The cornerstone of Australia's federal climate policy (as discussed in previous editions of The Climate Report) is known as the "Direct Action Plan," under which the federal government pays for emission reductions or abatements. This is done through a series of reverse-auctions, conducted by the Clean Energy Regulator via an emissions reduction fund ("ERF"), for lowest cost reductions.

Under this system, the Regulator issues one Australian Carbon Credit Unit ("ACCU") for each ton of emission reductions to be delivered by a particular project and enters into contracts with bidders guaranteeing payment to them by the government. Funded projects have included the regeneration of native forest, strategic burn-offs, and landfill gas collection. The third of the ERF auctions took place on April 27, 2016.

The ERF is complemented by a "Safeguard Mechanism" due to come into effect on July 1, 2016. This is designed to ensure that the emission reductions and abatements purchased by the government are not offset by increases in emissions over historic levels elsewhere in the economy.

Large facilities exceeding certain emission thresholds (direct "scope 1" emissions of more than 100,000 ton of carbon dioxide equivalence per year) must keep their emissions at or below a business-as-usual baseline enforced by the Regulator. These facilities—often operated by electricity generation, mining, manufacturing, transport, and construction businesses—collectively account for roughly half of Australia's greenhouse gas emissions.

The Regulator may seek financial penalties against companies and individuals who fail to comply with the baseline. However, facilities will be permitted to exceed the baseline in any given year provided that emissions over a two- to three-year monitoring period remain below the baseline. This is a significant concession—particularly given that the baselines for existing facilities are to be determined by reference to the facility's highest level of reported emissions in any year between 2009–2010 and 2013–2014. Businesses can also offset any excess emissions by surrendering ACCUs and can apply for exemptions in exceptional circumstances.

The data used for determining baselines for existing facilities will largely be obtained from the National Greenhouse and Energy Reporting Scheme, with most large emitters already a part of the scheme.

Facilities that are new, or that significantly expand after 2020, will be able to apply for a new or revised baseline in accordance with "emissions intensity benchmarks" applying to various sectors of the Australian economy. These benchmarks are intended to reflect "leading practice" in particular industries and will be updated over time, including in light of changes to "global warming potential" values.

According to draft guidelines released by the federal government in April 2016:

  • The benchmarks will generally be based on outputs and be neutral to factors such as inputs, geography, location, technology, and production practices;
  • Technical working groups will be established for each sector to define production variables (with the emissions intensity benchmark worked out as emissions per unit of the relevant production variable); and
  • Alternate approaches may be used where there is insufficient data or no identified production variable.

These matters will be subject to public consultation and reviewed by an independent committee, which will make a final recommendation to the Minister for the Environment.

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