Carbon Farming Initiative – update on recent developments - Environmental Law

Introduction

Since our last legal update the Carbon Farming Initiative (CFI) has continued to expand and develop. More methodologies have been approved, more projects have been registered and more Australian Carbon Credit Units (ACCUs) have been issued. This legal update provides a snapshot of these and other recent developments.

For an overview of the CFI, please refer to our previous legal updates which can be found here and the Carbon Market Institute publication "The Carbon Farming Initiative: A Guide for Business," co authored by Norton Rose Australia and RAMP Carbon.

The 2013 Federal Election

It has been announced that the Federal Election will occur on 14 September 2013. According to the Department of Climate Change and Energy Efficiency (the Department), the announcement of the election will not have any impact on the development, assessment or approval of methodologies. These processes will continue as normal until the start of the caretaker period on 12 August 2013.¹

Inevitably, Australia's approach to climate change will be a much debated topic in the lead up to the election. With polls conducted in The Australian on 26 February 2013 showing Coalition primary support at 48 per cent against only 32 per cent for Labor², it is important to consider the outcome of the election on the future of the CFI.

Labor's continued support for the CFI is clear from the increasing number of methodologies that are being determined and the increasing number of projects that are being registered. However, the protection, and possible expansion, of the CFI also forms part of the Coalition's developing policy stance. Greg Hunt MP, Shadow Minister for Climate Action, Environment and Heritage has reiterated the Coalition's commitment to the CFI and a desire to speed up the process for approving projects. He has also noted that there is a "significant opportunity to adopt many of the internationally approved methodologies and translate them to an Australian context".³

Approved methodologies

Since our last legal update in mid-December 2012, a further six methodology determinations have been made:

human induced regeneration of native forest: Carbon Credits (Carbon Farming Initiative) (Human Induced Regeneration of a Permanent Even-Aged Native Forest) Methodology Determination 2013;
reforestation and afforestation: Carbon Credits (Carbon Farming Initiative) (Reforestation and Afforestation) Methodology Determination 2013;
destruction of methane from piggeries using engineered biodigesters: Carbon Credits (Carbon Farming Initiative) (Destruction of Methane from Piggeries using Engineered Biodigesters) Methodology Determination 2013;
diverting legacy waste to an alternative waste treatment facility: Carbon Credits (Carbon Farming Initiative) (Diversion of Legacy Waste to an Alternative Waste Treatment Facility) Methodology Determination 2013;
capture and combustion of landfill gas – waste upgrade project: Carbon Credits (Carbon Farming Initiative) (Capture and Combustion of Methane in Landfill Gas from Legacy Waste: Upgrade Projects) Methodology Determination 2012; and
destruction of methane generated from dairy manure in covered anaerobic ponds: Carbon Credits (Carbon Farming Initiative) (Destruction of Methane Generated from Dairy Manure in Covered Anaerobic Ponds) Methodology Determination 2012.

These six new methodology determinations are now ready for use by farmers, landowners and others in setting up projects under the CFI and generating ACCUs. There are now 11 methodology determinations in total under the CFI. For more details on any of the existing methodology determinations please contact a member of the Norton Rose Climate Change team.

Proposed methodologies

There are currently 13 methodology proposals that are at different stages of the approval process.

Two methodology proposals, 'quantifying carbon sequestration by permanent plantings of native mallee eucalypt species using the CFI reforestation modelling tool' and 'avoided emissions from diverting waste from landfill through a composting AWT technology', have been endorsed by the Domestic Offsets Integrity Committee (DOIC). Following this endorsement, the next stage in the process for approval is for the Minister for Climate Change and Energy Efficiency (the Minister) to decide whether to make a methodology determination, based on the methodology proposal that has been endorsed by the DOIC. It is only after the Minister makes a formal methodology determination that the methodology can be used for a CFI offsets project.

There are two methodology proposals that are currently still open for public comment. The proposed methodologies, 'reducing greenhouse gas emissions in milking cows through feeding dietary additives' and 'avoided emissions from diverting legacy waste from landfill through a mechanical processing and separation, and enclosed aerobic composting alternative waste treatment facility' are both open for public comment until 10 April 2013.

In relation to the remaining nine proposed methodologies, they are either in the preliminary stages of the process or the DOIC has requested more information from the applicant.

For an updated list, including information relating to the status of methodology proposals and information justifying the approval and/or rejection of a proposed methodology, please visit the methodology proposals web page on the Department's website.

Other methodology developments

In December 2012, the Department hosted a workshop to identify opportunities for biochar projects under the CFI.⁴ The workshop included various participants who discussed a range of issues in relation to biochar and how these may affect a methodology. The participants agreed to work towards a methodology for sequestering carbon by applying biochar to agricultural soils for submission to the DOIC during 2013.⁵

Updated Methodology Guidelines

In January, updated Guidelines for submitting CFI methodologies (the Guidelines) and an example template (the Template) were released by the Department.

The revised Guidelines provide applicants with information in relation to developing methodologies, submitting methodology proposals and preparing a methodology proposal for assessment by the DOIC. The DOIC assesses all proposed CFI methodology proposals against the requirements of the Carbon Credits (Carbon Farming Initiative) Act 2011(the Act) and advises the Minister on the endorsement of methodology proposals.

All methodology proposals submitted to the DOIC for assessment must now use the updated version of the Template.⁶

Projects and credits

Since our last legal update, the number of registered projects has increased substantially. The total number of registered offsets projects is now 47, including 31 landfill gas projects, 10 savanna burning projects, three piggery projects, two reforestation projects and one diversion of legacy waste from a landfill project.⁷

The number of ACCUs that have now been issued has increased to 393,451. This figure includes the issue of 45,341 Non-Kyoto ACCUs eligible to SITA-ResourceCo Alternative Fuels Pty Limited for abatement achieved by the use of the Avoided Emissions from Diverting Legacy Waste from Landfill for Process Engineered Fuel Manufacture Methodology at Wingfield in South Australia.⁸

It is important to note that there are two types of ACCUs that can be issued: Kyoto ACCUs and Non-Kyoto ACCUs. The Act allows for the issue of Kyoto ACCUs if the eligible offsets project is an emissions avoidance project with a reporting period ending on or before 30 June 2012 or the eligible offsets project is a sequestration project with a reporting period ending on or before 31 December 2012. All projects that have a reporting period which ends after these deadlines can only be issued with Non-Kyoto ACCUs. However, these Non-Kyoto ACCUs will be classified as either Non-Kyoto ACCUs eligible or Non-Kyoto ACCUs voluntary. Non-Kyoto ACCUs eligible are able to be surrendered under the CPM. Whereas, Non-Kyoto ACCUs voluntary are only able to be sold in the voluntary market and cannot be surrendered under the Carbon Pricing Mechanism (CPM).

It is anticipated that there may be an additional rush of ACCUs issued pre 15 June 2013, given that a proportion of ACCUs can be used for compliance by liable entities under the CPM and registered projects will want to have the ability to sell their ACCUs prior to this compliance date.

Australian Financial Services licence

ACCUs issued under the CFI qualify as financial products under the Corporations Act 2001. A farmer or land manager who commences a CFI project and sells the ACCUs generated from the project will not usually need an Australian Financial Services (AFS) licence. However, the position for advisers and project developers is less clear. For example, a CFI project activity that would require an AFS licence for an advisor or project developer would include that party acting as a market maker to buyers if they regularly state prices at which they are prepared to sell ACCUs.

For further information, and examples of when an AFS licence may be required please visit the Australian Securities & Investments Commission Carbon markets page⁹ or alternatively contact a member of the Norton Rose Climate Change team.

Indigenous Carbon Farming Fund

The Indigenous Carbon Farming Research and Development Fund, which forms part of the CFI, has begun to provide funding grants to support the development of low-cost methodologies. In the first round of funding, $2.7m in funding has been approved to support the development of new methodologies for the benefit of indigenous communities over the next five years.

Recipients of the first round of grants include CSIRO for the development of a savannah burning methodology for the Tiwi Islands.¹⁰

Carbon Farming Futures program - update

The Department of Agriculture, Fisheries and Forestry (DAFF), administers various elements of the Carbon Farming Futures program (CFF), which includes the Filling the Research Gap, Action on the Ground and Extension and Outreach programs.

The deadline for round two of Filling the Research Gap was 23 February 2013. Under round two, up to $50 million (GST exclusive) will be made available to fund eligible research projects and to organise the coordination of national research programs. For further information on Filling the Research Gap, and to review the Research Strategy (July 2012 to June 2017) please visit the DAFF Filling the Research Gap web page.¹¹

The first round of the Action on the Ground component of the CFF provided $72.5m of investment into research relating to emissions reductions. It is expected that the second round of funding will be open for applications in the first quarter of 2013. To keep up to date on when round two applications are open please visit the DAFF Action on the Ground web page.¹²

DAFF is currently seeking applications for project funding under the Extension and Outreach Program, which encourages farmers and land managers to reduce greenhouse gas emissions and participate in the CFI through technical information and support. Applications for funding can be submitted at any time until April 2016. There will be a bulk assessment of applications at least twice a year. The first assessment cycle closed on December 2012, and the closing date for the next assessment cycle will be published by DAFF in the coming months. For further details about the eligibility requirements, the grant guidelines, application documents and for more information regarding closing dates for applications, please visit the DAFF Extension and Outreach web page.¹³

The Carbon Farming Initiative: from Plan to Practice

The Clean Energy Regulator (the Regulator) will be hosting a series of workshops in April and May 2013 across New South Wales, Queensland and Victoria. The workshops are intended to help farmers, land managers, and their advisors with the implementation of a CFI project. Each workshop will focus on a specific methodology determination to demonstrate the requirements of what is required to conduct a CFI project.

For further information in relation to dates, locations and registration for these Regulator workshops please visit the Regulator's Events web page.¹⁴

Emissions abatement study

DAFF in conjunction with the Australian Bureau of Agricultural and Resource Economics and Sciences (ABARES), recently produced a study entitled Costs and potential of agricultural emissions abatement in Australia – a quantitative assessment of livestock abatement under the CFI¹⁵. This study explored the technical and economic abatement potential of the Australian agricultural sector in the context of the CFI, focusing on livestock activities.

ABARES concluded that the effect of the CFI on agricultural emissions is highly sensitive to the carbon price and will be modest at low to medium carbon prices. In addition, ABARES concluded that under current carbon prices in Australia, farmers would not adopt many of the known emissions abatement technologies for livestock, without a significant reduction in their cost.

Linking with Europe

The Department has released various exposure draft regulations to facilitate the linking of Australia's CPM with the European Union Emissions Trading System (EUETS). This includes an exposure draft of the Carbon Credits (Carbon Farming Initiative) Amendment Regulation 2013 No. A (Draft Regulation A) which proposes amendments to the Carbon Credits (Carbon Farming Initiative) Regulations 2011 (the Regulations) and the Department has invited interested parties to make submissions.

In addition, the Department has produced a consultation paper which outlines the design of the proposed registry arrangement for the linking of the CPM and EU ETS and an explanatory table to assist stakeholders in reviewing the draft regulations and consultation paper.

Interested parties are invited to make submissions on all the draft regulations, including Draft Regulation A and the consultation paper by close of business on 28 March 2013.

The draft amendments contained in these regulations, will facilitate the indirect link between the CPM and the EU ETS to be established by 1 July 2015 and to enable trade in the interim linking period. According to the consultation paper, it is expected that by 1 June 2013, the subordinate legislation will be introduced to give effect to the registry arrangements for the interim linking period.

The amendments under Draft Regulation A, set out the steps that the Regulator must take, in accordance with s154 (3) of the Act, when it receives an instruction, under s154 (1) of the Act, to transfer an ACCU from an Australian National Registry of Emissions Units¹⁶ to a foreign account. As drafted, the Regulator would have to confirm, at the time the instruction to transfer was received, that an international arrangement that allows the direct transfer of the ACCU to a foreign account was operational, and to ensure that the transfer is conducted in accordance with the arrangement. If neither of these is possible, the Regulator must notify the person who gave the instruction that the instruction has been declined.

For full details of all of the draft regulations proposed to facilitate the linking, including Draft Regulation A, as well as the consultation paper and the explanatory table, please visit the Department's web page.¹⁷

Amending the Positive List

The Department has released Carbon Credits (Carbon Farming Initiative) Amendment Regulation 2013 No. B (Draft Regulation B). This exposure draft provides for the addition and amendment of projects contained in the 'positive list' of eligible activities under the CFI. The changes proposed by Draft Regulation B are based on recommendations made by the DOIC. For activities that are added to the positive list, a key consideration is whether the carrying out of the activity goes beyond the common practice of that industry or the kind of environment in which the activity is to be carried out.

Interested parties are invited to make submissions on Draft Regulation B by 29 March 2013.

Additions to the positive list

Draft Regulation B proposes to add three new activities to the positive list.¹⁸ These activities are:

the human induced regeneration, on or after 1 July 2007 of native vegetation, on land that is not conservation land, by the creation of waterponds on scalded claypans in rangeland areas (this is a land management technique which is used to revegetate scaled claypans in rangelands);
the passive oxidisation of legacy waste emissions using biofilters or biocovers on landfills (this is achieved by adding a layer of compost or other organic material over the surface of the landfill);
the establishment of a new farm forestry plantation (this activity involves commercial tree growing for the harvest of wood products, which can provide farmers with an alternative stream of income, and additional associated benefits. However, the minimum area for this activity has been limited to 30% of a farm and capped at 100 hectares per farm. Also, a farm forestry plantation cannot be or have been established under a forestry management investment scheme under Division 394 of the Income Tax Assessment Act 1997).

Amendments to the positive list

As well as making additions to the positive list, Draft Regulation B also proposes various amendments to the Regulations, to update the positive list to ensure it only protects activities that go beyond what is the common practice in that relevant area.

It has been proposed that paragraph 3.28(1)(i) of the Regulations will be amended to more precisely define and limit the approved processes for the reduction of methane and nitrous oxide emissions from the digestive tract and dung of ruminants. Previously, 3.28(1)(i) of the Regulations had been interpreted quite broadly by some stakeholders, and included activities that were considered common practice in most areas. This amendment is an attempt to ensure that only activities that are not commonplace in this area should be eligible for crediting under the CFI.

Draft Regulation B also proposes to amend paragraph 3.28(1)(l) of the Regulations, so that the positive list activity is specified as 'the diversion, before 1 July 2012, of mixed solid waste, which would otherwise have entered a landfill facility, to an alternative waste treatment facility.' This amendment is proposed in order to clarify the substance of the activity on the positive list, and to ensure that the positive list only relates to activities that are not considered common practice. To facilitate this amendment, various other changes are required to the Regulations and are proposed under Draft Regulation B.

Firstly, Draft Regulation B contains a new definition of alternative waste treatment facility, which clarifies that this is a facility that uses advanced technology to process waste. Secondly, Draft Regulation B clarifies the timing requirement for this activity on the positive list. The diversion of the waste must have occurred before 1 July 2012. However, emissions from the already diverted waste may occur beyond 1 July 2012, and continue to be eligible for crediting under the CFI. Finally, it is proposed that paragraph 3.28(4) and (5) of the Regulations will be substituted by Draft Regulation B in order to provide greater clarity about the eligibility of diversion of particular kinds of waste. New paragraphs 3.28(4) (a) to (e) of Draft Regulation B exclude waste that the DOIC has considered it is common practice to divert away from landfill, and therefore, the avoidance of emissions from these kinds of waste is excluded from being credited under the CFI.

For further information on the detail behind Draft Regulation B and the proposed changes to the positive list, please visit the Department's webpage to review Draft Regulation B and an explanatory statement accompanying Draft Regulation B¹⁹.

What will 2013 bring?

The Federal Election of 14 September 2013 may well have a significant effect on the future of Australia's carbon pricing mechanism and wider climate change policy. Although, the CFI is expected to be protected and developed regardless of the outcome, it is unknown how the CFI will interact with other areas of Australia's carbon program and in particular, whether the Government will end up being the only buyer of ACCUs.

In the interim, it is expected that the current pace of development under the CFI will continue, with more methodologies being approved and more registered projects generating more ACCUs.

If you would like further detail on any aspect of the CFI and the opportunities it presents, please contact a member of our Climate Change team.

Footnotes

¹The Department, CFI eNews: Jan/Feb 2013, http://www.climatechange.gov.au/government/initiatives/carbon-farming-initiative/subscribe/2013-01.aspx

²This poll was conducted by Newspoll for The Australian on 26 February 2013.

³The Hon Greg Hunt MP, Shadow Minister for Climate Action, Environment & Heritage, A Plan for a Cleaner Environment & Real Solutions for All Australians (27 February 2013).

⁴Biochar is charcoal created by pyrolysis of biomass http://www.climatechange.gov.au/government/initiatives/carbon-farming-initiative/activities-eligible-excluded/additional-activities-positive-list/application-of-biochar.aspx

⁵The Department, CFI eNews: Jan/Feb 2013, http://www.climatechange.gov.au/en/government/initiatives/carbon-farming-initiative/subscribe/2013-01.aspx

⁶ http://www.climatechange.gov.au/government/initiatives/carbon-farming-initiative/methodology-development/~/media/government/initiatives/cfi/methodology-development/methodology-guidelines/template-for-submitting-methodologies-pdf.pdf

⁷Further details of the registered projects can found on the Register of Offsets Projects available at www.cleanenergyregulator.gov.au/Carbon-Farming-Initiative/Register-of-Offsets-Projects/Pages/default.aspx

⁸Details of the ACCUs that have been issued can be found on the Register of Offsets Projects page, as above.

⁹ http://www.asic.gov.au/asic/ASIC.NSF/byHeadline/Carbon_markets_overview

¹⁰For a full list of recipients of the first round grant please see the media release of 21 December 2012 from The Hon Mark Dreyfus QC MP at http://www.climatechange.gov.au/

¹¹ http://www.daff.gov.au/climatechange/carbonfarmingfutures/ftrg

¹² http://www.daff.gov.au/climatechange/carbonfarmingfutures/...

¹³ http://www.daff.gov.au/climatechange/carbonfarmingfutures/...

¹⁴ http://www.cleanenergyregulator.gov.au/carbon-farming-initiative/events/Pages/default.aspx

¹⁵For the full ABARES study please visit http://adl.brs.gov.au

¹⁶Enacted under the Australian National Registry of Emissions Units Act 2011.

¹⁷ http://www.climatechange.gov.au/government/submissions/registry-arrangements-EU-trading.aspx

¹⁸At paragraph 3.28(1)(c)(vi), paragraph 3.28(1)(m) and paragraph 3.28(1)(n) of the Regulations.

¹⁹ http://www.climatechange.gov.au/government/submissions/CFI-exposure-draft-regulations.aspx

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.

Australia: Carbon Farming Initiative – update on recent developments