Chapter 2
Integrity standards
2.1
Without effective integrity standards, the environmental objectives of
an abatement program such as the Carbon Farming Initiative (CFI) may not be
fully realised. The Carbon Credits (Carbon Farming Initiative) Bill 2011 (the bill)
contains various integrity standards which are designed to ensure that offset
methodologies approved under the CFI achieve genuine additional abatement.
2.2
The integrity standards required of a CFI project are as follows:
-
additionality – ACCUs will only be issued for abatement that
would not normally have occurred (this is known as the "additionality
test");
-
measurable and verifiable – estimates of abatement achieved by a
project must be measurable and verifiable;
-
leakage – the abatement achieved by a project is not offset by
increases in emissions as a result of the project;
-
internationally consistent – where appropriate abatement
estimation methodologies must meet internationally recognised accounting
standards so that abatement may be counted towards Australia's Kyoto target;
-
supported by peer-reviewed science – to ensure scientific
credibility, estimation methods must be supported by relevant science that has
been published in peer-reviewed literature and generally accepted by the
scientific community; and
-
accounting for cyclical variability – estimation methods for
sequestration projects are required to provide estimates which accurately
reflect cyclical changes in carbon stocks.[1]
2.3
A number of submitters raised concerns about the integrity standards, in
particular the additionality test and the permanence provisions. These are
discussed below.
Additionality
2.4
As discussed in Chapter 1, the additionality test is designed to ensure
that ACCUs are only issued for abatement that would not normally have occurred
and therefore provides 'a genuine environmental benefit'.[2]
In order to pass the additionality test, a project must not be "common
practice" in the relevant industry (or relevant part of the relevant
industry) or the kind of environment in which such a project will be carried
out (the common practice test).[3]
2.5
"Common practice" is not defined in the legislation but
instead will be determined by regulations.
2.6
The CFI utilises a "positive list" mechanism to streamline the
process for determining the additionality of a CFI project. Abatement
activities or types of projects that are determined by the minister (on the
advice of the Domestic Offsets Integrity Committee) not to be common practice
within an industry or region will be included on the positive list and
recognised as additional.[4]
The positive list will be contained in the regulations to the bill.[5]
2.7
Various submitters were concerned by the potential subjectivity of the
common practice test and the impacts of its application to existing and future
methodologies to sequester carbon or abate emissions. Other submitters took
issue with the lack of information about what may, or may not, be included in
the positive list.
Application of the common practice
test
2.8
The issues raised by submitters regarding the common practice test were
essentially twofold: the application of the common practice test to existing
(current) practices to improve carbon abatement or sequestration; and the
application of the common practice test to future practices which become widely
adopted and, therefore, common practice.
Impact on first movers
2.9
The common practice test and how it would affect individuals and
organisations who have already taken steps to abate emissions or sequester
carbon (first movers) was a specific issue raised by several submitters. Some
agricultural and indigenous organisations were concerned the common practice
test would result in the cessation of current abatement projects.[6]
2.10
The Carbon Farmers of Australia and Carbon Farming and Trading
Association (CFTA) claimed '...the ‘business as usual’ rule...penalizes
Landcare farmers and other progressive landholders who have taken up carbon
farming techniques early and rewards laggards who continue to degrade their
soils'.[7]
The association went on to describe this treatment of progressive farmers as:
...the ultimate perverse outcome. The impact of that is that
there will be property not under contract for carbon farming. By that I mean
that these progressive farmers will eventually sell out or pass the farm on and
there is no guarantee that that regime will continue. We believe that people would
not desecrate a carbon rich environment because of the obvious value of such a
thing, but it is not guaranteed.[8]
2.11
Similarly, the National Indigenous Climate Change Coalition (NICCC) was
concerned the additionality provisions would not '...provide recognition of the
conservation work already undertaken by Indigenous people on Aboriginal land'.[9]
The NICCC argued the exclusion of these conservation efforts would be
detrimental to achieving positive climate change outcomes and the ability of
these projects to engage 'with markets that can sustain this work'.[10]
The Conservation Land Trusts Alliance also had questions regarding the common
practice test and parcels of land already protected by covenants.[11]
2.12
To prevent progressive farmers from being penalised for practices they
currently use to sequester carbon, the CFTA recommended farmers be eligible for
credits for carbon they create in addition to a baseline, irrespective of the
method(s) they use to do so.[12]
Mr Michael Kiely, Chairman of the CFTA, was careful to point out, however, that
farmers 'should not be rewarded for what they are sitting on; they should be
rewarded for what they create'.[13]
2.13
In their submission, the Australian Network of Environmental Defender's
Offices (ANEDO) went a step further and recommended '[p]ositive incentives
(for example, a fund) should be provided to ‘early movers’ to ensure
fairness and remove perverse incentives to cease existing abatement projects'.[14]
Applying the common practice test
to future practices
2.14
The NSW Farmers Association was concerned by the application of the
common practice test to both existing and future practices to capture carbon or
abate emissions. The association argued the methods by which a farmer increased
or conserved carbon were less important than the fact the farmer had done so.[15]
On this basis, the NSW Farmers Association felt the common practice test would
discourage farmers from participating in the CFI scheme, and potentially penalise
those farmers that participate in the scheme and use practices which are not
currently common practice but become so in the future:
The way additionality is applied will be critical to uptake
of the scheme in the farm sector.
The aim of the CFI should be to facilitate and [motivate] farmers
to adopt climate friendly farming practices as quickly as possible. A threat to
withdraw this funding should practices become common, or prove to be profitable
in the absence of carbon credits, will be a red light to the majority of
commercial farmers.
Such threats also raise doubt about the practicality of raising
funding for projects with uncertain future cash flow.
While appreciating the difficulties posed by Kyoto rules
applying to additionality, a central principle of the CFI should be that if a
farmer increases or conserves carbon beyond a base line he will be paid for the
service. In this regard, financial additionality or common practice
considerations should neither exclude participation nor lead to later disqualification
of an established project.[16]
2.15
The Australian Plantation Products and Paper Industry Council (A3P) was
critical of the absence of a definition of "common practice" and
warned 'this definition needs to be handled carefully because it is a subjective
concept'.[17]
The A3P went on:
...there are varying degrees of ‘difference’ from common
practice, and many ways to assess what makes an activity suitably unlike common
practice to qualify as additional. It is possible that a single definition will
not be universally appropriate.[18]
2.16
Both A3P and the Australian Forest Products Association (AFPA; formerly
the National Association of Forest Industries) suggested the costs of complying
with the common practice test would discourage the forestry industry from
participating in the CFI.[19]
2.17
By contrast, the common practice test was criticised by Greenpeace
Australia Pacific for being too weak. Greenpeace recommended a '...far more
robust test of "would the abatement have occurred in the absence of the
CFI legislation"'.[20]
ANEDO agreed '[t]he additionality test must be strengthened' through the use of
'...a simple test of "would the abatement have occurred in the absence of
the CFI"'.[21]
2.18
With respect to additionality and the common practice test, the
Department of Climate Change and Energy Efficiency (DCCEE) provided the
following explanation:
...the Carbon Farming Initiative was designed for the
voluntary market. Voluntary markets are essentially predicated on environmental
integrity standards, and one of those turns around additionality. What that in
fact means is that voluntary market buyers will not purchase abatement if they
believe it is going to happen anyway. I think most people would concede that
the additionality test is one of the more challenging elements of any offset
scheme. So in response to quite a lot of feedback from stakeholders the
government has worked very hard to streamline the additionality test to make it
simpler and easier for people to use. What we have done is say that project proponents
will not need to come to the administrator and have the additionality of their
project assessed on a case-by-case basis. We are saying that, instead, the
government will work with stakeholders through a consultation process to devise
what we are calling a positive list of regulation. This will mean that
activities that go beyond current common practice, that are not already in
widespread use for a given sector, local area or set of environmental
conditions, will be put on this positive list of regulations. We believe that
it will be a very good method for ensuring that everyone is very clear about
what will and what will not be deemed as additional for the purposes of the
Carbon Farming Initiative.[22]
2.19
In response to concerns regarding the application of the common practice
test to methodologies already in use to sequester soil carbon, Ms Shayleen
Thompson, First Assistant Secretary, Land Division, DCCEE explained that the
department would examine the issue closely and that if the methodology was
being used by everyone in the given area '...it would be difficult for it to
meet the additionality test under those circumstances'.[23]
2.20
The department also advised the committee that:
Most commercial forestry activities are unlikely to be
eligible for crediting under the Carbon Farming Initiative (CFI) because they
are common practice and would not pass the additionality test.[24]
But:
Forestry activities that are not currently common practice,
for example, longer rotations, low rainfall plantations, new species or
management regimes and integrated farm forestry models could be considered
additional and these projects may include some harvesting.[25]
The positive list
2.21
As discussed earlier, the positive list is designed to streamline the
approval of project methodologies and remove the impost on project proponents
of having the additionality of each project assessed and approved on a
case-by-case basis.
2.22
The committee heard throughout the inquiry conjecture about inclusions
in the positive list. Submitters' concerns focussed on what might be included
in the positive list, and a number of submitters made suggestions for
inclusions in the list. Ms Margaret Blakers, Director the Green Institute,
summarised the uncertainty about the positive list:
Ultimately, it is going to depend on what is in the regulations,
how the methodologies are put together, what is in the positive list and what
is in the negative list. That is all a blank sheet. We do not know what is
going to be in there.[26]
2.23
The National Association of Forest Industries (NAFI; now the Australian
Forest Products Association) opined:
Genuine industry engagement is therefore needed on...the
development of the ‘positive list’ of activities and projects deemed to have
met the additionality test.
NAFI would suggest the following classes of projects or
activities that should logically be considered for the positive list:
-
not-for-harvest carbon sinks (e.g.
environmental plantings);
-
Kyoto compliant forestry
activities;
-
long rotation commercial sawlog
plantations, where the high up-front costs of land and establishment and long
waiting period for harvest revenues have discouraged investment since the early
1990s; and
-
other commercial plantings (e.g.
pulpwood plantations, agroforestry) on a range of less productive or marginal
sites where commercial forestry activities would not normally occur.[27]
2.24
The Conservation Land Trusts Alliance had concerns about the treatment
of covenanted land under the CFI, specifically that people who have made a
commitment to preserve native forest through a covenant could be excluded from
participating in the scheme. The alliance suggested one way in which their
concern might be remedied would be to include covenanted forests in the
positive list.[28]
2.25
Whilst welcoming the positive list as '...a good step toward
streamlining the project approvals process', AUSVEG was uncomfortable with the
uncertainty around inclusions in the positive list:
It is this 'positive list' that lends itself to the greatest
potential for totally changing agricultural production.
If an agricultural practice in one commodity fails to be
recognised on this positive list by a bureaucrat, then production will “flow”
and lead to “significant change”.
The test is still defined “as not been widely adopted”. What,
how and who determines the definition of “widely adopted”?
As this requires a Ministerial decision, after receiving
advice from the Domestic Offsets Integrity Committee, it will ultimately be
open to political considerations.
This is an area that is unlikely to remain clear in any short
time-frame...Yet the activities that do get included in the regulations will
underpin agriculture's involvement in the Scheme.[29]
2.26
In response to claims such as these, DCCEE clarified the purpose of the
positive list:
Individual project proponents will not need to demonstrate
their project’s additionality to the scheme administrator, rather the
government will identify and list eligible activities that are not already in
widespread use and deem these to be additional in regulations. The government
will consult with stakeholders to identify activities for inclusion on the
list. To be eligible an activity would need to be beyond common practice in an
industry or under specific regional or environmental circumstances.[30]
2.27
The department also provided the committee with indicative examples of
activities which might be included in the positive list (see Appendix 5),
emphasising this list does 'not include all possible activities that may be
included'.[31]
Committee comment
2.28
The committee acknowledges the concerns raised during the course of the
inquiry regarding the application of the common practice test to existing
methodologies and to future methodologies, and the impacts this may have on
(potential) project proponents. The committee also recognises the uncertainty
amongst some stakeholders with respect to inclusions on the positive list.
2.29
In addition, the committee notes the concern of the Scrutiny of Bills
Committee 'that in practice it may be difficult to establish what is a "common
practice"'.[32]
The Scrutiny of Bills Committee has requested further advice from the minister
'about the justification for the approach and whether more precise legislative
guidance can be provided in the primary legislation'.[33]
2.30
The committee welcomes the DCCEE's advice that the positive list,
comprising project methodologies which have passed the additionality test and
been deemed as not common practice, will be developed in consultation with
stakeholders.[34]
Further, the committee notes the bill requires the minister to seek the advice
of the Domestic Offsets Integrity Committee (DOIC) when deciding whether a
particular type of project should be included on the positive list.[35]
2.31
The committee is confident that consultation with stakeholders to
establish the positive list will help address concerns regarding the
application of the common practice test to existing methodologies. The
department has stated the basis on which methodologies will be assessed for
"common practice": that is, the practice is not already in widespread
use for a given sector, local area or set of environmental conditions. The
committee believes there is sufficient flexibility in the department's criteria
for determining common practice to allow for existing methodologies which are
not in widespread use to pass the common practice test and therefore become
approved project methodologies under the CFI.
2.32
Similarly, the committee is of the view that the ongoing requirement of
the minister to seek the advice of the DOIC and have regard to whether a
methodology is not common practice in the relevant industry, relevant part of
the relevant industry or the environment in which the project will be conducted
will ensure the appropriate application of the common practice test into the
future. It may well be the case that methodologies which are initially
considered not common practice for the purposes of the bill are later
determined to be common practice and therefore no longer pass the additionality
requirements. The committee suggests this is entirely appropriate so as to
encourage the continued research and development of improved methodologies for
carbon abatement and to bolster environmental integrity.
2.33
The committee believes the government's indicative list provides greater
certainty to potential proponents about possible inclusions in the positive
list. The committee is pleased that the government has made these examples publicly
available.
2.34
The committee feels the government should take care to protect first
movers to ensure there are no perverse incentives to cease existing abatement
projects. First movers should also be encouraged to undertake further abatement
or sequestration activities under the CFI.
2.35
The committee is also of the view the government could do more to
accelerate methodology development, and to examine the workability of some
carbon abatement or sequestration projects in key agricultural industries. This
too would go some way to addressing uncertainty about the types of projects,
specifically agricultural projects, which may be eligible under the CFI.
Recommendation 1
2.36
The committee recommends the government consider options to ensure there
are no perverse incentives to cease existing abatement projects, and encourage
first movers to undertake further abatement or sequestration activities under
the Carbon Farming Initiative.
Recommendation 2
2.37
The committee recommends the government consider what more can be done
to fast track development of methodologies, and to develop and test the
workability of carbon offsets projects in key agricultural industries.
Permanence
2.38
As discussed in Chapter 1, the basic permanence obligation in the bill
is to maintain carbon stores for which ACCUs have been issued, or hand back the
credits received for the project. The permanence provisions require carbon
stores for eligible projects to be maintained over a period of 100 years.[36]
If carbon stores are not maintained over this period, ACCUs may be required to
be relinquished in circumstances where units were issued:
-
as a result of false or misleading information; or
-
in relation to a sequestration project and the project was varied
or revoked; or
-
in relation to a sequestration project and there was complete or
partial reversal of sequestration.[37]
2.39
Project proponents are not required to hand back ACCUs if carbon stores
are lost because of:
-
bushfire, drought or pest attack;
-
reasonable actions to reduce bushfire risks, such as establishing
fire breaks; or
-
vandalism or other actions that are outside the control of the project
proponent.[38]
2.40
A carbon maintenance obligation may be imposed on a project if a
requirement to relinquish ACCUs, as a result of a failure to maintain (or
restore) carbon stores, is not complied with.[39]
A carbon maintenance obligation prevents a project proponent from engaging in
conduct that results, or is likely to result, in a reduction in carbon stores
below a benchmark sequestration level.[40]
2.41
The CFI also includes risk of reversal buffers to insure the scheme
against temporary losses of carbon. The risk of reversal buffer is a five per
cent buffer:
...designed to ensure that all scheme ACCUs represent permanent
abatement by insuring the scheme against:
-
temporary losses of sequestration
whilst carbon stores are being re-established after a fire or drought;
-
losses as a result of wrongdoing
by a project proponent, which cannot be remedied through the application of
penalties under the scheme; or
-
necessary losses as a result of
fire reduction activities such as prescribed burning to establish fire breaks.[41]
Maintenance of carbon stores over
100 year period
2.42
A number of submitters argued that the requirement to maintain carbon
stores for 100 years was too long and would discourage some potential
proponents from participating in the scheme.[42]
Other submitters did not believe the 100 year permanence requirement was long
enough.[43]
2.43
For the CFTA, the permanence provisions were 'the deal killer'.[44]
Mr Michael Kiely, Chairman of the CFTA, stated:
No farmer would be silly enough to agree to 100 years for
soil carbon or 100 years for anything. A finance lender would want to know
seriously the impact on the value of the property of agreeing to such a thing.
We did some research into the 100 years thing and discovered it was a policy
decision, not a scientific measure...We believe that 100 years is a perverse
outcome. The result is said to be necessary so buyers can be confident they are
getting value—that is, genuine abatement—so they get nothing. There is nothing
available for them. We have found examples where the IPCC and the Verified
Carbon Standard have allowed other periods of time recently—20, 25, 30-odd
years. We believe we could work within that sort of time frame.[45]
2.44
While strongly supportive of the concept of the CFI,[46]
AUSVEG was similarly critical of the 100 year requirement for permanence:
...it would take a very brave farmer to agree to 100 year
permanent arrangements in which they (and their children and grandchildren)
will be held accountable for “natural disturbances such as drought that may
cause carbon to be released from the soil”.
Equally, placing all risk and costs as the growers'
responsibility for "bushfire (deliberate or natural), drought, or actions
by neighbours or third-parties" belies the Government's own commitments to
meeting its Kyoto obligations.
Given these serious challenges and immense uncertainty of
carbon markets, it is quite unrealistic to expect vegetable and potato growers
to sign 100 years commitments (with the threat of civil and criminal
prosecution), undertake major investments, and change generational farming
practices without any firm guarantees on the price they will be paid.[47]
2.45
Mr Andrew Grant, Chief Executive Officer of CO2 Group Ltd, highlighted
the difficulty the permanence provisions may pose for his company:
It is a problematic issue in that, from an investment
perspective, after the growth period you have a long maintenance obligation with
no income off it. Whether that is 100 or 50 years is rather semantic post the
growth period. So, for argument’s sake, say you have a 50-year growth period.
You then have a 50- year permanence obligation.[48]
2.46
In its submission, the Climate Institute agreed that the 100 year
permanence provision was likely 'to be perceived by many landholders as a
substantial, even insurmountable barrier to participation in the scheme' but
acknowledged that the bill provides considerable flexibility by allowing
landholders to 'switch from a carbon-credited land-use and/or management practice
should the landholder wish to do so, as long as they are prepared to pay for
the credits'.[49]
2.47
In contrast to those who felt the 100 years was too long, other
submitters recommended the 100 year permanence provision be strengthened.
Greenpeace Australia Pacific suggested the 100 year period should be a minimum
requirement[50]
while ANEDO recommended that carbon maintenance obligations be applied to 'every
eligible offsets project which carries a risk of reversal'.[51]
Committee comment
2.48
Given the strong and diverse views about the permanence provisions and
the length of time carbon stores should be required to be maintained in the
environment, it is the view of the committee that scientific research on the
issue of permanence continue to be monitored and the permanence obligations in
the CFI be adjusted to reflect international consensus on this matter.
Recommendation 3
2.49
The committee recommends the government continue to monitor scientific
research relevant to the issue of permanence and adjust permanence obligations
in the CFI to reflect international consensus on this matter.
Risk of reversal buffer
2.50
The risk of reversal buffer is initially set at five per cent and is intended
to insure the CFI against unexpected or unforeseen losses of carbon stores. The
explanatory memorandum states 'the buffer will be adjusted over time to reflect
actual losses of carbon across the scheme'.[52]
2.51
A number of submitters suggested changes to the risk of reversal buffer
in the CFI.
2.52
The NSW Farmers Association were of the view that the five per cent
buffer for all projects under the CFI risked:
...creating winners and losers across different kinds of
bio-sequestration projects. It is likely that different buffer approaches will
be appropriate for different projects, with high buffer needs effectively being
subsidised by those with low buffer needs.[53]
2.53
To address their concern, the NSW Farmers Association recommended
different risk of reversal buffers be applied to different risks:
...it is suggested risks related to "wrong doing"
and risk due to "natural disturbance" are treated separately. A
uniform buffer "wrong doing" buffer could be established – say 2% -
and levied on all projects. A further "natural disturbance" buffer could
then be fitted precisely to the project methodology or category of project.[54]
2.54
Mr Andrew Grant, Chief Executive Officer of CO2 Group Ltd, had a similar
view. He suggested that different buffers be applied to projects of different
scale:
For a small project that has a low level of quality and a low
level of entry, I think you need a more aggressive insurance buffer. For a
large-scale project where the project is insured and there is a portfolio of
projects, it is a bit heavy-handed. For example, in an earlier question, I
think, Senator Colbeck asked, under the New South Wales [Greenhouse Gas
Abatement Scheme] there is no buffer required but you have immediate
consequence if you have a reversal. Similarly, in New Zealand, if there is an emission
of any kind—so if you remove the forest or destroy it any other way, whether it
be natural or human induced—you have an automatic liability. For a large
company like us that is something we are comfortable with and we structure that
risk and we insure it. For a smaller operator, that is a difficult thing for
them to do and therefore a buffer...works well. So it is horses for courses.
Our view is that you should be able to take either a lower
level of compliance with a higher level of buffer, or opt out of that and not
have the obligation but bear the full brunt of the consequence.[55]
2.55
ANEDO were critical of the risk of reversal buffers and claimed the
buffers were an attempt 'to mitigate the failure' of the permanence provisions
and carbon maintenance obligation.[56]
ANEDO recommended amending the bill so that project proponents must relinquish
ACCUs where carbon stores have been reversed as a result of a natural
disturbance or conduct beyond the proponent's control. Further, ANEDO believed
the government should '[e]ncourage project proponents to take out insurance to
cover the risk of such occurrences'.[57]
2.56
For sequestration projects, Greenpeace Australia Pacific opined that the
five per cent risk of reversal buffer was too low and did not accurately
reflect on the reversal risks.[58]
Greenpeace recommended '...a 50% discount on sequestration credits to account
for their uncertain permanence'.[59]
2.57
Interestingly, Mr Michael Kiely of the CFTA believed '[t]he idea that
fire and drought will destroy soil carbon has been very much overplayed by the
science community'.[60]
Mr Kiely explained that two Australian carbon farmers of his acquaintance had
'increased their soil carbon by two and a half and three [percentage points] in
the last 10 years, which was probably the worst 10 years that we have had, with
the drought'.[61]
2.58
The department responded to questions regarding the level of the risk of
reversal buffers with the following reasoning:
In this scheme, because there is actually a legislative
requirement to re‑establish carbon stores if they are lost following a
drought or bushfire or some other natural disturbance, and there are provisions
for averaging and other legislative provisions in the scheme for compliance and
auditing and things like that, you have a much higher level of certainty around
keeping the carbon permanently and re-establishing it if it is lost. So you are
able to have a much smaller buffer, which is of course a benefit to people
doing projects.[62]
Committee comment
2.59
The committee acknowledges the concerns expressed during the course of
the inquiry regarding the appropriateness or otherwise of the five per cent
risk of reversal buffers to address risks associated with losses from carbon
stores.
2.60
It is the view of the committee that the five per cent risk of reversal
buffer is an appropriate starting point, in light of the other requirements in
the bill for maintaining and re-establishing carbon stores via the permanence
provisions and carbon maintenance obligations. The committee notes the
statement in the explanatory memorandum that the buffer will be adjusted over
time so as to reflect actual carbon losses across the CFI.
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