06 Feb 2014

Direct Action's Emissions Reduction Fund begins to take shape with release of Green Paper

by Brad Wylynko, Monty Neate

The current public consultation period provides businesses an opportunity to comment on and potentially influence the design of the proposed Emissions Reduction Fund, the centrepiece of the Federal Government's Direct Action Plan.

With efforts underway to abolish the Carbon Pricing Mechanism (CPM) implemented under the Clean Energy Act 2011 (Cth), the Federal Government continues to progress its Direct Action Plan, to reduce Australia's domestic greenhouse gas emissions.

At the heart of the Direct Action Plan is the proposed Emissions Reduction Fund (ERF). The ERF aims to provide a pool of capital for the Clean Energy Regulator to purchase lowest cost emissions reductions or abatement (consisting of an initial allocation of $300 million).

In contrast to the tax-based approach provided under the CPM introduced by the former Federal Labor Government, the ERF is designed to provide a direct incentive for businesses operating in Australia to reduce their emissions below historical business-as-usual levels. Details of the Government's preferred design for the ERF are outlined in the Emissions Reduction Fund Green Paper released for public comment on 20 December 2013.

The Green Paper sets out the design principles which underpin the ERF:

  • Lowest cost emissions abatement;
  • Genuine emissions reduction; and
  • Streamlined administration.

Although the specific details of the ERF are yet to be determined, it is proposed the ERF will:

  • operate from 1 July 2014 to 2020;
  • be designed to allow businesses to continue "business-as-usual" operations without penalty;
  • build on existing arrangements under the Carbon Farming Initiative (CFI) legislation for crediting emissions reductions through the issue of Australian Carbon Credit Units that are measured and verified by approved methods;
  • be supported by a mechanism that will provide incentives to not exceed historical emissions baseline (although the precise nature of the relevant incentive is not yet known). Implementation of this mechanism could be delayed until 2015 to provide the Government with additional time to consult with business; and
  • exclude from eligibility, any emissions abatement achieved under any other program.

The Government also proposes that:

  • the existing Clean Energy Regulator will operate a procurement process to purchase emissions reductions at the lowest available cost. This is likely to involve a reverse auction format;
  • there will be two categories of eligible emissions abatement methodologies: activity-based and facility-based methods; and
  • the Government will enter forward contracts on standard contract terms. The contract period will generally only be for five years, and may not be in respect of all the credits generated from a particular project during that period.

The Green Paper states that credits not contracted to the government are eligible for purchase by business wanting to offset emissions. Some submissions on the Green Paper have indicated that in the absence of a commitment to acquire credits over the life of a project (which can extend for periods of greater than five years) – or some legal obligation on emitters not to exceed baselines – the prospect of a viable market developing around project credits may be limited.

In addition, the fact that the Government intends to review Australia's climate change policy in 2015 as part of the next round of international climate change negotiations, but essentially only a year after the proposed implementation of the ERF, adds further uncertainty to the risk profile of abatement projects.

The Government is inviting submissions in response to the ERF Green Paper until COB on Friday 21 February 2014. The Government has indicated it is seeking comment particularly with respect to:

  • developing methods for calculating emissions reductions from priority activities, including "importing" international methodologies and adapting them to the requirements of the ERF and National Greenhouse and Energy Reporting Scheme (NGERS);
  • streamlining approval of methodologies;
  • the scope of covered emissions for the purpose of the ERF, which could involve both scope 1 and scope 2 emissions which are currently reported under NGERS;
  • how business-as-usual emission baselines should be set (for example, average historical absolute emissions, or emissions intensity), and the threshold at which a facility will be covered (with the suggestion that a 100,000CO2-e threshold will reduce the number of covered entities to 190 and cover 50% of Australia's emissions);
  • compliance options in the event business-as-usual emissions baselines are exceeded, including the potential for a multi-year compliance period; and
  • the treatment of new entrants and significant expansions, with the suggestion that industry average or best practice emissions intensity may be more appropriate.

Responses received in connection with the ERF Green Paper will inform the development of a proposed ERF White Paper. Although the Government has given no indication as to when any such White Paper will be made available, it has committed to implementation of the ERF by 1 July 2014 to align with the removal of the carbon tax.

The current public consultation period provides businesses an opportunity to comment on and potentially influence the design of the proposed ERF – the centrepiece of the Federal Government's Direct Action Plan for reducing Australia's domestic greenhouse gas emissions. It is also a timely reminder of the potential opportunities under the Federal Government's proposed ERF.

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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.