Key Elements and Opportunities for Business in Australia

The White Paper presents the Commonwealth Government’s final design of its Emissions Reduction Fund (ERF) – the central component of the Direct Action Plan to reduce Australia’s emissions by 5% below 2000 levels by 2020.

This article sets out the key elements of the ERF, and opportunities for business in Australia.

In short, while the commencement date for the ERF is uncertain, proponents of emission reductions projects in the waste, mining, electricity, manufacturing and land sectors should be positioning themselves now to benefit from the $2.55 billion funding for the ERF. It is important for businesses to remember that the ERF is only intended to provide a platform for carbon regulation in Australia to 2020. Businesses should consider how best to use funds freed up by the ERF’s reduction in carbon compliance costs to position themselves to compete in a ‘carbon constrained’ Australian environment in the long term. In our view, a commitment and expertise in best practice sustainability will remain integral to streamline approval pathways for greenhouse gas emitting projects – regardless of the current political landscape surrounding carbon regulation in Australia.

ERF Key Elements

The ERF will comprise three core elements as follows:

Crediting Emissions Reductions

• proponents will be able to register emissions reduction projects with the Clean Energy Regulator (CER). The project must be consistent with an approved emissions reduction method, and satisfy other pre-qualification due diligence checks; 
• there will be a broad range of emissions reduction methods approved by the Minister for Environment. It is estimated that 30 emissions reduction methods will be available at the start of the ERF - these will be either ‘activity methods’ (specific emissions reduction activities such as landfill gas capture) or ‘facility-wide methods’ (aggregate of emissions reductions from multiple activities at large facilities); 
• the Carbon Farming Initiative (CFI) will be streamlined and merged with the ERF – so projects approved under the CFI will become ERF projects; and
• the CER will issue Australian Carbon Credit Units (ACCUs) to the proponent for verified emissions reductions. ACCUs will constitute personal property and businesses can compete to sell their ACCUs into the ERF, or use them in other ways such as in voluntary offset programmes.  

Purchasing Emissions Reductions

• the forward estimates commitment to the ERF will be $2.55 billion, with further funding to be considered in future budgets; 
• the CER will conduct 4 auctions in the first year (commencing in the second half of 2014) - with an indicative forward schedule of auctions published for the subsequent 12 months. The CER will confirm the auction once there are enough registered bidders; 
• proponents of registered projects can participate in auctions by submitting a secret bid on the basis of a price per ACCU generated by their emissions reductions project; 
• there will be a benchmark price set by the CER, above which emissions reductions will not be purchased. The CER has discretion to publish the benchmark price for the first auction, otherwise the benchmark price will not be published (however the weighted average price awarded to successful projects will be published after each auction); 
• emissions reductions will be purchased at the price offered in each successful bid. The Government will generate competition by purchasing only 80% of the emissions reductions offered for sale at a price below the benchmark price. Alternatively, the CER may set a budget for the auction and select projects up to that budget; 
• the CER will enter into a standard contract with successful parties to provide payment on delivery of emissions reductions. The Government’s preference is that contracts will be for five years, however the Government proposes to undertake market testing of contractual terms (including contract lengths) prior to the first auction; and
• the Government will retain a discretion to enter out-of-auction contracts with proponents of large scale emissions reduction projects by way of procurement and tendering processes.

Safeguarding Emissions Reductions

• a ‘safeguard mechanism’ will be implemented to set absolute emissions baselines for large scale facilities that emit direct emissions of at least 100,000 tonnes of CO2-e a year (estimated to be around 130 companies);
• for existing facilities, absolute emissions baselines will be set using existing data under National Greenhouse and Energy Reporting Scheme (NGERS). For new facilities (and significant expansion at existing facilities) baselines will reflect industry best practice; 
• a flexible framework is proposed to enforce compliance with the emissions baselines. Possible options include emissions-intensity testing, multi-year compliance period and offsetting emissions increases by purchasing ACCUs created by other emission reduction projects; and
• the ‘safeguard mechanism’ will not commence until 1 July 2015 - to allow the Government sufficient time for industry consultation on design and implementation.

Opportunities for Business

We have set out below some of the key opportunities for business in Australia arising from the ERF. 

Proponents of Emissions Reduction Projects

For proponents of emissions reduction projects there are a number of elements of the ERF that should provide reason for optimism as follows:

• there will be a streamlined and transparent approach to developing and assessing new emissions reduction methods. The Government anticipates that this measure will result in a ‘broad menu’ of emissions reduction methods available for project proponents to rely on (estimated to be at least 30 approved methods by the start of the ERF);
• the amount of funding for the ERF has increased from a total of $1.55 billion proposed in the Green Paper, to a forward estimates commitment of $2.55 billion with ‘further funding to be considered in future budgets’; and
• the types of industry sectors that are likely to benefit from ERF funding include large scale emitters (new generic method proposed for emissions reductions at facilities reporting under NGERS), waste industry (new methods proposed for capture and combustion of landfill gas and alternative treatment of organic waste), mining industry (capture and destruction of coal mine fugitive emissions) and the land sector (new methods for soil carbon, carbon sink plantings and reforestation).

Proponents of ‘Large Scale’ Emissions Reduction Projects

The ‘White Paper’ has sought to remove a number of barriers that were considered to prevent proponents of ‘large scale’ emissions reduction projects from participating in the ERF. The government considers large scale to be projects that can deliver emissions reductions above 250,000 tonnes of CO2-e per year.

The key elements of the ERF that are likely to provide scope for such projects to obtain funding under the ERF include:

• a mechanism for proponents of large scale emissions reduction projects to request (through the Emissions Reductions Assurance Committee) the Minister to give priority to developing a method for their specific project. Such methods could include emissions reduction improvements of large facilities such as power stations, and cement and aluminium production facilities; 
• the Government will retain a discretionary power to enter into contracts with proponents, that is not dependant on success in a reverse auction process. To enable this, the CER will be given power to use different types of procurement and tendering processes. This will allow the Government to fund large-scale emissions reduction projects that cannot compete with smaller scale, short term and low capital cost projects that are expected to participate in the in initial reverse auctions; and
• potential for the Government to grant contracts with longer terms than the preferred five year term – subject to market testing of contractual terms (including contract lengths) prior to the first auction.

Barriers removed for third party ‘project aggregators’

The Government proposes a number of measures to facilitate the cost effective implementation of emissions reduction projects by a ‘project aggregator’. For example, a company that is responsible for registering and managing one emission reduction project that comprises livestock emission reductions at a number of individual farms.

The measures proposed to achieve the above objective include:

• removing the requirement for project proponent to own or have a property interest in the project area. Instead, the project aggregator will only need to show that it has the agreement of landholders to participate in the project; and 
• creating standard arrangements for transferring rights from households and small businesses to a project aggregator to reduce implementation costs and perceptions of risk. 

Reduction of ‘carbon costs’ for large scale emitters

The key effect of the ‘safeguard mechanism’ is that large scale emitters will face greatly reduced carbon compliance costs to operate their business in Australia (as compared to the compliance costs forecast under the carbon pricing mechanism). 

That is, large scale emitters will not incur any costs to offset carbon emitted at business as usual levels from their facilities, and the options flagged to enforce compliance with emissions levels do not on its face represent a material cost risk. As stated above, suggested compliance options include emissions-intensity testing, multi-year compliance period and offsetting emissions increases by purchasing ACCUs created by other emission reduction projects. 

Removal of ‘carbon costs’ for small scale emitters

The ‘safeguard mechanism’ is only intended to set an emissions baseline for approximately 130 large scale emitters (with direct emissions of more than 100,000t/CO2-e a year or more). This will capture about 52% of Australia’s emissions.

The effect of the above is that approximately 229 ‘smaller scale’ emitters (those currently liable under the carbon pricing mechanism) will not be subject to any ‘carbon cost’ risk under the ERF arising from carbon emitted from its facilities. This may present a material saving for certain businesses, and provide some flexibility for businesses to invest such funds into clean energy and other emissions reductions programs to make the business more competitive in a ‘carbon constrained’ environment in Australia.

Corporate Environmental Reputation

The reduction in carbon compliance costs for large scale emitters (and removal of such costs for small scale emitters) presents an opportunity for companies to channel these funds into clean technology and emissions reduction programs.

While the political landscape for carbon regulation in Australia is likely to remain uncertain in the short term, in our view a commitment to sustainability will remain integral to any company that wishes to maintain and enhance its corporate environmental reputation in Australia, and to streamline approval pathways for new projects that generate greenhouse gas emissions. 

It is important for businesses to remember that the ERF is only intended to provide a platform for carbon regulation in Australia to 2020. Businesses should consider how best to use the funds freed up by the ERF’s compliance framework to position themselves to compete in a ‘carbon constrained’ Australian environment in the long term.

Next Steps

The Government proposes to:

• release draft legislation to implement the ERF for public comment in June 2014, with a view to the ERF commencing on 1 July 2014;
• release draft exposure legislation for the ‘safeguard mechanism’ in March 2015; and
• review the operation of the ERF at the end of 2015.