Australian Government releases draft legislation to implement the Emissions Reduction Fund

The Australian Government recently released draft legislation to implement the Emissions Reduction Fund (Fund), which is the cornerstone of the Government’s Direct Action Plan climate change policy.  The Direct Action Plan centres around the purchase of greenhouse gas emissions reductions by the Government (via the Fund).

The release of the draft Carbon Credits (Carbon Farming Initiative) Amendment Bill 2014 (Cth) (Bill) follows issuance of an Emissions Reduction Fund Green Paper late last year and a subsequent White Paper in April 2014, both regarding the design of the Fund.

The Bill will amend the Carbon Credits (Carbon Farming Initiative) Act 2011 (Cth) (CFI Act) and build on the existing Carbon Farming Initiative (CFI) under that Act by providing for the purchase of greenhouse gas emission reductions credits by the Government.  The Bill also makes minor amendments to associated Commonwealth legislation.

Key elements of the Bill include:

• Coverage under the Act will be expanded from land-based and certain types of waste sector projects (which previously applied under the CFI) to any type of emissions reduction project, economy wide.
• Australian carbon credit units (issued to registered emissions reductions projects for each tonne of CO₂-e reduced or stored in land) that represent carbon abatement (the removal or avoidance of greenhouse gases) may be purchased on behalf of the Government.
• The Clean Energy Regulator (CER) will conduct purchasing processes.  Although both a reverse auction and tender process are contemplated, the CER will have broad discretion to utilise other purchasing processes.  Any purchasing process should meet a series of specified principles, including purchasing emissions reduction projects with the lowest cost reductions.
• Certain aspects of the purchasing process set out in the White Paper (for example, a minimum bid size at auctions) are not set out in the Bill.  The Explanatory Memorandum accompanying the Bill indicates that the CER will publish separate conditions or requirements for the purchasing process which will cover these aspects.
• Project proponents who are successful at an auction or via other purchasing processes will enter into carbon abatement contracts with the CER requiring them to deliver emissions reductions in order to receive payments for the credits issued for their emissions reductions.  These contracts will be standardised.
• The period of time during which credits can be created for a project will be limited to a single defined “crediting period” (removing the ability to apply for subsequent crediting periods currently available under the CFI).  The standard crediting period will be 7 years for emissions reduction projects and 15 years for sequestration projects, unless a different period is set by a methodology.  The Bill provides for transitional measures in relation to the CFI, including in relation to transitioning existing CFI projects and methods to the Fund.

The Government has called for public submissions on the Bill, which may be made before 12 noon EST on 23 May 2014.

Safeguard Mechanism not addressed by the Bill

The Green Paper and White Paper indicate that a key element of the Fund will be the introduction of a Safeguard Mechanism to incentivise (but not penalise) facilities that report direct emissions of 100,000 tonnes of CO₂-e or more a year under the National Greenhouse and Energy Reporting Scheme not to exceed their historical baseline (which the White Paper indicates will be set based on the highest level of reporting data under the National Greenhouse and Energy Reporting Scheme during the period between 2009-2010 and 2013-2014).

The Bill does not address the Safeguard Mechanism.  The Explanatory Memorandum for the Bill reiterates statements in the White Paper that the Safeguard Mechanism will be dealt with by separate legislation.  The Government has previously stated an intention to release this separate draft legislation in the first quarter of 2015, after ongoing consultation.

Previous indications are that the Government does not intend the Safeguard Mechanism to raise revenue or to be punitive, however no decision has been made regarding how to ensure compliance.  Instead, flexible compliance options will be considered prior to the implementation of the Safeguard Mechanism in July 2015, including allowing businesses to:

• exceed their absolute emissions baseline if they do not increase the emissions intensity of their production;
• use multi-year compliance periods to manage cyclical peaks in emissions; or
• use eligible credits to offset emissions above baseline levels.

The absence of strong disincentives to facilities exceeding their historical baselines (such as punitive compliance options) may reduce the chances of Australia’s emissions reduction target being reached, particularly as the Government estimates that the mechanism will only cover around 52% of Australia’s emissions.  Buying emissions reductions from Fund participants will only achieve overall reductions in Australian emissions if the emissions from non-Fund participants do not increase in the same period.