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10 Jul 2009

Seeing the wood for the trees: A look at recent forestry amendments to the CPRS

by John Clayton

The proposed amendments to the CPRS Bill in relation to forestry could mean more commercial flexibility in dealing with carbon sequestration rights arising from forestry projects and a streamlined integration of forestry into the CPRS.

In May 2009, the House of Representatives passed changes to the CPRS Bill 2009 ostensibly in response to feedback from stakeholders and as a result of the global recession, including amendments dealing with forestry.

This article takes a short look at some of the forestry amendments.

Scheme in a nutshell

The CPRS as it is currently proposed establishes a mechanism whereby eligible reforestation projects can participate in the CPRS and earn Australian Emissions Units (AEU). There are a number of steps which need to be satisfied in order to participate in the CPRS:

  • an entity must have an exclusive, enforceable right to forest carbon. The Bill sets out the criteria required to establish the exclusive enforceable rights. In general terms, the Bill picks up the provisions of the various State-based carbon rights creation and registration schemes, so that a carbon right which is a legal creature in a State jurisdiction will be a relevant carbon right for the purposes of the CPRS;
  • an entity will need to apply for and be recognised as a reforestation entity;
  • once accredited as a reforestation entity, the entity must include its forest in the CPRS. The forest will need to satisfy the requirements of the Kyoto Protocol, and may then be declared an eligible reforestation project.

Once the forest is declared to be a reforestation project, it may participate in the CPRS.

There are a number of other elements of regulation for a reforestation project established by the CPRS, but this article will focus on three significant amendments to the way forests are treated as a result of the recent changes to the Bill.

Multiple titles

Under the original CPRS Bill a reforestation project had to be confined to a single land title. This resulted in significant concern from stakeholders given that most large-scale commercial forestry projects would include multiple land titles. Further, there would always be the potential for subdivision of a single title at a later point in time. The compliance implications (including multiple reporting) caused by multiple titles was said to be a disincentive to participating in the CPRS.

The Bill has now been amended to allow reforestation projects over multiple land titles. The summary produced by the Department of Climate Change in relation to the Bill suggests that this will allow larger entities to manage forests across different geographical locations in order to reduce some sorts of risk, for example, from natural events such as fire.

There are also likely to be significant administrative benefits, enabling participation in the scheme to be defined by reference to landholders rather than lot boundaries

Transfer scheme liabilities

Under the initial version of the CPRS Bill, the person who held the carbon sequestration right for the reforestation project also held the liability to comply with the CPRS, including reporting and relinquishment obligations (relinquishment obligations arise, for example, when forests for which AEUs have been issued are cleared without being replaced).

Under the amendments to the Bill, it will be possible for the holder of the carbon sequestration right to enter into an agreement with another person to transfer the liability for complying with the CPRS to that person. The right to transfer liabilities is not untrammelled and must be approved by the regulating authority. The Bill sets out the criteria for approval.

These agreements may be unilaterally cancelled by the holder of the carbon sequestration right if it wishes to assume responsibility for compliance with the CPRS. The Department's summary says this will enable a broader range of legal and commercial arrangements for reforestation projects. We note that it will also allow a more flexible allocation of risk in commercial arrangements where reforestation is an element.

Forest maintenance

Under the initial CPRS Bill, an accredited reforestation project could be issued with AEUs on the basis of its estimated carbon sequestration over the life of the project. Having regard to the exigencies of carbon sequestration, it is proposed that the AEUs be calculated having regard to a risk of reversal buffer. This is relevant because where there is shortfall in actual carbon sequestration when compared to the AEUs granted for the project (such as in the example given above where a forest is cleared without being replaced), the holder would have to relinquish AEUs to have regard for this shortfall. The average calculation of AEUs and the risk of reversal buffer were designed to mean no surrender of AEUs in the event of natural occurrences such as fire, provided that any lost forest was reforested.

Where the forest is cleared or not replanted following harvesting or other destruction, the forest entity may be liable to surrender AEUs and there may be a notice issued on that entity to surrender the AEUs. If the AEUs are not surrendered as required then a forest maintenance obligation will arise.

Under the initial CPRS Bill, the forest maintenance obligation rested on the forestry right holder (usually the landowner). The forest maintenance obligation was an obligation to re-establish the forest if it had been cleared or maintain an existing forest. The obligation would be enforced on the forestry right holder even if that entity did not receive the AEUs in the first place.

Under the amended CPRS Bill, the forest maintenance obligation is converted from a positive to restrictive obligation and is a broad-based obligation. It now applies to all persons with an interest in the land and, in effect, requires that a person must not engage in conduct that will have the effect of reducing the long-term carbon stores of a forest. Because this obligation applies to "persons" in general rather than the forestry right holder, the burden of the forest maintenance obligation will be spread more broadly and contraventions of the obligation will be easier to prove. The Department's summary notes that this approach reduces the risk to landowners for allowing reforestation projects on their land.

Conclusion

The proposed amendments to the CPRS Bill in relation to forestry are likely to have the effect of allowing more commercial flexibility in dealing with carbon sequestration rights arising from forestry projects and may well have the effect of streamlining the integration of forestry into the CPRS.

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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 communication. Persons listed may not be admitted in all States and Territories.