Australia: Opportunities for agribusiness under the Emissions Reduction Fund (ERF)
Clayton Utz Insights

Key Points:

New methodologies, land ownership rules, and a new measure for additionality all offer opportunities to agribusiness.

The Federal Government's proposed Emissions Reduction Fund (ERF) provides opportunities for proponents of projects which can demonstrate greenhouse gas (GHG) emission reductions to obtain Government funding, essentially via successful bids in a reverse auction for that funding.

The ERF will use much of the legislative architecture of the Carbon Farming Initiative (CFI), which focuses on land sector GHG abatement.

So what are the opportunities and challenges for agribusiness in the ERF?

The intersection between the Emissions Reduction Fund and agribusiness

The CFI is established and operates under the Carbon Credits (Carbon Farming Initiative) Act 2011 (CFI Act). Project proponents can generate Australian carbon credit units (ACCUs) from projects which are registered under the CFI Act and are carried out in accordance with a methodology which is approved under the CFI Act.

So far, 124 projects have been registered under the CFI Act, applying various approved methodologies. Most of these projects occur in the waste sector, but several projects are agribusiness-based:

• eight reforestation and afforestation projects;
• nine avoided deforestation projects;
• 11 permanent environmental planting projects;
• 11 early dry season savannah burning projects; and
• seven projects involving methane destruction from piggeries.

There are also two approved methodologies relevant to agribusiness that have not yet been implemented:

• methane destruction generated from dairy manure in covered anaerobic ponds; and
• GHG reductions in milking cows through feeding dietary additives.

Proponents of CFI projects who can demonstrate actual abatement can obtain ACCUs from the Government under the CFI Act and then sell these to persons who have a liability under the carbon pricing mechanism (CPM) if the project generating the ACCUs is Kyoto-compliant, or in the voluntary market if the project is not Kyoto compliant.

The ERF will be established and operate under an amended version of the CFI Act. The project registration, methodology requirements and ACCU generation aspects of the CFI will remain (although they will be simplified and streamlined in a number of ways).

However, it is expected that the CPM will be repealed and, instead of persons liable under the CPM wanting to purchase ACCUs, the Government will offer to buy ACCUs. It will do so via a reverse auction, in which proponents will bid ACCU sale prices and the Government will purchase (via standardised contracts) the ACCUs which are bid with the lowest prices, up to a total budgeted spend. The distinction between Kyoto and non-Kyoto compliant ACCU's will be removed under the ERF, however, it still will be possible to sell ACCUs in the voluntary market under the ERF scheme.

The changes to the CFI regime associated with the ERF are particularly relevant for agribusiness. We have outlined some key changes below.

Some opportunities for agribusiness

While some of the details as to how the ERF will operate are still being determined, it seems likely the ERF will provide some additional opportunities for agribusiness. For example:

New methodologies

It can take significant time to prepare new CFI methodologies, but the Government has already begun developing some methodologies which are particularly suited to agribusiness. The Government has indicated that, by the time it expects Parliament will pass the ERF legislation (either shortly before or shortly after 1 July), the following additional land sector methodologies will be available:

• increasing soil carbon;
• reducing livestock emissions; and
• expanding opportunities for environmental and carbon sink planting and reforestation.

Since the development of a relevant methodology is often expensive and is one of the most significant elements in a CFI project timeline, the Government's initiatives in developing new methodologies ahead of the commencement of the ERF, as well as simplifying the process for assessing and making methodologies under the ERF, are welcome.

New land ownership rules

The current CFI contains quite narrow land holding requirements for CFI project proponents – essentially, they need to own the land or have another relevant property right (eg. carbon property right) with respect to the land in order to have a project registered.

Under the ERF, in order to encourage participation of agribusiness through aggregation, it is proposed that a project aggregator (ie. a person who deals on behalf of several project proponents) will only need to demonstrate that it has the agreement of landholders to participate in the project. This should facilitate more efficient sharing of the risks and transaction costs of a CFI project among several project operators.

New permanence rules

Under the current CFI, there is a 100 year rule for sequestration projects (that is, the project must be continued for 100 years to minimise the risk and consequence of lost abatement). The ERF proposes a 25-year permanence option for sequestration projects, with a trade-off of a 20% reduction in the number of ACCUs issued for those projects (as an alternative risk offset mechanism). This is in response to comments about the difficulty which a 100 year rule presents for project feasibility.

New measure for additionality

The ERF takes a new approach to the concept of additionality (ie. the concept that a project must project GHG abatement over and above standard practice). Instead of the "positive list" of eligible project types which exists under the CFI Act, the draft ERF amendments to the CFI Act propose project-specific evaluations of additionality or methodology-specific additionality requirements. This should enable those who best understand the projects for which methodologies are being prepared to work out which projects will provide "additional" abatement and which won't.

Some possible challenges for agribusiness

Costs and reverse auction competitiveness

One of the difficulties with the CFI for some agribusiness enterprises is the implementation and administration cost. The ERF legislation should reduce administration costs with its streamlining initiatives, and some of the changes mentioned above should help reduce implementation costs. However, it is not yet clear whether agribusiness project proponents will be able to keep costs low enough to bid successfully at the ERF reverse auctions.

Long-term nature of agribusiness projects

Many agribusiness projects have long lead-times before ACCUs are generated or relatively long payback periods. It is not yet clear whether the long-term nature of agribusiness projects will remain an issue under the ERF scheme.

No more backdating of projects

The CFI allows projects to be backdated to 1 July 2010, provided they have been operating under the terms of an approved methodology and the CFI legislation during the backdating period. This allows projects some flexibility as to the timing of registering a project and recognises that projects are being carried out in anticipation of CFI registration. Under the ERF, while backdating can continue for existing CFI projects, only new projects will be accepted for registration going forward.

Concluding comments

The ERF legislation provides additional opportunities for agribusiness to participate in carbon abatement. Perhaps the biggest challenge for agribusiness, given the typically longer lead-times for agribusiness projects, is support for the value of ACCUs generated from agribusiness projects over the medium to long term.

The ERF, with its proposal for Government contracts for the supply of ACCUs, offers the opportunity for increased certainty, because typically governments can be expected to honour existing contracts but legislative schemes are less immune to change.

Other opportunities for longer-term value support could come from:

• the development of a safeguard mechanism which involves entities who emit more than a prescribed amount of GHG (which is likely to be set by reference to a baseline for those entities) having to purchase ACCUs, possibly from land-based projects – the Government is proposing to develop its "safeguard mechanism" to complement the ERF over the next 12 months; and
• the establishment of additional government support for agribusiness projects on the basis of their environmental co-benefits (such as improved soil conservation and agricultural productivity through higher soil carbon levels, and enhanced biodiversity through forestry projects) – although it may be necessary to review the additionality tests in the draft ERF legislation to ensure such support is possible.

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• The final design of the ERF? ERF White Paper answers some key questions

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.