Laying the foundation for an Australian Emissions Trading Scheme

By Brendan Bateman and Natalie Hewitt.

Key Points:
Greater detail on reporting obligations and methodology is needed to evaluate the NGER Act.

In July we reported on the rush to greenhouse gas ("GHG") reporting, considering steps taken by both the Commonwealth and the States and Territories to introduce a robust GHG reporting system.

Since this publication, the Commonwealth Government has:

• announced Australia’s Climate Change Policy which includes a commitment to introduce a national emissions trading scheme by 2011;
• passed the National Greenhouse and Energy Reporting Act 2007 ("NGER Act");
• released a regulations discussion paper on the proposed National Greenhouse and Energy Reporting System established by the NGER Act; and
• released for public consultation a discussion paper on incentives for early abatement in the lead up to the commencement of the Australian Emissions Trading Scheme ("AETS").

The legislative and policy initiatives in recent months have been supplemented by numerous consultation forums around the country on the discussion papers. This underlines the importance of having many of these and other measures in place within a relatively brief period to support the commencement of the AETS by 2011, and also the importance of Australia's response to climate change generally as an election issue.

NGER Act

The NGER Act is intended to provide a single, national framework for reporting GHG emissions and abatement action by corporations, as well as energy production and consumption, from 1 July 2008. When introducing the NGER Bill into Parliament, the Government stated that the Bill will lay the foundation for the future AETS announced by the Prime Minister, with the reported data informing emissions liabilities, permit allocation and incentives for early abatement action under the scheme. As both the Government and the Opposition have now committed to establishing the AETS, the NGER Act clearly has important implications for Australian business.

Thresholds limits for reporting obligations

The NGER Act will phase in reporting obligations over a number of years, with reporting obligations being imposed upon corporations which satisfy particular threshold limits. The first question for Australian business in assessing the implications of the NGER Act will therefore be whether the corporation satisfies these threshold limits.

There are four threshold limits for reporting, each of which is assessed in terms of the activities of a corporate group. The corporate group includes the controlling corporation and particular subsidiaries, joint ventures and partnerships. The threshold limits are set out in the table below.

Reporting obligations for registered corporations

Where a corporation satisfies one or more of the threshold limits for a financial year, it must apply to be registered on the National Greenhouse and Energy Register administered by the Greenhouse and Energy Data Officer ("GEDO"). Registration for the first reporting period must be completed before 31 August 2008. Reporting obligations are then imposed upon registered corporations.

Each financial year a registered corporation must report GHG emissions, energy production and energy consumption for all facilities under the operational control of the corporate group. What constitutes reportable "emissions" has been left to the regulations which will prescribe specific methodologies which will dictate the type of emissions to be reported. At this time, it is anticipated that the regulations will limit mandatory reporting to scope 1 and scope 2 emissions[1], but clearly the wording of the Act permits the regulations and prescribed methodologies to be amended to permit broader emissions reporting in the future.

Detailed requirements relating to the nature and scope of the information to be reported has also been deferred to later regulations. Similarly, the required method of calculation will be determined by the Minister at a later time, with the Minister able to require different methods of calculation for different industry sectors and different circumstances. This provides the Minister with considerable scope to introduce more detailed and targeted policy at a later time. Importantly for Australian business, it means that the specific reporting requirements are not yet known.

Greenhouse gas projects

Voluntary reporting of GHG reduction, removal or offsets from a GHG project is also available to registered corporations. Again, the required method of calculating GHG reduction, removal and offsets will be determined by the Minister at a later time, with the Minister able to require different methods of calculation for different industry sectors and different circumstances.

A GHG project is an activity designed to remove or reduce GHG emissions that meets particular requirements set out in regulations. These requirements, and therefore the activities that will qualify as a GHG project, are not yet known.

A corporation that is not otherwise required to register on the National Greenhouse and Energy Register may do so for the purpose of reporting GHG projects. With Australia’s Climate Change Policy stating that the Government will consider incentives for abatement action taken prior to commencement of the AETS [Link to Trisha's article], there will be a strong incentive for business to report GHG projects. A company which elects to voluntarily report on GHG projects will not be liable for technical breaches related to the manner and form of reporting under the NGER Act.

Publishing reported information

The Greenhouse and Energy Data Officer is required to publish reported information relating to a registered corporation for each financial year on a website. The Greenhouse and Energy Data Officer must publish the total GHG emissions, and energy production and consumption for each registered corporation, and may also publish information relating to any GHG projects undertaken. The GEDO has a discretion to publish the information as a range of values or specific figures, as well as a discretion to publish the information as a total for the corporate group or by reference to each member of the corporate group.

The NGER Act recognises that whilst it is important to make GHG emissions and energy related performance of corporations available to the public, such information can be commercially sensitive. To this end, a corporation may request that information is not published where it is capable of revealing trade secrets or the matter has a commercial value that may be destroyed if the information is disclosed. There is no requirement for the GEDO to disclose that information has been withheld, a feature which has drawn criticism from the Australian Conservation Foundation.

Interaction with State and Territory reporting schemes

As we reported in July, one of the main issues for business will be the cost of complying with the new reporting system. The NGER Act attempts to address this concern by providing a single reporting system that will operate across all jurisdictions and remove duplicative reporting requirements between the Commonwealth and the States and Territories, across a variety of schemes.

The reporting schemes that the NGER Act intends to replace include reporting obligations under a range of voluntary and mandatory schemes such as Greenhouse Challenge Plus, the Mandatory Renewable Energy Target Scheme, the Victorian State Environment Protection Policy, NSW/ACT Greenhouse Gas Abatement Scheme and the Energy Efficiency Opportunities Act. Early concerns about the breadth of the terms of the exclusive reporting regime and the potential for unintentional exclusion of related State and Territory law has been addressed by an amendment. The Act will now only apply to the exclusion of State and Territory laws related GHG emissions and projects, and energy consumption and production.

Information will be reported to the GEDO, with the GEDO under an obligation to disclose relevant information to the States and Territories except where certain conditions relating to confidentiality and security are not satisfied. The single reporting regime will however be phased in such that reporting under other schemes will continue for at least the initial period of the NGER system.

The single streamlined reporting system for GHG emissions and energy is also intended to give effect to the COAG agreement of July 2006. The Act provides that any amendment to a national environment protection measure does not apply to the extent that it requires reporting or disclosure of information relating to GHG emissions or GHG projects. On commencement of the NGER Act, it will have the effect of rendering redundant the States' and Territories' proposal to pursue an amendment to the NPI NEPM to require interim reporting of GHG under the NPI from 1 July 2008.

Comment

The NGER Act is a significant step towards the introduction of the future AETS, with the European experience during Phase 1 of the European Emissions Trading Scheme demonstrating the importance of the AETS being underpinned by robust data. The Government has announced its intention to use information reported under the NGER Act to inform emissions liabilities, permit allocation and incentives for early abatement action under the AETS. On this basis, the importance of the reporting obligations imposed by the NGER Act should not be understated.

Devil in the detail

The NGER Act defers a number of the more detailed reporting requirements to later regulations. While some of these requirements relate to the mechanics of the reporting scheme, others such as the criteria for GHG projects represent significant policy decisions. A regulations discussion paper has been released, which identifies a number of matters on which comment is sought including:

• the aggregation of emissions from smaller facilities for reporting purposes
• whether registered corporations should only be required to report data relating to specific thresholds exceeded in any reporting period, or report all emissions once the threshold is exceeded
• how the duplication caused from the reporting of scope 1 and scope 2 emissions by different reporting entities will be addressed; and
• how the system for external audits should be established and managed (for example, what qualifications and expertise should external auditors have, what guidelines are necessary regarding the conduct of audits and audit reports.

It is clear from the public consultation forums that have been conducted so far, that many important and difficult issues remain to be resolved, such as the treatment of emissions from diffuse sources (such as transport, pipelines and transmissions). It is anticipated that draft regulations will be available in early 2008.

Simplification of reporting?

The single national reporting system for GHG emissions and energy proposed by the NGER Act is also a welcome move towards reducing the cost to business of complying with the myriad of current reporting schemes. Again, as a number of detailed reporting requirements have been deferred to later regulations, it is not yet clear whether the NGER Act will actually deliver any significant cost reductions to business, and if it does, these may not be realised for some years whilst the NGER system in bedded down and the other scheme's reporting systems replaced.

EU ETS déjà vu

One of the significant concerns which remains is the quality and quantity of the data that will be available and which will inform the Federal Government's decisions on caps and allocations under the AETS. If, as stated, it is intended that the AETS commence by 2011, those decisions will be taken in parallel with the implementation of the NGER system. In circumstances where:

• registered entities do not report their emissions for the first reporting period (1 July 2008 - 30 June 2009) until October 2009
• the GEDO will not publish the reported data for that period until late February 2010
• the Federal Government estimates that approximately 300 corporations will be caught by the NGER system who presently do not report their GHG emissions or energy consumption/production under any other scheme; and
• the Minister for the Environment in the second reading speech for the NGER Bill stated that during the initial years of the NGER system, emphasis will be on building reporting capacity within registered corporations to achieve compliance, rather than enforcement - that is, trying to get robust data by educating registered entities about the scope of reporting,

there is a real risk that important aspects of the AETS, such as caps and permit allocations, will be based on something less than robust data, thus bringing with it the spectre of repeating the same mistake of the first phase of the EU ETS. This would be ironic having regard to the Federal Government's repeated statement that its caution in proceeding with an emissions trading system has been to avoid that very mistake in phase 1 of the EU ETS. If this was to occur with an AETS, the current proposed scheme would not permit that error to be remedied until the first five year "gateway" in 2016-2017, whereas the EU ETS was able to overcome that deficiency after only two years.

With a number of significant policy decisions relating to the scope of the reporting obligations yet to be announced, and the need for the development of methodologies with respect to measurement and auditing we wait to see how effectively the NGER Act will operate as the intended foundation of the AETS.

[1] "The Greenhouse Gas Protocol: A Corporate Accounting and Reporting Standard", describes scope 1 emissions as direct GHG emissions which occur from sources owned or controlled by the company, and scope 2 emissions as the GHG emissions from the generation of purchased electricity consumed by the company.

For further information, please contact Brendan Bateman.