendations it made, that the Carbon Credits (Carbon Farming Initiative) Bill 2011; the Carbon Credits (Consequential Amendments) Bill 2011; and the Australian National Registry of Emissions Units Bill 2011 be passed. Coalition senators included a dissenting report and considered that the legislation should not be passed at present due to the critical aspects which remain unresolved. Additional comments by the Greens are also contained in the report.
The Bill was also referred to the House Standing Committee on Climate Change, Environment and the Arts for inquiry. In its report the Committee recommended that the three bills be passed.
The views of major interest groups who made submissions to these inquiries are discussed in further detail under the heading ‘Position of major interest groups’.
Finally, the Senate Scrutiny of Bills Committee commented on the bills in Alert Digest no. 4 of 2011 and also in Report no. 6 of 2011, which contained the Minister’s responses.
Although the CFI was announced in August, and draft legislation was released in November 2010, when the final legislation’s debate began in Parliament, the Coalition did not appear to have an official position towards it. It does stand to reason that the overall concept of the CFI would be acceptable to the Coalition as it leverages emission reduction projects in the land-use sector, in the vein of The Coalition’s Direct Action Plan on climate change. In fact, Greg Hunt MP, conceded that the Coalition ‘support[s] the principle, but ... ha[s] some significant issues with the construction and design’ of it.
From a statement issued by Mr Warren Truss MP, Leader of the Nationals:
...buying emission reductions from farmers under the government’s so-called Carbon Farming Initiative mirrors the Coalition’s direct action policy.
The major difference between the Government and Opposition policies is how they would be funded. The Direct Action Plan relies on government money, whereas the CFI is based on a market mechanism. This is a key difference and of concern to some Nationals. Senator Fiona Nash issued a press statement highlighting the threat the CFI could potentially pose to food production. ‘I am very concerned that we’ll see a shift in land use for the worse, with prime agricultural land being replaced with forestry,’ she said. Warren Truss has said that ‘these bills are fundamentally flawed and cannot be supported at this time’ and ‘this is just another subsidised tree planting scheme’.
Acting on behalf of the Opposition, Greg Hunt moved to delay the Second Reading debate until certain issues had been clearly and adequately addressed. These he outlined as:
- the threat to agricultural land
- the threat of expropriation of Western Australian crown land usage rights
- the certain inclusion of soil carbon
- the risk of offset permit fraud
- the issue of permanence
- the issue of additionality
- any other issues that the Senate Standing Committee on Environment and Communications inquiry report highlights.
The Senate Committee report included a Coalition Senators’ dissenting report which added to this list another five areas of concern:
- research relating to potential land use change being conducted by Australian Bureau of Agricultural and Resource Economics and Sciences (ABARES) and Commonwealth Scientific and Industrial Research Organisation (CSIRO) is as yet not complete
- how natural resource management (NRM) plans will interact with the CFI
- the shapes of the positive and negative lists
- the treatment of Native Title land
- the risk of reversal buffer.
The dissenting report also cited concern that the implementation and impacts of the CFI would depend heavily on whether the scheme was linked to a price on carbon. On 25 May 2011, the Coalition called for all regulations (the positive and negative lists and methodologies) to be finalised and made public before debate on the legislation continue.
Although the Greens support a Federal policy to increase carbon absorption through altered land management practices, they have concerns regarding some of the detail in the CFI legislation. In particular, they are generally not in favour of any policy instruments that may repeat the outcomes of previously managed investment schemes. Senator Christine Milne claimed that the design of the CFI could potentially create a surplus of offsets that could essentially flood the market. Aside from this, she is also concerned that the creation of ACCUs may generate dangerous competition for land between food, fibre, energy and carbon farmers.
The Greens included an Additional Comment to the Senate Committee inquiry report. Like the Coalition dissenting report, this comment from the Greens also drew attention to the importance of a carbon price in how the CFI will operate. Another issue was that of indigenous rights under the legislation. However, the major issue of concern to the Greens is the role of NRM groups in mitigating negative impacts and maximising positive co-benefits of CFI projects. Their view is that this role is important and requires increased levels of support. The Greens also see a need for amendments to improve the legislation.
Mr Robert Oakeshott MP supports the CFI legislation. To date, Mr Tony Windsor, MP has not given his final verdict on the Bill, however he generally supports a policy that catalyses action in agriculture and soils for the management of atmospheric carbon. He has long been advocating the inclusion of farmers in a carbon framework.
As a farmer, I believe that the great benefits of the carbon debate will not be in the carbon market but will be in the increased productivity that will come about by accumulating humus and organic matter in soils and with other practices, whether they be pasture technologies, no-till farming, conservation farming or a range of other things. 
Independent Member for Kennedy, Mr Bob Katter, MP made a statement in the beginning of the CFI consultation process that the scheme was plagued with opportunities for extortion. He claimed that the legislation would reward farmer actions with valuable credits without resulting in any net reduction of atmospheric greenhouse gases. He has not commented on the amended legislation.
Independent Member for Denison Mr Andrew Wilkie, MP has made no comment on the legislation; nor have Senators Nick Xenophon or Steve Fielding.
Some of these groups have shaped entire business plans around carbon farming activities and therefore strongly support the CFI. However, they rightly see it as simply a supply-side policy and would like to see it matched by a demand-side policy. In other words, they are advocates of an overall Australian carbon framework to which the CFI could provide offset credits, such as an ETS. On the detail, some see an issue with the requirement for carbon to be maintained over a 100-year period, and on the differences in crediting periods between projects. There is also some concern with the need for projects to be deemed beyond ‘common practice’, since this tends to disadvantage those that have chosen to undertaken early action. Where there is a risk of natural disasters affecting a project site, the legislation proposes a 5 per cent risk of reversal buffer. The Verified Carbon Standard Association (VCSA) suggests the nominal 5 per cent figure should be replaced with a sliding scale based on project specific risk assessments.  Existing offset accreditation bodies call for recognition of their proprietor standards, either through adoption of their methodologies or some sort of equivalence measure.
Emissions-intensive industry groups, represented by the Australian Industry Greenhouse Network (AIGN), do not see the need for the CFI. The AIGN notes that Australia is on track to meet its commitment under the first phase of the Kyoto Protocol, and as such the CFI is redundant. According to the AIGN, until a broad economy carbon price is rolled out, the CFI creates unnecessary policy uncertainty.
There is overarching support for the proposed CFI from the forestry sector. Nevertheless, some groups are worried that small-scale growers are unlikely to participate in the CFI because of its complexity and uncertainty as well as its costly processes. A broad carbon price in Australia is sought to increase the price of and demand for offset credits.  Forestry groups also call for more clarity on the concepts of additionality and permanence. Many believe a 100-year commitment is major impediment and disincentive.
The farming industry also supports the CFI but has some serious concerns. The National Farmers' Federation (NFF) believes that the administrative and technical procedures of the CFI are too costly. The NFF has claimed that more investment is needed in research and development and education for the farming sector to properly benefit from the CFI. They would also like to see the scheme linked to a national carbon price with an unrestricted acceptance for ACCUs. The New South Wales Farmers Association has gone one step further than the NFF claiming that before the implementation of a carbon price in Australia, the CFI is premature. It believes any non-Kyoto compliant ACCUs endorsed under the CFI will become redundant once an Australian carbon price is established.
One issue of concern specific to the agricultural sector is the immaturity of the science in relation to soil and plant carbon. There is still much uncertainty regarding the storage of carbon in soils and plants through variable weather and climate. This concern reinforces the NFF’s call for further research funding. It also reinforces the views of many in the sector that the CFI’s requirement to commit to 100-year carbon storage arrangements is unreasonable.
There has also been some apprehension within the farming sector over the heavy emphasis of regulations over legislation in the scheme. According to some, this bias has led to a lack of clarity regarding which agricultural projects may or may not be included in the CFI and has made it difficult to assess the likely effectiveness of the legislation. This and other details of the Bill have led farmers to argue that the CFI legislation favours forestry projects over agricultural projects. They believe that forestry will slowly ‘creep’ into agricultural land. 
There are mixed views amongst environmental and conservation groups regarding the CFI. Many are unsure about the potential outcomes, believing these could either reinforce or actually weaken existing biodiversity. Some have called for links to be established with Australia’s commitment to the United Nations Convention on Biological Diversity. Another suggestion has been to create a Biodiversity and Climate Fund ‘for the protection and restoration of Australia’s terrestrial and marine ecosystems’ with proceeds coming from the CFI and any eventual carbon price mechanism.
There is little homogeneity in the views of various environmental groups on the key elements of the CFI. Most disagree on issues such as the need to sustain carbon storage for a 100-year period, the risk of reversal buffer, the additionality clause, how native forests should be treated, or even the potential linkage with a carbon price scheme. The only consensus is guarded enthusiasm and a certain apprehension.
The waste and recycling sector strongly support the CFI. The Australian Landfill Owners Association (ALOA), representing the majority of landfill owners in Australia, has voiced just one concern. This is the fear that a low ACCU price will not engage smaller landfill sites in the CFI because the capital cost of methane capture equipment is excessive for sites emitting less than about 25 000 tonnes of CO2e.
As a transitionary measure into the scheme, some in the landfill and alternative waste treatment sector have called for automatic accreditation of projects already approved under the previous GFS and Greenhouse Gas Abatement Scheme (GGAS), without the requirement to demonstrate additionality. Alternative waste treatment providers are a special case. Under the proposed CFI, they can receive ACCUs for projects undertaken since 2010 and until the start of any carbon price scheme, but they cannot trade credits from projects undertaken through the GFS. This does not recognise early movers and in fact disadvantages those who may have based business plans around previous policy decisions.
One perverse outcome of the proposed CFI legislation, according to the Australian Council of Recycling Inc (ACOR), is that it tends to favour waste disposal over recycling. This is because the legislation explicitly includes methane capture from landfill as an eligible emissions avoidance, but does not include recycling or resource recovery. ACOR suggests that
A better and cleaner approach legislatively may be to define all resource recovery and recycling sector activity as an eligible offset project, with defined unit entitlements for the various materials recycled, and thereby encourage all ‘recycling as carbon abatement’ projects to garner the potential to monetise the carbon abatement that they deliver.
Traditional land owners support the intent of the CFI and are keen to engage with it. Centrefarm Aboriginal Horticulture Limited has created a not-for-profit fund, the Aboriginal Carbon Fund Limited, to assist with and promote indigenous Australian CFI projects and the trading of resulting ACCUs. Nonetheless, almost all indigenous groups have highlighted issues with the CFI’s treatment of native title land holders, particularly non-exclusive native title holders. Since almost 4.5 per cent of Australia’s total area is non-exclusive possession native title land, the Government has said that there is an ongoing consultation process in this regard.
Another issue relates to the definition of additionality for the eligibility of a project. There is concern that the terms of additionality would exclude indigenous groups from taking advantage of some state and local programs and funding in conjunction with the CFI.
Finally, under the Bill’s requirement for permanent carbon storage, there is a ‘disparity between the 100-year commitment required under the Bill and a 40-year limit on the power of Indigenous Land Trusts to enter agreements affecting land under other federal law in the Aboriginal Land Rights (Northern Territory) Act’.
State and local governments have been active in the consultation process and generally support the Bill. They raise many issues raised by other interest groups. The Australian Local Government Association is also unsure of local government rights under the CFI.
Currently there is uncertainty, whether ‘local’ government expenditure will be eligible for crediting under the CFI. Under the previous carbon offset generation program ‘Greenhouse Friendly’ local government facilities were recognised as offset generators. However, under this legislation the position of such operations is not clear. Local government was an enthusiastic supporter and participant in ‘Greenhouse Friendly’, and looks to the opportunity that the CFI would provide. The status of local government facilities requires considerable clarification within the legislation.
The Government has stated that:
The total cost of the Carbon Farming Initiative is capped at $45.6 million over four years, with the following profile: $4.4 million in 2010-11, $16.1 million in 2011-12, $13.1 million in 2012-13 and $11.9 million in 2013-14. This includes $4 million to provide information about the scheme to land mangers via Landcare.
The $4 million provided to Landcare will be used to implement regional workshops, national forums and training material. The breakdown over the four years is: $0.3 million in 2010-11, $1.45 million in 2011-12, $1.3 million in 2012-13 and $0.95 million in 2013-14.
The biggest challenge to the CFI, and on which the success of the scheme depends, is ensuring ACCUs represent genuine reductions in atmospheric greenhouse gases. The technicalities of the Bill in relation to this are complex and controversial. This is in part because the science of land-based carbon management is still developing. As already alluded to, the credibility of ACCUs, and the success of the scheme, are reliant on certain integrity standards, namely additionality, permanence and leakage.
In the Government’s draft CFI legislation, the additionality assessment was subject to a ‘financial additionality’ test. A project would not be acceptable if it was already economically viable before being credited with ACCUs. In other words, if a project had financial co-benefits to carbon storage, such as increased productivity and therefore income, and this financial co-benefit was sufficient to justify the existence of the project, then the project would be ineligible for the CFI. This clause was an issue of major concern to stakeholders, and was removed through the consultation process. In its place, the Government has proposed a new way of defining additionality. The Bill now refers to the need for a project to be ‘of a kind specified in the regulations’. The Explanatory Memorandum explains that ‘the regulations will list activities or types of projects which are additional. This is referred to as a ‘positive list’’.
For a project to pass the CFI additionality test and therefore be included in the ‘positive list’, it must be considered by the DOIC, and it must not be accepted as ‘common practice’ in the relevant industry or environment. The Bill explicitly states that the test for ‘common practice’ will ‘factor out the impact of the scheme’. The definition of ‘common practice’ is a grey area and difficult to formally apply. It also varies by State and bioregion. Additionality has been an issue of contention amongst prospective CFI participants as it introduces uncertainty into the scheme and makes it difficult to assess the legislation before regulations have been developed. However, for ACCUs to be recognised in international voluntary and compliance markets, additionality is a necessary clause. Without international recognition, demand for ACCUs will be reduced. This is likely to lead to oversupply making the ACCUs essentially worthless.
As well as being additional, greenhouse gas abatement from CFI projects must be permanent. In the Bill, permanence is considered a 100-year period. Although different offset schemes tackle the issue of permanence differently, the choice of a 100-year period is not out of line with the norm. Nevertheless, it does pose a challenge to CFI participants and could be a deterrent for some.
In ensuring that the carbon retention is assured over the designated time horizon, the Bill defines a ‘risk of reversal buffer’. The ‘risk of reversal buffer’ is a percentage deducted from the total expected abatement figure to insure against the risk of losses. The default for this buffer is 5 per cent unless otherwise specified by regulation. There has been some debate over the 5 per cent buffer. Greenpeace has called for a stronger buffer, closer to 50 per cent, while The Climate Institute and others suggest a sliding scale where the percentage is based on a risk assessment.
Reflecting the voluntary nature of the scheme but maintaining its integrity in relation to permanence, the Bill requires that if a project participant chooses to end or reverse the project they must return as many ACCUs as have been credited. In practice this means that the farmer or forester would need to purchase ACCUs from the market to match the number they had received (and probably sold). However, as ACCUs prices are predicted to increase, any such temporary participant in the scheme is likely to come out at a loss. The Wentworth Group of Concerned Scientists has suggested that this could actually be a strength rather than a weakness of the scheme as it lowers the incentive to participate for those who do not have a long-term view for their land.
One final factor for determining the credibility of ACCUs is leakage. If efforts to reduce atmospheric greenhouse gases in one place, by one activity, lead to increases of such gases somewhere else or in some other form, it is referred to as leakage. The Explanatory Memorandum distinguishes between two types of leakage: direct and indirect.
Direct leakage is defined as any increase in emissions within the scope of the project, as a result of the project. For example, if a dairy farmer decides to modify the cows’ diets to reduce emissions of methane from enteric fermentation, but this new diet results in an increase in the production of manure (and therefore methane and nitrous oxide emissions), then direct leakage has occurred. This type of situation is factored into the Bill.
Indirect leakage is defined as any increase in emissions outside the scope of the project. The Explanatory Memorandum provides the example of reducing emissions on one property by destocking beef cattle, and this resulting in an increase in stock numbers on another farm since the demand for beef remains constant.
Because the CFI is founded on a project-by-pro8ject basis, indirect leakage is difficult to monitor and control. As such the Bill makes no allowance for it. The Explanatory Memorandum states that:
The Department of Climate Change and Energy Efficiency is working with stakeholders to identify streamlined ways to account for leakage. Streamlined accounting treatments developed through this process would be incorporated into the relevant methodology determinations.
Problems of leakage have the capacity to undermine the environmental integrity of the scheme and lead to unsubstantiated claims of carbon abatement.
Although the CFI is unambiguously targeted at farmers, who do not generally have much spare time (least of all for government bureaucracy), its demands on participants are arguably complex and protracted. In its submission to a parliamentary inquiry, the Queensland Murray-Darling Committee put it thus:
The Commonwealth has inadvertently assumed that rural landholders have a level of literacy and acceptance of Climate Change and associated carbon policy terminology so as to be able to engage in this debate. This is despite extensive periods of severe drought, and in many areas now severe flooding, consuming agricultural businesses time and efforts over the last decade. “Information and tools to help farmers benefit from Carbon markets will be available on the DAFF website” is insufficient in terms of communication of this complex topic to such a diverse and dispersed group.
Through the consultation process, the Government was alerted to the complex and costly nature of the scheme. A number of changes were subsequently made to streamline operations and reduce the number of required forms and reports. However, significant barriers to participation still remain.
One such barrier may be the determination of methodologies. For a project to eligible under the CFI, it must be covered by an approved methodology for carrying out the project and measuring/monitoring the net carbon abatement. If relevant methodology does not already exist, it must be developed and approved. This involves an iterative multi-step process and requires a high level of expertise in carbon science, management and accounting. It is likely that this level of understanding would be beyond most farmers. Consultants could be hired to manage this process, but such endeavours can be costly and may not be economically justifiable to most farmers or land owners. According to the ABARES:
These costs have considerable consequences for the Australian agricultural offset market. The majority of Australian farms emit less than 1 000 tonnes of CO2-e a year .... Therefore, most agricultural abatement offset projects in Australia would be small scale. The associated transaction and administration costs could be a possible deterrent to participate in the CFI.
If the Bill assumes that experts, not farmers, will be the methodology applicants, it provides no incentive for such experts to engage in the long and demanding methodology development and determination process. The result is likely to be a shorter list of projects, developed mostly by the Government and its agencies.
Carbon management activities on Aboriginal lands have long been seen to have potential. They present an opportunity to drive sustainable poverty alleviation in Aboriginal communities and offer a low-cost way to assist Australian companies with their carbon abatement costs—and through this assist Australia with carbon abatement. To maximise this potential, the Bill includes provisions intended to address some of the problems that might arise when applying it to Aboriginal lands.
Firstly, there is the problem of determining the project proponent. The proposed legislation requires that the project proponent hold the legal right to carry out the project, be able to pass a `fit and proper person' test and be responsible, jointly and severally, for fulfilling all obligations under the scheme. This includes paying penalties for non-compliance. However, when the proponents are the common law holders Aboriginal and Torres Strait Islander land this determination presents a practical problem. To avoid all common-law holders having to be individually assessed against the `fit and proper person' test and individually subject to penalties, the Bill deems the relevant registered native title body corporate to be the project proponent, regardless of whether the native title is held on trust or not. Where a registered native title body corporate is taken to be the project proponent, the Bill requires that any units issued must be held in a special native title account on trust for the common law holders, to ensure that the common law holders accrue the benefits of any project.
Secondly, there is the problem of determining the right to carry out a project. It is not clear whether native title could include a right to carbon sequestration as native title rights are sourced from traditional laws and customs which may not include the recently identified right to benefit from carbon stored in the land. To avoid native title holders needing to seek costly court determinations to confirm their carbon sequestration rights, the Bill takes the registered native title body corporate to be the project proponent. However, this is only the case where the land is exclusive possession native title land, there is a registered native title body corporate, and no other person (except for the Crown) holds the carbon right or the legal right over the project. If the exclusive possession native title is overlayed by another interest, the registered native title body corporate would need to obtain the consent of the other interest holder before any project could proceed. The Bill does not, however, provide any special treatment for non-exclusive native title because non-exclusive native title interests, such as native title access or usage rights, are thought less likely to include carbon sequestration rights.
Thirdly, there is the problem of recognising the rightful participation of native title holders and of transferring carbon sequestration rights. The Bill provides that a native title holder (exclusive or non-exclusive) may still hold the carbon sequestration right and the legal right over the project, if this right is, for example, recognised in a consent determination. The Bill also provides that other parties may also have rights if, for example, agreed through an indigenous land use agreement. So although the default proponent is the registered native title body, and native title cannot be transferred, individuals and companies can be allowed to undertake projects on native title land. Even when rights are not recognised to lie elsewhere, and the registered native title body corporate is deemed the project proponent, the Bill provides that regulations require that a registered native title body corporate consult with, and act in accordance with the directions of, the common law holders in relation to anything done by the project proponent. The latter would mirror section 58 of the Native Title Act 1993 that provides that affected common law holders must consent to any decisions by the registered native title body corporate affecting native title. The Government stated in its Explanatory Memorandum that it considered this approach to be beneficial because:
all native title holders may participate in the scheme;
exclusive possession native title holders do not have to establish that native title includes rights to carry out projects and carbon;
common law holders do not have to undergo the `fit and proper person' test for scheme registration;
common law holders would not be individually responsible for any liabilities under the scheme; and any ACCUs are protected on trust for common law holders.
Under the requirements of permanence, all project land (whether native title land or land rights land) can become subject to a carbon maintenance obligation. This obligation may affect not just those with the right to farm carbon on the land but also others with an interest in the land (such as mortgagees, easement holders or owners of leased land). The Bill provides that each person with an `eligible interest' must give consent to an application for a sequestration project. Where land rights land is, under State or Territory legislation, less than freehold the Minister responsible for the land rights land is regarded as having an eligible interest. On Crown land legal interests or estates derived from the Crown are recognised as eligible interests. The interests that might be relevant to Native title land are so broad and the possible interactions between this Bill and the Native Title Act 1993 are so complex that the Government has declared its intention to seek further advice:
Given the practical and legal complexity of the interaction of the scheme with native title, the Government intends to undertake further consultation with a broad range of stakeholders and complete detailed legal analysis before reflecting a considered approach in amendments to the bill.
According to the Government’s own calculations, even the most optimistic scenario results in less than 23 Megatonnes (Mt) of CO2e sequestered or avoided in 2020 through the CFI. This is less than 15 per cent of the total abatement required under the bipartisan agreement to reduce greenhouse gas emissions by 5 per cent (160 Mt of CO2e) by 2020 on 2000 levels. Of this potential abatement through the CFI, more than 80 per cent is expected to come mainly from forestry activities with less than about 4 Mt of CO2e in 2020 from agriculture. This contribution from agriculture accounts for less than 2.5 per cent of the targeted 160 Mt of CO2e. Yet agriculture currently contributes 15 per cent of Australian greenhouse gas emissions and is the second largest emitting sector in the Australian economy, after electricity generation. From this, it seems the uptake of the CFI is expected to be low and the impact modest. It will also be highly dependent on the demand for ACCUs, which will be determined by any forthcoming Australian carbon price and international commitments.
In its submission to the Senate inquiry, the ABARES noted that ‘Future demand for carbon offset credits is intimately linked to the ongoing processes aimed at establishing long-term, credible carbon pricing schemes and carbon accounting rules, both nationally and internationally.’ Certainly, the demand, and therefore price, for ACCUs would be stronger and more certain if such credits were accepted to offset liabilities under a domestic compliance market, such as an ETS or carbon tax. However, in its consultation paper, the Government was non-committal on this important issue:
Whether or not CFI credits can be used to meet carbon liabilities under a domestic carbon pricing mechanism is a matter for future Government decision-making, following consideration of a carbon price by the Multi-Party Climate Change Committee.
Nor did the Explanatory Memorandum, under the heading ‘Interaction with carbon markets’, contain any specific reference to a national compliance market.
In his sixth update paper, Professor Garnaut argued for linkage between the CFI and an Australian compliance market. However, he also built a case for limiting the amount of offset credits accepted, at least in the early stages under a fixed price scheme. This is primarily to ensure budget neutrality of a carbon price scheme, but also to guarantee that mitigation efforts in high-polluting sectors are not weakened.
A limit of 4 per cent in 2012, rising by 0.75 percentage points per cent a year to 10 percent in 2020 is suggested for permits used by liable entities to acquit their responsibilities through the use of Kyoto –compliant offsets. A limit of 2 per cent in 2012, rising by 0.25 percentage points per cent each year to 4 per cent in 2020 of the total permit revenue is suggested for purchase of non-Kyoto credits by the regulatory authority. These limits to acceptance of Kyoto-compliant offset permits from liable parties, and for the purchase of non-Kyoto credits by the regulatory authority are arbitrary. They will allow strong growth in and high levels of sale of land-based offsets.
The concept of capping the number of credit units available to a domestic carbon pricing scheme has gained some support from such groups as The Climate Institute, the Wentworth Group of Concerned Scientists and in fact Greenpeace. However, by some others it is seen as a distortion to the market and a barrier to CFI uptake. The Multi-Party Climate Change Committee, established by the Government to ‘explore options’ for a carbon price (and to gain enough support to form Government), is currently ‘considering the link between the CFI and the Government’s plans to introduce an emissions trading scheme in Australia.’
Although Australia’s LULLUCF offset options under the Kyoto Protocol are restricted by article 3.4, two thirds of the CFI’s abatement potential is expected to come from Kyoto-compliant activities. The international compliance market is therefore expected to account for a sizeable share of the demand for ACCUs. Yet, the first commitment period of the Kyoto Protocol ends in December 2012 and large shadows of doubt hover over the continuance and likely future form of the treaty.
At the latest UN climate change conference, which took place in April in Bangkok, no agreement was reached on the second commitment period to the Kyoto Protocol. Many countries highlighted the importance of adopting such as agreement before the end of the 2012, so that there is no ‘gap’ between the two commitment periods. As it took 10 years after the Kyoto Protocol was first adopted in 1997 to determine all the operational and compliance rules before its start date in 2007, many believe that there is not enough time to complete these new negotiations; even considering that many of the rules from the first commitment period will form the basis for the second commitment period. As well as the United States, who was not party to the first commitment period of the Kyoto Protocol, Russia and Japan have advised that they may exclude themselves from any subsequent commitment period. This has added to uncertainty surrounding an international agreement post-2012.
Should an agreement be reached, and resemble the first commitment period in any significant way, there is has been no clear statement on what Australia’s decisions will be with respect to article 3.4. Yet these decisions would have an important impact on the CFI and the likely demand for ACCUs.
Therefore, the international compliance market, while the biggest market available to CFI participants, provides investor certainty only until December 2012. Since Australia is on track to meet its 2012 Kyoto Protocol target even without factoring in the CFI, the majority of ACCUs will probably be traded to other Kyoto parties looking to balance their own carbon accounts. Such trades will be made mostly from 2012 to 2014 and during the true-up period (but only on abatement that occurred before 2013).
Because of Australia’s decision under article 3.4 of the Kyoto Protocol, and because of the uncertainty in the science of agricultural carbon management, the CFI is likely to favour forestry projects over agricultural projects. As the Government’s early estimate suggest, more than 80 per cent of abatement under the CFI is likely to come from forestry activities. This bias towards tree plantations could result is a number of perverse outcomes.
First, there is a fear that abundant and misplaced forestry projects could impact on water availability. Second, if the resulting plantations end up being mainly carbon-rich monocultures, then biodiversity could be affected. Third, there is the danger that valuable cropland will be transformed into large sections of forests. Theoretically this could result in reduced food production; but the danger may be overstated. For the cost-effectiveness of tree plantations to outweigh that of agriculture, the price and price certainty of ACCUs would need to reach some critically high value. At least in the short-term this is not expected to happen.
In response to these risks, the Government has proposed positive and negative lists to be specified in regulations. A project on the negative list is ineligible as a CFI project. However, not all those projects listed on the positive list are eligible. As well as being listed on the positive list for a project to be eligible it must gain approval under any relevant natural resource management (NRM) plan, if one exists for that project area.
While these measures go some way in resolving the risks of perverse environmental outcomes, there are questions as to whether they are adequate and scientifically rigorous.
This simple power to make regulations may not be sufficient to address the perverse impact risks associated with offset projects, nor is it likely to give stakeholders sufficient certainty about what projects may be excluded from ACCU eligibility and when.
There have been suggestions that the Environment Protection and Biodiversity Conservation Act 1999 (EPBC Act) may provide a more credible framework for assessing the environmental impact of LULUCF projects. For example, for each bioregion, thresholds could be determined to limit the amount of allowable reforestation. Once the threshold of a given bioregion is reached, any new forestry projects would need assessment and approval under the EPBC Act. Such vetting could take into consideration environmental, social and economic factors. Bioregions with significant forest coverage would have a threshold set relatively low, whereas sparse bioregions may be assigned more lenient thresholds. The weakness of this approach is that, until a threshold is attained, there is no spatial scrutiny of projects. That is, until a threshold is reached and vetting under the EPBC Act is triggered, carbon forests could appear anywhere within a bioregion, even if that project location could have important adverse impacts on biodiversity or water management.
Another suggestion, and alternative to the positive and negative lists, has been a heavier reliance on, and linkage to, regional NRM and land use plans:
The most effective approach for optimising carbon farming offsets at the appropriate scale is for state, territory and local governments to link regional NRM plans across Australia to land use planning schemes and zone land according to its suitability for carbon farming offsets. Land use planning schemes can then guide carbon farming offsets into areas of highest benefit and away from areas of risk, without significantly undermining the terrestrial carbon market.
While the suggestion has merit it also raises some issues. Firstly, NRM plans are currently not designed for such purposes. Regional NRM bodies will need significantly more resources if they are to take on this new role. Also, some oversight would be needed to ensure that certain standards exist and are upheld across all NRM plans nationally. Senator Milne has commented on the lack of Commonwealth scrutiny of NRM plans:
I am very concerned that there is such unevenness around the country in the quality of the NRM plans and the differences in local and state regulatory environments, and there is really no Commonwealth power here to do anything for local and state government in relation to that or indeed taking account of the NRM plans.
Another potential perverse outcome of the CFI relates to its interaction with existing and future policy instruments at the Commonwealth, State and local levels. Because of the additionality rulings, early movers—those who have made voluntary efforts towards biodiversity and carbon retention by placing a conservation covenant on their land—are now not able to benefit from their actions through the CFI. Similarly, any participating in the Government’s Environmental Stewardship program under the Caring for Country initiative would also be excluded from CFI eligibility—and vice versa. In reaction to this, some are now reticent to adopt new covenants or engage with similar programs. According to the Tasmanian Land Conservancy, Conservation Land Trusts Alliance,
over the last three years we would have seen 30 to 50 per cent of the people who appear to be very interested in doing a covenant holding back and citing uncertainty about potential carbon markets as the reason for holding back.
As a partial solution, Senator Milne proposes that a fund be created from a proportion of any carbon pricing revenue and that it be used to maintain and enhance existing carbon stocks. In general though, perhaps there needs to be further investigation into the potential of integrating or streamlining some schemes. Without broader guidelines on how the CFI should interact with other government schemes, there may be pressure put on governments, particularly at the local level, not to adopt new legislation that might affect the additionality of projects.
The CFI charts new legislative ground. Australia will become the first country to legislate a carbon offset scheme for farming and forestry projects, at a national level. Such pioneering action comes at a risk. The robustness of the scheme’s administrative requirements will be tested, perhaps not immediately, but certainly as the projects grow in number and type. Theft, fraud, auditing requirements and reviews are all salient issues, especially in light of the recent problems that arose from the Government’s Green Loans and Home Insulation Programs. Another potential administrative weakness of the CFI concerns the way projects are listed in the Registry alongside community and environmental co-benefits.
According to the Bill, CFI participants will be able to list information about environmental and/or community benefits associated with an offsets project and the ACCUs deriving from it. The difficulty in associating such co-benefits with quantitative tradeable credits is that the attribution within each ACCU becomes subjective. At the core this is not a problem. Already soil carbon ACCUs are likely to sell for a much lower price than, for example, forestry projects, for a number of reasons already mentioned. However, where there exists a plethora of different cultural values, the inclusion of co‑benefits could lessen the credibility of ACCUs.
In the Explanatory Memorandum, the Government proposes a standardised co-benefits index:
The Government will develop a co-benefits index to provide a low-cost, credible standard for co-benefits, which can be recognised easily within the carbon market. This will assist project proponents to obtain a premium for ACCUs from these projects in the voluntary market.
In doing so, the Government acknowledges the risk of including co-benefits, and goes some way towards remedying it. However, for co-benefits to add real value there needs to be some sort of third-party assessment and an ongoing review of each attributed co-benefit:
By failing to provide ongoing Monitoring, Reporting and Verification on co-benefits, the CFI scheme will run a substantial risk of losing credibility, should it be found that a single project is failing to deliver on its claims. In such a controversial and politically sensitive market as carbon, there are many parties with an interest in damaging the credibility of a scheme. To leave an ‘open goal’ in this respect would be a strong mistake...
As is common in carbon markets globally, CFI credits will exist only as entries in an electronic registry, the integrity of which is still to be tested. Recently, the security of carbon registries around the world has been put to question. Over the past 18 months, more than 3 million offset credits from the EU ETS and the Kyoto Protocol have been reported stolen through cybercrime. The majority of these have later been found back in circulation. The security breaches have been so serious that in January 2011, the EU was forced to close down registries and all trading for over a week. A number of spot emissions exchanges also stopped trade for related problems.
The existing registry used to account for Australian Kyoto Protocol units will be given a legislative basis under the Australian National Registry of Emissions Units Act 2011, if it is passed. The same statutory registry will then bring together both ACCUs and all of Australia’s Kyoto-compliant credits. To what extent this registry could be at risk of cybercrime is uncertain, but this will have direct bearing on the integrity of the market.
Auditing of reports and projects is essential for market confidence; however such requirements can be costly and administration heavy. Under the Bill, audits are generally required prior to crediting of any offsets and in some cases for approval of projects (for example if they are complex in nature). Further, compliance audits may be requested by the Administrator if there is a fear that a participant may be in contravention of the Act. All audits must be undertaken by an auditor registered under the NGER scheme.
In response to feedback from the early consultation process, the Government has already streamlined the audit requirements for small CFI projects. There is still the realisation, however, that there will be a need to increase the number of auditors qualified under NGER framework to fill this expanded role. Of course, this problem will only occur if the CFI is relatively successful.
Much can be learnt from the early experience of the global carbon market and specially the Kyoto Protocol’s CDM. According to the World Bank’s report, ‘procedural inefficiencies and regulatory bottlenecks have strained the capacity of the CDM infrastructure to deliver CERs on schedule, as too many projects await registration and issuance’. Such bottlenecks could affect the financing of projects and indirectly start to affect the quality of audits.
Before the end of 2014, the Minister must review the Act and its regulations. According to the Explanatory Memorandum, this is a ‘way of ensuring that it is meeting integrity principles, including that abatement is additional, sequestration projects are meeting permanence requirements, and that projects are not resulting in unintended outcomes’.
While a review is a necessary and a useful undertaking, the value of the exercise will depend heavily on the design of the review. How will the success of the scheme be measured? A low uptake in the first few years of the scheme may not be an indicator of failure. In fact, it may be an indication that the right safeguards are in place and that ongoing improvements in the science will lead to a gradual ramp-up in project numbers. Conversely, a high level of abatement may not indicate success of the scheme if it is at the detriment of investment into areas with the greatest future abatement potential.
A review will need to take a broader view of the scheme in the context of Australian conditions, both environmental and regulatory, and of international progress on climate change action. As a market mechanism, the success of the CFI could be variable and dependent on uncontrollable external factors.
The following section provides a brief overview of the key provisions of the Bill. For more detailed information refer to the Explanatory Memorandum.
The Key provisions outlined address the criteria for:
- recognition as an offsets entity, including the role of the Administrator in granting and cancelling applications for accreditation and the requirements imposed on multiple parties and
- declaration of an eligible offsets project, including provisions for obtaining consent, necessary regulatory approvals, et cetera and options for returning, varying and revoking the declaration.
The provisions also address the approval process for the project methodology, reporting requirements (allowing for the issue of ACCUs), monitoring and enforcement.
Finally, the provisions establish the Offsets Integrity Committee and Carbon Credits Administrator, prescribe publication of certain information, while making use and disclosure of protected information an offence (except in defined circumstances), and oblige the Minister to undertake a review of the legislation.
In order to take part in the CFI and thus receive ACCUs for an eligible offsets project, a person must be an accredited ‘recognised offsets entity’, that is, they must satisfy the ‘fit and proper person’ test. This test serves as one of a few screening devices to maintain the integrity of the CFI by lessening the prospect of ‘fraud, deceptive or unfair conduct, and non-compliance’.
Making the Application
A person may apply to the Carbon Credits Administrator (Administrator) for recognition as an offsets entity, but not before the 28th day after the commencement of clause 60, so as to prevent the assessment and recognition of offsets entities prior to the CFI’s commencement.
Clause 61 details the requirements for a person to make an application to become a recognised offsets entity. These form and manner requirements are that the application must be in writing, and must include additional information and documents as specified in the regulations. The application must also be accompanied by the fee (if any) specified in the regulations.
The Administrator may, by written notice, request that the applicant provide further information within a specified time period and may refuse to consider the application or take any further action in relation to the application, if that information is not supplied (clause 62).
Subclause 64(5) requires the Administrator to take all reasonable steps to make a decision on the application within 90 days of the application being made or further information being received. However, the validity of a decision made outside the 90 day period is not affected. Refusal to recognise the applicant as an eligible offsets entity must be given in writing by the Administrator (subclause 64(6)). Such a refusal is reviewable (clause 240).
Criteria for recognition as an offsets entity
Subclause 64(3) provides that the Administrator must not recognise a person as an offsets entity unless satisfied that they are a fit and proper person, having regard to such matters as:
- whether the applicant has been convicted of an offence against a law of the Commonwealth, a state or a territory, where the offence relates to dishonest conduct
- whether the applicant has been convicted of an offence against a law of the Commonwealth, a state or a territory, where the offence relates to the conduct of a business
- whether the applicant has been convicted of an offence against section 136.1, 137.1 or 137.2 of the Criminal Code
- whether an order has been made against the applicant under section 76 or section 224 of the Competition and Consumer Act 2010
- whether the applicant has breached the CFI Act or its associated provisions
- whether the applicant has breached the Australian National Registry of Emissions Units Act 2011 or regulations under that Act
- whether the applicant has breached the National Greenhouse and Energy Reporting Act 2007 or regulations under that Act, or
- any other such matters (if any) that that Administrator considers relevant.
If the applicant is an individual, the Administrator must be satisfied that the applicant is not an insolvent under administration. And, if the applicant is a body corporate, the Administrator must be satisfied that the applicant is not an externally-administered body corporate.
If the regulations do specify additional criteria, then the Administrator needs to be satisfied that the applicant has met those criteria. A person’s recognition as an offsets entity is not transferrable (clause 67).
Cancellation of recognition of offsets entity
Clause 65 provides that the Administrator may cancel the recognition of a person as an offsets entity where they are satisfied that the person is not a ‘fit and proper person’, having regard to the criteria which is the same as the ‘fit and proper person’ test set out in clause 64. It is not clear why clause 64 provides that the Administrator must refuse to recognise a person as an offsets entity unless satisfied they are a ‘fit and proper person’ whereas, clause 65 states that the Administrator may cancel the recognition of a person as an offsets entity if satisfied the person is not a ‘fit and proper person’ taking into account the same considerations.
Notification requirement where recognition criteria for offsets entities are no longer satisfied
When a certain listed event happens (a recognised offsets entity basically no longer satisfies one of the criteria for being a ‘fit and proper person’) then they must, within 90 days of that event, notify the Administrator in writing of the event (subclauses 84 (1) and (2)). Subclause 84(3) provides that a person must not facilitate in any way, directly or indirectly, contravention of the notification requirement. Subclauses (2) and (3) are civil penalty provisions.
Voluntary surrender of recognition
A person who is recognised as an offsets entity may surrender their recognition by giving written notice to the Administrator (subclause 66(2)). Multiple project proponents
It is possible for a project to be undertaken by a group who share the benefits, responsibilities and liabilities associated with that project both as a group and individually. This not only expands the participation in the initiative but it seeks to ensure the integrity of the scheme by making all applicants recognised offsets entities (clauses 135 and 145).
The significance of the project proponent
A project proponent assumes a significant role in this scheme because all ACCUs are issued to the project proponent. The project proponent assumes responsibility for the project and has the legal right to carry out the project. The legislation does not create any of these rights in favour of a person. They must be obtained on their own.
Clause 136 provides that in cases of multiple project proponents, they are able to nominate a nominee in relation to the project who is able to represent them in matters listed in clause 138 and to open an Australian National Registry of Emissions Units account on behalf of the project (subclause 140(2)).
In order to receive ACCUs an offsets project must be approved by the Administrator as an eligible offsets project. This is to reduce the likelihood of having projects which have adverse social and environmental consequences. The eligibility criteria also include a requirement that sequestration projects are only embarked upon with the consent of all interest holders in the land.
The declaration of eligibility will specify the project area, the name of the project, the project proponent, and spell out the attributes as required by the regulations (subclause 27(3)). The declaration will also state whether the eligible offsets project, is or is not an eligible Kyoto project (Clause 27(2)). Such declaration is not a legislative instrument (subclause 27(20)). And, the declaration may logically be revoked where it no longer meets the eligibility criteria (clause 35).
Making the Application
The process and requirements for the declaration of an offsets project are similar to those for a recognised offsets entity outlined in clause 61.
A person may apply to the Administrator for the declaration of an offsets project as an eligible offsets project, but not before the 28th day after the commencement of clause 22.
Clause 23 details the requirements for a person to make an application to the Administrator for the declaration of an offsets entity. These form and manner requirements are that the application must:
- be in writing
- include additional information and documents as specified in the regulations
- be accompanied by an audit report, if the project is of a kind prescribed in the regulations
- be accompanied by a copy an indigenous land use agreement, if it is relevant to the Administrator’s decision
- include a request under clause 92, if the project area was or the project areas were wholly or partly covered by a prescribed non-CFI offsets scheme
- if relevant to part or all of the project area, be accompanied by a statement of consistency relating to the regional natural resource management plan.
The application must also be accompanied by the fee (if any) specified in the regulations (paragraph 23(1)(i)). These fees are refundable where an applicant withdraws their application (subclause 25(3)). The purpose is to provide for instances where the Administrator may preferably inform the applicant if there are issues with their application, affording them the opportunity to withdraw and re-submit, rather than face rejection and squander the application fee.
The Administrator may, by written notice, request that the applicant provide further information within a specified time period and may refuse to consider the application or take any further action in relation to the application, if that information is not supplied (clause 24).
Eligible offsets projects
The types of projects allowed under the Bill are outlined in clauses 53 to 55. Eligible offsets projects are emissions avoidance offsets projects and sequestration offsets projects which may be classified as either Kyoto or non-Kyoto offsets projects. Clause 57 deals with the restructure of an eligible offsets project.
Excluded offsets projects are described in clause 56.
Declaration of an eligible offsets project
Subclause 27(3) requires that a declaration of an eligible offsets project must identify:
- the name of the project
- the project area(s)
- the project proponent
- attributes of the project as specified in the regulations
- a declaration that the project is subject to the voluntary automatic unit cancellation regime, if the application included a statement that it should be so.
Criteria for declaration of a project as an ‘eligible offsets project’
Clause 27(2) provides that the scheme Administrator must only declare a project as an eligible offsets project if the criteria in clause 27(4) have been satisfied. These criteria are designed to act as environmental safeguards. They include:
- the project is to be conducted in Australia
- the project is covered by an approved methodology determination
- the project passes the additionality test in clause 41 basically requiring the greenhouse gas abatement project to be new and not something that would have taken place anyway. This is to be determine by the so-called positive list created under this clause. Briefly, a project passes the additionality test if is of a kind specified in the regulations (having regard to the matters in subclause 41(3)), and the project is not required to be carried out by or under a law of the Commonwealth, a state or a territory
- the applicant is the project proponent and a recognised offsets entity
- if the project is a sequestration offsets project and the project area is on Crown land, the relevant minister of the state or territory has certified that the applicant holds the applicable carbon sequestration right
- if a sequestration project is on Commonwealth property, the relevant Commonwealth minister has certified that the applicant holds the applicable carbon sequestration right
- the project does not involve clearing native forest or using material obtained as a result of clearing or harvesting native forest
- the plan meets eligibility criteria (if any) specified in the regulations, and
- the project is not an excluded offsets project. An excluded offsets project is one whose operation would present a real risk of significant adverse impact on water availability, biodiversity conservation, employment, or the local community.
Consent must also be given by all relevant interest holders in the land. Where the land is subject to native title, the relevant participant in the scheme is the registered native title body corporate (paragraph 27(4)(k)). Consent must be in a form, in writing, approved by the Administrator (subclause 27(7)).
A declaration of a project as an eligible offsets project must not be made under subclause 27(2) if the project area(s) is subject to a carbon maintenance obligation (subclause 27(10)).
Subclause 27(11) provides a list of other circumstances in which a declaration of an eligible offsets project in relation to a new project must not be made. They must have regard to a notice given under clauses 88, 89, 90 or 91 in relation to the project (the prior project).
Permanence obligations need to be taken into account so that a declaration cannot be made for a new project where the land was part of a prior project where permanence obligations were not met. Outstanding permanence obligations would need to be met in relation to that land before a new project is able to be considered for declaration. Permanence obligations are an important environmental safeguard in the legislation. They are supported by clauses 16, 17, 90, 91.
In making a declaration of a project as an eligible offsets project, the Minister must be satisfied that the project proponent has obtained the necessary approvals from Commonwealth, state and local government planning, environmental and water requirements. Where these have not yet been met, the Minister may make the declaration conditional upon those approvals being obtained (clause 28).
The requirement for a carbon sequestration right to be held by the project proponent
Sequestration projects have criteria that apply only to those projects. Because they lend themselves to reversal, they are subject to permanence obligations. Thus for carbon sequestration projects there is a requirement that the project proponent holds the carbon sequestration right for all of the relevant project area. A carbon sequestration right is the exclusive right of the holder, to legal, commercial or other benefit from the sequestration of carbon dioxide in the relevant carbon pool on the project area (clause 43).
The Bill makes provision for recognition of carbon sequestration rights on native title land (clause 46). Specifically, there is a recognition that a registered native title body corporate for determined exclusive possession native title land is also the holder of the carbon sequestration right and can be the project proponent. It also remains open for native title holders to permit third parties to exercise carbon rights pursuant to an indigenous land use agreement (subclause 43(10)).
The Bill does not deal with the circumstance of holders of undetermined and/or non-exclusive native title. The Government has signalled its intention to consult with relevant stakeholders in relation to forms of native title other than exclusive possession. However, to the extent that the land vested or granted to Aboriginal or Torres Strait Islanders may be likened to freehold land and is registered on title and managed by a single legal entity, then it seems that the legal entity may be eligible to participate in offsets projects. Though, as already stated, consultation and the addition of further provisions will be needed to clearly deal with the notification and consent requirements when another entity, such as the Crown, has an eligible interest in the land.
Refusal to declare a project as an eligible offsets project
The Administrator must give written notice of such a decision to the applicant (subclause 27(18)).
Variation of a declaration of an eligible offsets project
Project proponents may apply to the Administrator to add or remove areas of land from the project. Requirements for such variation are provided for in clause 29.
Changes can also be made in relation to the specified project proponent(s) in the project declaration (clause 30). This change to the specified project proponent(s) would take place where there has been a change in the ownership of a project. Other administrative requirements accompany such a change.
Revocation of a declaration of an eligibility offsets project
A project declaration may be revoked
a) voluntarily by the request of a project proponent (clauses 32 - 33). Before the Administrator revokes the declaration, the project proponent must return the same number of ACCUs that were issued for the project.
b) unilaterally by the project Administrator in the circumstances listed below. However, where the Administrator intends to revoke the declaration, the current or new project proponent must be consulted so that they have an opportunity to address the issues or identify any mitigating circumstances (subclauses 34(3), 35(3), 36(3), 37(3) and 38(3).
A useful and practical suggestion has been made that:
any decisions regarding revocation or termination of a project should also consider including specific provisions to inform all interested parties of the decision to revoke the project, and thereby remove the liability attached to the land title.
Consideration must be given to the implications for cases of mortgagee re-possession. This would require financiers to become “eligible entities”. One option may be that the Government consider applying an exclusion from this requirement where properties are on sold within 90-180 days of possession.
Regulations may make provision for empowering the Administrator to unilaterally revoke an eligibility offsets project declaration in the following circumstances. However, project revocation is at the Minister’s discretion.
- where the declaration is subject to the condition that all regulatory approvals must be obtained before the end of the first crediting period and those conditions have not been met. Though, the Administrator must first consult with the project proponent before deciding to revoke the declaration (subclauses 34(1), (2) and (3))
- if a project fails to meet an eligibility requirement, specified for the project (subclause 35(2), see also subparagraph 89(1)(c)(i))
- where the project proponent ceases to be a recognised offsets entity, and if after 90 days, the person who is the project proponent, has not become a recognised offsets entity (subclause 36(2), see also subparagraph 89(1)(c)(ii))
- if the project proponent loses the legal right to carry out the project, and if after 90 days, the new project proponent is not a recognised offsets entity (subclause 37(2), see also subparagraph 89(1)(c)(iii)). However, prior to revocation the Administrator must consult with the multiple project proponents
- if false and misleading information was given to the Administrator in an application in connection with an application (subclause 38(2), see also subparagraph 89(1)(c)(iv))
- in the case of multiple project proponents, where the Administrator is not given the name of a nominee within 90 days (clause 139, see also subparagraph 89(1)(c)(v)).
- Transition from non-CFI offsets schemes
The transition of offsets projects from pre-existing prescribed non-CFI offsets schemes, for example the Greenhouse Gas Reduction Scheme and Greenhouse Friendly, is provided for under clauses 92 to 95. However, an existing project under a specified offsets scheme could only be transferred into the CFI if there is applicable methodology. A determination needs to be sought from the Administrator, specifying the number of credits issued for the project under the other offsets scheme (clause 92). This request must be in a form approved by the Minister and subject to the requirement that additional information be provided in order to make that determination (clause 93 and subclause 94(1) respectively). A request for a determination must be made within two years after the commencement of the CFI Scheme (subclause 92(2)).
Once recognised as an eligible offsets entity, the next step for the project proponent is to obtain project methodology approval from the Minister. These methodologies are required because the greenhouse gas abatement which is sought to be achieved by the eligible offsets project, needs to be capable of measurement and verification (paragraph 133(1)(b)). And, the methodologies should be consistent with relevant scientific results published in peer-reviewed literature (paragraph 133(1)(d)). Offsets project methodologies serve this function by creating the procedures for estimating abatement, as well as project-specific rules for monitoring, record keeping and reporting on abatement. Clause 106 provides that the Minister may, by legislative instrument, make a methodology determination. Methodology approval is based on the recommendations of an independent expert committee (the Domestic Offsets Integrity Committee) which considers the proposal in light of its compliance with offsets integrity standards in this Bill (subclause 106(4)). The proposal is subject to a mandatory public consultation period of at least 40 days (subclause 112(6)). This requires DOIC to publish methodology proposals on the DCCEE website and invite public submissions on each methodology proposal prior to approving the methodology (subclause 112(5)).
Subsection 106(8) enables a methodology determination to incorporate other instruments as in force or existing ‘from time to time’. The potential for uncertainty that incorporating materials by reference may create in the law, in addition to the considerations of unfairness for those who are under an obligation to follow a law made without scrutiny or ease of access to its terms, is perhaps a matter for re-consideration.
Clause 114 allows for variations to be made to project methodologies. Clause 123 enables the Minister to revoke a project methodology. However, before doing so the Minister is required to seek advice from the DOIC as to whether the methodology should be revoked.
On 25 May 2011, the Minister for Agriculture, Fisheries and Forestry and the Parliamentary Secretary for Climate Change and Energy Efficiency, announced savannah burning (improving fire management) as the first methodology to be released for public comment and possible inclusion on the positive list. The closing date for feedback is 30 June 2011.
The Bill requires project proponents to provide an offsets report, accompanied by an audit report (prepared by a registered greenhouse gas energy auditor) to the scheme Administrator (clause 76). The reporting period must not be shorter than 12 months and not longer than five years, providing project proponents with flexibility.
Clause 81 requires sequestration offsets project proponents to notify the Administrator in writing of a natural disturbance that causes or is likely to cause a reversal of carbon sequestration. Project proponents must also notify the Administrator if a project becomes inconsistent with a NRM plan (clause 83).
Once an eligible offsets project has been approved, the project proponent must prepare and submit offset reports. These reports are used as the basis for issuing ACCUs.
At the end of the relevant crediting period, which is dependent on project type, a certificate of entitlement for ACCUs (which must be applied for) needs to be submitted (clause 12). The Administrator may ask for additional information to be provided. The Administrator must issue a certificate if the matters set out in subclause 15(2) are satisfied. The Administrator then issues ACCUs into an Australian National Registry of Emissions Unit account (clause 11). Carbon credits generated under the project can be sold to individuals or companies in Australia or overseas. Kyoto Protocol consistent credits can be exchanged and sold overseas.
The unit entitlements for sequestration projects are dealt with under clauses 16 and 17. In brief, the unit entitlements attaching to sequestration projects (that are not based on protecting native forests from being converted and used as land) will be the amount of abatement which is measured according to the reporting period, minus the risk of reversal buffer, which has been set at 5 per cent as a point of commencement. Though, as information becomes available about the risks that may be associated with different projects, the regulations permit adjustment of this 5 per cent, so that the buffer operates with practical relevant application. This does not mean that the reversal buffer can be changed during a crediting period. Indeed for that period, it will remain stable so as to provide investors with certainty. The regulations may prescribe circumstances in which credits for native forest conversion projects can be received at the commencement of the project, rather than over a 20 year period.
The unit entitlements for emissions avoidance projects are provided for by subclauses 18(1) and (2).
What is a crediting period?
This refers to the period during which the methodology determination and risk of reversal buffer cannot be changed without the consent of the project proponent. The crediting period for offsets projects other than native forest protection projects is 7 years. Though, depending on the nature of the project, the regulations may allow for variations to this standard crediting period (subparagraph 69(1)(b)(ii)). The crediting period for reforestation projects is 15 years.
Six months prior to the end of a crediting period, a project proponent can apply for a new crediting period, referred to as a subsequent crediting period (subclause 70(2)).
Credits may be voluntarily cancelled and if so, they cannot be counted towards Australia’s Kyoto target.
Part 14 of the Bill provides the steps to be taken for voluntary cancellation.
Clauses 148—150 deal with the characteristics of ACCUs. Provision is made for the transfer of ACCUs between accounts within the Australian National Registry, in the name of the same person (clause 156). Transmission of ACCUs may also occur by assignment or by any other lawful means, provided that the specified procedure is followed (clauses 152 and 153).
Clause 157 allows Kyoto ACCUs to be exchanged for Kyoto units.
The Bill requires certain standards of record-keeping and project monitoring. Record-keeping requirements in relation to the preparation of an offsets report and methodological determinations are set out in clauses 191 to 193. Clause 194 deals with project monitoring. Civil penalty provisions apply for a failure to comply with these requirements.
Clause 196 provides for the appointment of inspectors for the purposes of the Act. Inspectors must be provided with identity cards which they must carry at all times when exercising their powers as inspectors. Clauses 198—201 set out the powers of an inspector in relation to monitoring compliance with obligations under the legislation. Clauses 203-208 provide that an inspector may only enter a premises as part of their monitoring function where they have obtained the consent of the occupier or with a warrant. An occupier is entitled to reasonable compensation for damage to their electrical equipment or, data or programs stored on that equipment as a result of an inspector carrying out their monitoring functions. Part 18, Division 5 provides that the occupier is entitled to observe the execution of a warrant, but they must provide the inspector with the facilities and assistance that is requested of them. The maximum penalty for a failure to comply is 30 penalty unit points ($3300).
Part 20 provides for the liability of executive officers of bodies corporate. In brief, where a body corporate contravenes a civil penalty provision and an executive officer was involved in the contravention, the officer will contravene a civil penalty provision.
Part 21 provides for civil penalty provisions for contravention of the Bill. The Senate Standing Committee for the Scrutiny of Bills raised queries and concerns in relation to the civil penalties provisions in the Bill. For details, the reader is asked to refer to Alert Digest No. 4 of 2011, pp 12–15. For example, the imposition of penalties of up to 2000 and 10 000 penalty units for each contravention for a person and a body corporate respectively, is arguably a trespass on personal rights on account of the amount of the penalty.
Part 22 deals with offences relating to administrative penalties.
Part 24 of the Bill provides for the review of certain decisions, which are outlined in clause 240. Certain decisions of delegates of the Administrator may be reviewed by the Administrative Appeals Tribunal following a process of internal reconsideration by the Administrator (clause 244). Certain decisions of the Administrator and the DOIC may be reviewed by the AAT (clause 244(2)).
Part 25 of the Bill provides for the creation of the position of Carbon Credits Administrator. Briefly, it sets out the functions of the Administrator, delegation of functions or powers of the Administrator, assistance to be provided to the Administrator by Australian Public Service employees and the use of consultants to assist the Administrator. Provision is also made for the Minister, by legislative instrument, to give directions to the Administrator in relation to the performance of his or her duties.
Part 26 of the Bill establishes the Domestic Offsets Integrity Committee. Briefly, it sets out the functions of the Committee, its membership and the qualifications for appointment of Committee members, and their period of appointment. Clause 260 provides that regulations may prescribe procedures, covering a range of matters, to be followed in meetings of the Domestic Offsets Integrity Committee. Clause 266 deals with the resignation of a Domestic Offsets Integrity Committee member and clause 267 lists the matters that the Minister is to have regard in deciding whether to terminate the appointment of a Domestic Offsets Integrity Committee member.
Part 12 of the Bill requires the Administrator to publish certain information about the Act. The following information relating to ACCUs must be published on the Administrator’s website:
- information about the issue of ACCUs, the name of the person to whom they were issued and the amount (clause 160)
- quarterly reports about the total number of ACCUs issued during that quarter (clause 161)
- publication of concise description of the characteristics of ACCUs (clause 162)
- information about any voluntary cancellation of ACCUs (clause 163)
- information about relinquishment requirements (clause 164) and information about the number of relinquished unit (clause 166)
- information about unpaid administrative penalties, the name of the person and the amount unpaid (clause 165)
An offence provision has been created for a person who is or has been a public official to disclose or use protected information unless one of the specified exceptions apply (clause 270). Protected information basically refers to information that has been obtained in one’s official capacity.
The Minister is under an obligation to ensure that the first review of the CFI is completed and a report tabled in Parliament by 31 December 2014.
The CFI is a carrot rather than a stick approach to atmospheric carbon reduction. It creates the incentive to take positive action by rewarding the agricultural and forestry sectors with carbon credits. As such it creates a supply of credits and a framework for trading them. However, the scheme, on its own, does nothing to stimulate demand. It merely assumes that demand for carbon credits exists through the voluntary market and the limited overlap with the Kyoto Protocol system. Unfortunately, this demand may be limited. So, although the CFI is an important and positive step in the direction of carbon abatement, it may have very little impact, at least in the early days.
As landholders gradually develop a better understanding of the mechanism, the scheme may grow in importance and deliver the confidence stakeholders require for further investment. This process may be expedited by the establishment of an economy-wide carbon price, in which case the CFI may be become an valuable instrument for reducing Australia’s total greenhouse gas emissions. However, it is a double-edged sword. As long as the CFI is in operation, agriculture and forestry are excluded from any eventual ETS, except as offset sectors. This restricts control over Australia’s land-based greenhouse gas emissions.
Nevertheless, and despite its potentially low impact, the CFI is essential for engaging the land sector in greenhouse gas abatement and helping Australia meet its Kyoto commitment. To leave this sector with no means of participating in the growing international carbon market would be irresponsible.
Members, Senators and Parliamentary staff can obtain further information from the Parliamentary Library on (02) 6277 2421.
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