This legal update provides a brief summary of the main changes to the Carbon Farming Initiative (CFI) since our last legal update in July 2013.

For an overview of the CFI, please refer to our previous legal updates which can be found here and the Carbon Market Institute (CMI) publication "Implementing the Carbon Farming Initiative: A Guide for Business" (2013), co authored by Norton Rose Fulbright and RAMP Carbon.

New projects and more ACCUs

There are now 90 projects declared eligible under the CFI and 2,723,320 Australian Carbon Credit Units (ACCUs) have been issued by the Regulator.

Although the rush for projects transitioning from prescribed non-CFI offsets schemes into the CFI seems to have ended, it is important to be aware that from 8 December 2013, the Regulator can no longer make a determination which:

  • for transitioning carbon sequestration projects, enables permanence obligations created under prescribed non-CFI offsets schemes to be enforced through the CFI, and
  • for transitioning landfill legacy emissions avoidance projects, provides that the regulatory additionality test does not need to be satisfied.

New Government and the impact on the demand for ACCUs

With the recent change of government, we have a new Minister, the Honourable Greg Hunt, who will be responsible for the CFI under the new Department of Environment.

Carbon Pricing Mechanism

On 15 October 2013, the Government released draft legislation to repeal the Carbon Pricing Mechanism (CPM). If the CPM is repealed (which, prior to 1 July 2014, would require support of Labor or Greens in the Senate and after 1 July 2014, would require support of other parties in the Senate), the Government will remove the "compliance market" into which ACCUs can be sold. This will impact on the demand for ACCUs generated under the CFI. By way of example, in the 2012/13 financial year, 97% of all ACCUs issued were purchased by liable entities under the CPM. For further information on the draft legislation please see our previous legal update, available here.

Additionally, the deadline for exchanging Kyoto ACCUs to Kyoto Units has now passed (1 July 2013) and the Government's Repeal of the Carbon Tax Consultation Paper rules out any direct linking arrangements with international emissions trading schemes.

Despite the potential repeal of the CPM, however, it is likely that in the short term we will continue to see projects capitalising on the certainty that liable entities under the CPM will be required to surrender eligible emissions units to cover their 2013/14 liability by 2 February 2015 (which can include ACCUs to cover up to 5% of a liable entity's liability, or for landfills, 100%).

Direct Action Plan

In place of the CPM, the Government plans to introduce a new mechanism to address climate change and carbon emissions, known as the Direct Action Plan. For further information on the Direct Action Plan please see our previous legal update, available here.

Although the design of the Direct Action Plan is only in the consultation phase, it is expected that the CFI will continue and may be a central platform for delivering abatement for sale to the Emissions Reduction Fund (Fund). The Government has indicated that its intention is for the Fund to become a purchaser of ACCUs.

Importantly, however, the Government's current policy intention is that the Fund will only purchase "lowest-cost abatement". This policy approach is likely to have an impact on the ability for CFI projects to compete for the sale of ACCUs with other lower cost abatement projects which are proposed to be included in the Direct Action Plan (such as energy efficiency).

The Government has released terms of reference for the Fund and is seeking submissions on it by 18 November 2013. Entities involved in the CFI should closely follow the development of the Direct Action Plan and consider making a submission in response to the terms of reference. For example entities which have already invested in the CFI may want to consider transitional issues such as how to reward or protect their early investment, or entities whose current or proposed CFI projects may not be able to compete with other lower cost abatement projects, may want to consider ways the Government can support the diversity of abatement projects currently recognised under the CFI.

The Government intends to release a Green Paper on the Direct Action Plan in December 2013 and a White Paper with exposure draft legislation in early 2014.

New CFI Regulation increases the scope of projects

The exposure draft of the Carbon Credits (Carbon Farming Initiative) Amendment (Additionality Test and Other Measures) Regulation 2013, which we outlined in our previous CFI legal update, available here, has now been made into law by the Carbon Credits (Carbon Farming Initiative) Amendment (Additionality Test and Other Measures) Regulation 2013 (Amendment Regulation). The Amendment Regulation came into force on 9 August 2013.

The main change between the exposure draft regulation and the Amendment Regulation is the definition of 'Kyoto offsets project'. Under the Amendment Regulation, a project which commences after 1 January 2013 will be a Kyoto offsets project if the project's abatement can be used to meet Australia's targets under the Kyoto Protocol (which depends on the applicable methodology determination) and the project is:

  • a landfill emissions avoidance project
  • an agricultural emissions avoidance project, or
  • the following types of carbon sequestration projects:
    • the protection of native forest from deforestation
    • the establishment or management of vegetation on land that covers an area of at least 0.05 hectares, or
    • projects, on land used for cropping or livestock production, to manage carbon stocks.

It is expected that there will now be few potential project types under the CFI that will fall outside the definition of a Kyoto offsets project (for example, wetland restoration and feral animal management). Whether or not a project is a Kyoto offsets project or a non-Kyoto offsets project is determined by the Regulator at the time of issuing a declaration of eligible offsets project.

The Amendment Regulation also added five new types of projects to the positive list. We note, however, that applicable methodology determinations are yet to be approved for these new project types. The new project types are:

  • feeding fats or oils to livestock that are pasture-grazed year-round
  • feeding nitrate supplements to any livestock
  • torrefaction, pyrolysis or gasification of livestock manure
  • use of selective breeding to improve the residual feed intake of livestock (that is, the feed use efficiency of livestock), and
  • the establishment of long rotation hardwood plantations (that is, a hardwood forest that is managed for a harvest cycle of at least 25 years).

New methodology determination

Since our last legal update, only one new methodology determination has been made by the Minister. The Carbon Credits (Carbon Farming Initiative) (Reducing Greenhouse Gas Emissions by Feeding Dietary Additives to Milking Cows) Methodology Determination 2013 sets out detailed rules for projects which avoid emissions by feeding additives (specifically, canola meal, cold-pressed canola meal, brewers grain, hominy meal, or dried distillers grain) to milking cows which are pasture grazed for at least 9 months each year.

The previous Government's Department of Industry, Innovation, Climate Change, Science, Research and Tertiary Education released a list of new methodology determinations which it anticipated would be made over the next 12-18 months, that can be found here. Of particular interest was the intention to release methodology determinations for "building soil carbon" and "application of biochar (created from livestock waste) to agricultural soils" by early and mid 2014 respectively. Although this was a commitment of the previous Government, it is expected that the new Government will also expand the methodology determinations which are available under the CFI and speed up the process to have methodology determinations approved. Again, however, the details of how new methodology determinations will be developed (or imported from other offset schemes) is part of the Direct Action Plan and further information is expected as part of the Green Paper.

We note that the deadline for making methodology determinations which could be backdated to 1 July 2010 has now passed (proposals were required to have been made by 30 June 2012 and the methodology determination must have been made by 30 June 2013).

How can we help you?

Norton Rose Fulbright has been heavily involved in the CFI since its inception and has worked closely with both the Department and Clean Energy Regulator as the CFI has developed. We would be happy to assist if you would like our help in framing a submission relating to the role of the CFI under the Direct Action Plan.

Additionally, Norton Rose Fulbright is currently developing a CFI Legal and Contracts Guide (Guide) as part of the Department of Agriculture's Extension and Outreach program. Development of the Guide is progressing well and we expect it to be released before the end of the year.

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.