Early emissions abatement opportunities - what do they mean?

By Trisha Cashmere.

Key Points:
There is enough information for businesses to start preparing for the opportunities and obligations which will arise with the early abatement scheme and the National Greenhouse and Energy Reporting Scheme.

Uncertainty around the allocation of permits under the Australian Emissions Trading Scheme (AETS) could discourage investment in carbon reduction programs prior to the commencement of the AETS. Recognising this issue, on 3 June 2007, Prime Minister John Howard at the Liberal Party Conference in Sydney gave an undertaking that measures will be put in place so that abatement activities and investment in low emission technology occurring after this date will not suffer any "disadvantage" as a result of making the relevant investment prior to the details of the AETS being confirmed.

To resolve the issues inherent in the implementation of the undertaking a discussion paper was released by the Department of the Prime Minister and Cabinet (PMC) on 24 September 2007, seeking stakeholder views on the implementation of the undertaking. The paper also considers:

• incentives to bring forward new abatement activity in the lead up to the commencement of trading under the AETS; and
• the definition of an asset "in existence" at 3 June 2007 for the purpose of compensation for loss of value.

Implicit in the discussion paper is an appreciation that there will, without safeguards, be an incentive for business to inflate 2008-09 emissions data. The PMC suggests that the best way to prevent this is to use entity emissions data for the period prior to the announcement of the AETS, however there was no broad collection of this data. Some proposed sources include information from environmental approval processes, or other greenhouse and energy use programs. This additional data may also be used to assist in the permit allocation process.

This article focuses on the proposals around early abatement, and what this means for business both in sectors which will be covered by the AETS and those which will at least initially be excluded.

Types of abatement

The paper proposes two types of abatement credits.

Offset credits which can:

• be used to counterbalance emissions that are covered by the AETS, or can be purchased by individuals or business wishing to undertake voluntary abatement;
• only be generated by new projects in sectors that will not initially be covered by the AETS (ie forestry, agriculture, land use and perhaps waste); and
• continue to be created after the commencement of the AETS.

Early action credits that:

• will be issued for abatement occurring between now and the commencement of the AETS in sectors that will be covered by the AETS; and
• can only be created until the commencement of the AETS.[1]

Standards for abatement

The paper identifies the quality of offsets as an important issue, and additionality of offsets is identified as a key element of the scheme. To meet internationally recognised standards for environmental integrity, offsets should represent abatement that is additional, which means abatement that has actually occurred, and is permanent[2], measurable, and verifiable. Assessing additionality becomes more complex with the impending AETS as businesses begin to factor the cost of carbon into business planning.

Activities seeking to earn abatement credits must be qualitatively equivalent to emissions permits as they will be used interchangeably with the AETS.

Abatement registration

It is suggested that initial arrangements for the creation of abatement credits be through the existing Australian Greenhouse Office, Challenge Plus program. The credits approved under this program are of a high standard and are therefore more likely to satisfy the integrity requirements of the PMC.

One problem with this approach is the limited number of protocols currently in use in the Challenge Plus program for the approval of abatement projects. It is therefore proposed that priority be given to the development of protocols for the types of projects that would be eligible for early action credits and deliver quick and significant abatement.

The Government proposes to develop a national register to track all dealings in offsets which could be recognised in the AETS. Reporting under the National Greenhouse Energy Reporting Act 2007 may provide this opportunity, as corporations which do not meet the reporting thresholds under that Act may voluntarily register where the corporation is intending to undertake a project designed to reduce or remove greenhouse gas and which meets certain requirements.

AETS Regulator

The AETS Regulator will be established in 2009, and will have responsibility for amending and approving new offset protocols and offset projects, as part of the legislative framework for the AETS. The enabling legislation would include a provision for early action credits to be exchanged for emissions permits dated for the first year of the AETS. Any limitation on banking of emissions permits will equally apply to those permits exchanged for early action credits.

It is proposed that there be no limit on the number of early action credits that may be created. It is also proposed that early abatement activities be taken into account when setting the emissions caps in the initial period of the AETS to ensure there is no over-allocation. It is clear however that the Government does not anticipate that the number of early abatement credits will be great in number mostly because of the short time for project development, approval and realisation.

Positive incentives to abate

The discussion paper suggests that there are a number of advantages associated with early abatement, both at an organisational and national level. These include:

• companies undertaking early abatement will reduce future obligations under the AETS and build capacity to manage both their emissions and the future carbon price risk
• the transition to the AETS will be smoother as business takes up low cost abatement opportunities and early carbon price discovery; and
• assisting Australia to meet its Kyoto target.

The complexities of satisfying the as yet to be detailed rules around additionality may mean prove to dissuade some businesses for taking advantage of this proposal.

Comment

As it is a discussion paper, there is no guarantee that the program proposal will bear any resemblance to that which is ultimately adopted for the early abatement program. There is however enough information for businesses to start preparing for the opportunities and obligations which will arise with the early abatement scheme and the National Greenhouse and Energy Reporting Scheme (NGERS).

First, detailed emissions and energy use and creation records must be maintained, whether or not businesses are looking at early abatement opportunities. The sooner businesses start the data collection process (for those who have not already) the more likely that the necessary systems will be in place in the time frames required. This will also be important where the PMC has flagged that the regulator will look to additional data sources to test the veracity of data reported pursuant to NGERS.

Secondly, for those businesses in covered sectors only abatement occurring in advance of the AETS and after 3 June 2007 will be eligible to earn credits. Therefore to the extent that these businesses wish to position themselves to earn early action credits, it is necessary to start the planning process now, recognising that there are many unresolved issues around the process.

Thirdly, the paper suggests that the AGO Greenhouse Challenge Plus Reporting and Verification guidelines under the Greenhouse Friendly Program will assist those seeking to measure abatement activity, and it is proposed that this program be used for this purpose. Any action undertaken before further announcements by the PMC should consider this program.

Fourthly, businesses looking to take advantage of early abatement opportunities should note that:

• there is a limited window of opportunity in which to develop project proposals, submit them for approval and generate credits prior to the commencement of the AETS. This is especially in light of the fact that there are no firm guidelines in place to date; and
• any banking limitations on emissions permits dated for the first year of the AETS will also apply to early action credits.

For further information, please contact Brendan Bateman.