Clayton Utz Insights

22 December 2011

Carbon Farming Initiative takes off

By Nick Thomas.

Key Points:

Now that the legislative architecture is in place, stakeholders should consider how the Carbon Farming Initiative will affect their projects.

Farmers and land managers across Australia will now be able to generate extra revenue by planting native forest trees while reducing carbon in the atmosphere, as Australia's Carbon Farming Initiative (CFI) is now up and running.

The Regulations to give effect to the CFI were made in early December, and the first broad-ranging offset methodology – which deals with environmental plantings – was approved on 15 December 2011.

This article highlights some key features of the new Regulations and the environmental plantings methodology.

Carbon farming – a brief re-cap

The CFI is established under the Carbon Credits (Carbon Farming Initiative) Act 2011. It allows farmers, landfill operators and other land managers to earn carbon credits by storing carbon or reducing greenhouse gas emissions on the land. These credits can then be sold to others who want to offset their emissions.

A person can generate Australian carbon credit units (ACCUs) by establishing and operating an approved offset project in accordance with the Act. Requirements for establishing ACCUs include:

  • the project proponent must become a recognised offsets entity;
  • the project must satisfy the "additionality" test (ie. it must not be required by an Australia law and must be on the "positive list" of activities which go beyond "common practice" in the relevant industry or environment);
  • it must not be on the "negative list" of activities which are potentially adverse to the environment, communities, employment or agricultural land access; and
  • the project must be approved as being covered by an approved methodology, and must be carried out in accordance with that methodology.

There are two kinds of ACCUs:

  • Kyoto ACCUs are ACCUs which are generated from a Kyoto offsets project. These are projects which reduce carbon emissions in sectors which count towards Australia's international commitments under the Kyoto Protocol or an international agreement which succeeds it (which is a helpful extension given the outcome at COP17 in Durban). Kyoto ACCUs can be used by liable entities to satisfy their obligations under the Carbon Pricing Mechanism (CPM) which starts on 1 July 2012, and can be traded in overseas markets which accept them.
  • non-Kyoto ACCUs are ACCUs which are generated from a non-Kyoto offsets project. These are projects which reduce carbon emissions in sectors which do not count towards Australia's international commitments. Non-Kyoto ACCUs can be used by entities who want to offset their carbon emissions in voluntary carbon markets, but cannot be used in the CPM, and so will have a lower value than Kyoto ACCUs.

Carbon farming regulations

Key features of the Carbon Credits (Carbon Farming Initiative) Regulations 2011 include:

  • They confirm the list of projects which will be Kyoto offsets projects.

The Act already prescribed agricultural emissions avoidance projects and landfill legacy emissions avoidance projects. The Regulation adds reforestation projects, the protection of native forest from deforestation, and the establishment of vegetation on land that was subject to deforestation by seeding, planting and other human-induced regeneration.

  • They provide the "positive list" of eligible activities.

These include (among other things) various kinds of permanent plantings, human-induced regeneration, restoration of wetlands, application of biochar to soil, capture and combustion, or reduction, of methane from animals, capture and combustion of methane from specified landfill waste, and certain projects under the Commonwealth Government's "Greenhouse Friendly" program.

  • They provide the "negative list" of ineligible activities.

These include (among other things) projects which were mandated by Australian laws until 24 March 2011, establishment of forests under forestry managed investment schemes, planting of weed species, re-establishment of vegetation on land which was subject to clearing of native forest in specified situations, and planting of trees in an area which receives more than 600mm long-term average annual rainfall (subject to exceptions).

  • They provide additional requirements for recognition as an offsets entity.

Environmental plantings methodology

Before 15 December, only two offset methodologies had been approved – the destruction of methane from manure in piggeries and the capture and combustion of landfill gas. These had very limited application.

The Government has now approved the Methodology for Quantifying Carbon Sequestration by Permanent Environmental Plantings of Native Species using the CFI Reforestation Modelling Tool. The Methodology's stated aim is to establish permanent mixed species native forests in order to sequester CO2 for storage in biomass. It is expressed to provide broad geographical coverage which can be easily implemented at comparatively low cost.

Listed ancillary benefits include biodiversity enhancement, alleviation of dryland salinity, reduced wind and water erosion, and potential shelter for livestock.

The Methodology applies to the establishment of permanent environmental plantings which have the potential to attain a crown cover of at least 20% and a height of at least two metres. Accompanying the Methodology is a Reforestation Modelling Tool, which helps define the project area, and other tools to assist in estimating emissions and removals from the project, to enable the calculation of ACCUs generated by the project.

It is quite prescriptive in specifying the types of plantings it will cover and the means by which the plantings are commenced and managed.

The Government is currently considering proposed methodologies for avoiding emissions by diverting landfill waste into fuel manufacture, management of camels in the Australian rangelands and early dry season savannah burning.

Implications

The Environmental Plantings Methodology is far more wide-ranging than other methodologies which have been approved or are under consideration. It therefore offers a broader range of land managers the opportunity to participate in the CFI.

The legislative architecture is now in place. Stakeholders should now consider:

  • how the CFI legislation and Government policy will apply to their project and facilitate the generation and sale of ACCUs;
  • obtaining appropriate land use rights for CFI project sites;
  • appropriate legal and commercial structures for CFI projects;
  • assigning the appropriate project proponent to ensure ACCUs are held by the right entity; and
  • contractual arrangements for the sale of ACCUs which the project will generate.

 

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For more information, contact...
Email: Nick Thomas, Partner
Tel: +61 2 9353 4751
Disclaimer
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.
Nick Thomas
Nick Thomas