Australia: Carbon farming initiative

The Carbon Farming Initiative ("CFI") is a voluntary carbon offsets scheme which aims to provide incentives for the agricultural and forestry sectors to minimise greenhouse gas emissions or maximise carbon storage by altering their agricultural practices.

The incentives are in the form of carbon credits which can be earned by reducing greenhouse gas emissions or storing carbon on their land.

As carbon credits can be sold to persons and businesses wanting to reduce their carbon foot print, the CFI provides farmers and land managers with an additional source of revenue whilst helping the environment by reducing carbon pollution.

The CFI is part of a legislative package which came into effect on 8 December 2011. One of the main purposes of this package is to provide long-term certainty to participants in carbon offset schemes and to underpin the environmental integrity and market value of carbon credits, being Australian Carbon Credit Units ("ACCUs").

The scheme is administered by the CFI Administrator whilst the Department of Climate Change & Energy Efficiency is responsible for, among other things, the assessment of eligible and excluded activities for the CFI.

Under the CFI, greenhouse gas abatement is achieved by:

  • reducing or avoiding emissions eg. through the capture and destruction of methane emissions from livestock manure or landfill; or
  • removing carbon from the atmosphere and storing in soil or trees eg. by growing a forest or farming in a way that increases soil carbon.

ACCUs will be issued in respect of each tonne of abatement generated by such activities. However, such activities must be eligible offset projects for which a number of specific criteria must be met. For an offset project to be eligible, it must:

  • pass the additionality test,
  • be on the positive list and not be on the negative list; and
  • must have a methodology to measure greenhouse gas abatement.

To pass the additionality test, each project must not be required by an Australian law, or for an activity that is common practice and already widely adopted. In other words, under the additionality test, ACCUs will only be available for projects which provide "additional" greenhouse gas abatement.

By reason of some draft amending regulations which are likely to take effect before 1 July 2012, the additionality test may not apply to a project undertaken to satisfy a legal requirement to offset greenhouse gas emissions if a person is using that offsetting project to minimise its carbon price liability.

The positive and negative lists are prescribed in the CFI Regulations.

The positive list indentifies activities which are not considered to be common practice within relevant industries. Therefore if a project consists of activities listed in the positive list and is not required to be carried out by law then the project passes the additionality test.

The positive list includes the following kinds of projects:

  • the establishment of permanent plantings since 1 July 2007
  • the capture and combustion of methane from livestock manure
  • the reduction of methane emissions through the humane management of certain feral animals

The negative list is intended to manage risks that are not addressed by existing planning regimes and regulations and identifies activities that are ineligible in circumstances where there is a material risk that the activity will have a material adverse impact on one or more of the following:

  • availability of water;
  • conservation of biodiversity;
  • employment;
  • local community; and
  • land access for agricultural production.

The negative list includes the following activities:

  • establishment of forest as part of forestry management investment scheme
  • cessation or avoidance of harvest of a plantation forest (as they were not designed for permanent plantings)
  • planting trees in an area that receives more than 600mm long-term average rainfall (subject to certain exceptions eg. specified tree planting is not an excluded offset activity when it contributes to the mitigation of dryland salinity in accordance with specified methods)

The positive and negative lists will change over time as new activities are assessed (with input from the Domestic Offsets Integrity Committee) and added. The Committee has been established to assess offset methodology to ensure they lead to real abatement and will publish on its website from time to time approved methodologies as well as proposed methodologies for public comment.

It is important to note that each project must use an approved methodology that sets out the baseline against which allotment is measured, the baseline being an estimate of what would happen in the absence of such project. This ensures that only improvements beyond what would otherwise occur can be credited under the CFI.

Carbon in vegetation or soils can only really offset greenhouse gas emissions if it is stored permanently. For this reason, sequestration projects are subject to permanence obligations and other additional requirements. Usually a registration on the title to the relevant land will be required to alert prospective purchasers and others that CFI obligations may apply to such land.

Applicants will be required to submit regular reports on their projects to enable the CFI Administrator to decide whether or not to issue ACCUs, vary/revoke a project or issue certain maintenance obligations.

In most cases, the applicants will need to arrange for their reports to be reviewed by a greenhouse and energy auditor who has been registered under the National Greenhouse & Energy Reporting Act 2007. The audit will focus on alignment of the project with the methodology and other CFI requirements.

ACCUs are not issued automatically and applicants must apply for a certificate of entitlement to receive ACCUs for their project for any reporting period.

If a certificate of entitlement is issued, ACCUs will be deposited by the CFI Administrator into the registry account with the Australian National Registry of Emission Units, which account an applicant must open, for the purpose of receiving and/or trading ACCUs listed on the certificate.

With respect to the ACCUs credited to the registry account, the applicant can then deal with them as necessary. In this regard, the applicant may exchange or convert them to another type of unit, cancel them and/or transfer them to another account (rules permitting). ACCUs do not have an expiry date.

There are two types of ACCUs – Kyoto ACCU and non-Kyoto ACCU.

Kyoto-ACCUs are earned from activities which count towardsAustralia's national target under the Kyoto Protocol (eg. reforestation, reducing emissions from livestock and manure, and waste deposited in land fills before 1 July 2012). Non-Kyoto ACCUs do not count towards the national target and generally will be traded in the voluntary carbon market.

At any time, a person can elect to withdraw from the CFI by notifying the CFI Administrator. If the offsets project is a sequestration project, then all ACCUs issued (or their equivalent) must be returned to the CFI Administrator. As an alternative, the applicant can transfer the offsets project to another recognised offsets entity.

Farmers and land managers may now wish to consider how the CFI can apply to their activities with a view to generating ACCUs for any eligible offsets project.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Kemp Strang has received acknowledgements for the quality of our work in the most recent editions of Chambers & Partners, Best Lawyers and IFLR1000.

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