Australia: Trash into treasure - landfill gas and the Carbon Farming Initiative

Key Points:

The Carbon Farming Initiative provides an opportunity for councils to turn their trash into treasure, but they must prepare their contracts carefully.

The Federal Government's Carbon Farming Initiative presents opportunities for local councils with landfill facilities. To fully grasp those opportunities, councils need to ensure that services contracts for the day-to-day operation of landfill facilities effectively manage liabilities and reporting obligations under the program and related legislation.

What is the Carbon Farming Initiative?

The Carbon Farming Initiative (CFI) provides a scheme which allows landfill owners, typically local councils, to generate carbon credits by reducing the levels of methane being emitted from "legacy waste" in their landfill facilities. "Legacy waste" is landfill waste that was disposed of prior to the commencement of the Clean Energy Scheme on 1 July 2012.

Under the CFI, Australia Carbon Credit Units (ACCUs) can be created when emissions from this waste are abated. Emissions from post-1 July 2012 waste fall within the operation of the Clean Energy Scheme and are not the subject of the CFI (with abatement practices simply reducing any liabilities under the Clean Energy Scheme as opposed to creating new ACCUs). However, ACCUs created under the CFI can be used to acquit a council's carbon liability under the Clean Energy Scheme or may be sold to other parties.

Combustion of waste landfill gas

In addition to the opportunities presented by the CFI, a council seeking to maximise potential benefits in this area may look to generate electricity from the combustion of waste landfill gas. This type of venture may generate Renewable Energy Certificates under the Renewable Energy (Electricity) Act which can be sold to liable entities under the RET scheme (typically electricity retailers). Many councils will already be reporting landfill emissions under the National Greenhouse and Energy Reporting Act. The accurate and accountable recording of emissions data is critical in maximising the opportunities and minimising the potential liabilities under these various schemes.

Third-party contractors of a council's waste operations

Where a council contracts out the operation of a landfill facility and gas collection and generation to a third party, then it is likely that the contractor will be in the best position to collect the data that is required to comply with the credit, liability and reporting regimes that apply to the facility. The services contract needs to be carefully drafted to ensure that all the required information is efficiently collected by, and transferred from, the contractor to the council and that its terms capture the full scope of the information required. It is also important to protect against all the possible consequences of non-compliance.

The statutory data collection and calculation regimes (defined in measurement and methodology determinations) are very prescriptive and this means that contracts need to be tailored to suit the specific circumstances. It is important that contracts clearly describe the particular services to be provided by the contractor and the precise form of the information that is to be provided to the council. For example, the measurement regimes can contain options for the use of assumed or measured values. Contracts need to specify which option is to be used and all parties need to be clear as to the potentially significant cost and value consequences of these choices for them. Warranties should be obtained from contractors that the information they are providing is fully compliant with the legislative prescriptions.

Lessons for councils

Local governments currently negotiating landfill facility services contracts may consider that the CFI does not currently provide sufficient incentives for participation. However, if participation in the CFI, or a future similar scheme, is ever likely to be pursued, current contracts should create a framework to provide for the requisite flow of information, rights and responsibilities, in order to allow the council to readily participate in such a scheme at the appropriate time.

Finally, with a federal election fast approaching, parties should ensure that their contracts contain suitable "change of law" clauses so that contracts can be adapted to changes in legislation.

In closing, the CFI provides an opportunity for councils to turn their trash into treasure. However, successful participation in the scheme requires careful contract preparation to ensure ease of reporting and that the creation of ACCUs and other certificates can take place without dispute as to the role of a council's landfill facility contractors.

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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.