Australia: Carbon Farming Initiative bills passed; now to get ready for them

Australia will soon have a framework for carbon farming in place, with the passage of the Carbon Credits (Carbon Farming Initiative) Bill 2011, Carbon Credits (Consequential Amendments) Bill 2011 and the Australian National Registry of Emissions Units Bill 2011.

So far we do not know the date the new laws come into force, but it's expected to be soon.

What is carbon farming?

As we noted at the time the Bills were introduced into Parliament,  the CFI aims to give farmers, forest growers and landholders access to domestic and international carbon markets, providing an investment incentive for environmental conservation and greenhouse gas emission reduction. The CFI will work alongside the  announced carbon pricing mechanism (CPM) by facilitating the crediting of greenhouse gas abatement projects in the land sector and from legacy waste emissions.

By undertaking approved emission abatement activities that reduce or store carbon pollution, carbon credits, known as Australian Carbon Credit Units (ACCUs), can be created. Subject to the rules under which they are created, these ACCUs can then be sold domestically or internationally, and can be used to meet regulatory obligations such as under the CPM, or voluntary abatement activity.

The processes involved in establishing and operating offsets projects are set out in the Bill, and include the following requirements:

  • the project proponent must satisfy the "fit and proper person" test and become recognised as an offsets entity;
  • the project must be covered by an approved methodology;
  • the project must satisfy other scheme eligibility requirements, including being on the "positive list" of activities that are not common practice and not being on the "negative list" of activities that are excluded from the scheme (see below);
  • the project must be undertaken in accordance with the approved methodology; and
  • project reports must be submitted to the Carbon Credits Administrator.

The Government has committed $45.6 million over four years to implementing the scheme.

What's changed in the CFI Bill?

The Carbon Credits package was amended slightly in the Senate. The most significant changes are:

  • projects can now be excluded from the CFI scheme if they would have a significant impact on access to land for agricultural production, or have a material impact on water, biodiversity, employment, or the local community (there was no reference to a material impact leading to exclusion);
  • non-exclusive Native Title holders can now have carbon rights; and
  • the Domestic Offsets Integrity Committee must publish reasons for its decisions to endorse (or refuse to endorse) a proposal for a methodology determination that applies to a specified kind of offsets project within 28 days.

How does the CFI relate to the carbon price mechanism?

Although the CFI can work independently of the proposed CPM, clearly that mechanism will provide a demand for ACCUs generated by the CFI and so make many more abatement projects financially viable. Under the Clean Energy Future Package released on 10 July and the Clean Energy Bill 2011 released for public consultation on 28 July, Kyoto compliant ACCUs can be:

  • used to meet up to 5% of a liable entity's obligation during the first three years of the CPM (2012/13-2014/15), with no quantitative restrictions thereafter; and
  • exported to be used overseas.

ACCUs which are not Kyoto compliant (which cannot be counted towards Australia's emissions target under current international carbon accounting rules) and which cannot be used by liable entities under the CPM, will be purchased by the Commonwealth Government. It has committed $250m over six years from 2012/13 for this purpose with the intention of increasing incentives for additional abatement through projects involving soil carbon, revegetation and cessation of logging in native forests.

What's still to be determined about the CFI?

A crucial element to the CFI scheme will be the regulations, many of which are yet to be released. We currently have a draft version of the regulations on the positive and negative lists for the Carbon Farming Initiative, which is open for public consultation until 16 September.

The idea underlying the draft regulations is that activities, not individual projects, will be assessed for additionality, ie. the likelihood that a particular activity would occur without the Carbon Farming initiative, and is not common practice. This is intended to provide greater assurance that particular projects will be approved and hence reduce overall transaction costs.

The Positive List identifies 15 activities that would be considered additional and hence eligible to participate in the scheme, including:

  • establishment of permanent environmental plantings;
  • establishment of permanent mallee plantings after 1 July 2007;
  • re-establishment of native vegetation on private land; and
  • capture and combustion of methane from waste deposited in a landfill facility before 1 July 2012.

The Negative List identifies six activities that would otherwise be additional, but cannot be part of the scheme because they pose a significant risk to communities or the environment. Included on the list is the establishment of a forest as part of a forestry managed investment scheme.

Where to now?

The passage of the CFI bills is an important first step, but a first step only. Much of the detail relating to methodologies and other aspects of the mechanics of the CFI scheme are yet to be finalised. Until much of this detail is released, it may be difficult for the CFI to commence to garner critical mass.

Another factor that will affect take-up is the carbon price mechanism. Once the future policy and regulatory framework around a carbon price becomes clearer, interest in CFI will undoubtedly increase.

Nonetheless, the Carbon Farming Initiative is an important part of the general carbon market and the new carbon pricing mechanism. While the lead time needed to generate credits through CFI projects may mean that the initial supply which could be used in the carbon price mechanism is modest, the long-term effect will no doubt be greater. Those active in the offset space, including financial institutions, are working hard to make the CFI scheme an effective one which will deliver credits that could potentially reduce carbon price mechanism compliance costs for liable entities, and deliver better environmental and sustainable outcomes in the land sector.

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this bulletin. Persons listed may not be admitted in all states and territories.

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