Jurisdiction - Australia
Reports and Analysis
Australia – Emissions Reduction Fund White Paper Released.

7 May, 2014

 

Legal News & Analysis – Asia Pacific – Australia – Environment 

 

What You Need To Know

 

  • On 24 April 2014, the Government released the Emissions Reduction Fund White Paper.
  • The Emissions Reduction Fund White Paper sets out the Government’s position on the design, implementation and ongoing development of the Emissions Reduction Fund, in particular the processes for crediting and purchasing emissions reductions and the safeguard mechanisms. 
  • The Emissions Reduction Fund White Paper has expanded on the details previously provided by the Emissions Reduction Fund Green Paper, however there remains a number of gaps in the information provided especially in relation to the penalties that will be imposed if businesses exceed their emissions baselines. 
  • The Government has also revealed that an extra AUD 1bn will be allocated to the Emissions Reduction Fund, increasing the total commitment to AUD 2.55bn, with further funding to be considered in future budgets. 
  • The Government intends to release the exposure draft legislation on the Emissions Reduction Fund by June 2014, with the exposure draft legislation on the safeguard mechanism to be released late 2014 – early 2015.

 

What You Need To Do

 

  • There will be further opportunity to comment on the operation and implementation of the Emissions Reduction Fund following the release of the exposure draft legislation. We will notify you when the exposure draft legislation is made available. 
  • Proponents should seize this opportunity prior to the release of the exposure draft legislation to:
    • consider what emissions reducing and productivity-enhancing activities may be undertaken, and
    • perform the necessary feasibility studies,
 

to ensure that they are in a position to bid into the Emissions Reduction Fund once it has opened for business. 

 

The Emissions Reduction Fund White Paper (White Paper) sets out the Federal Government’s (Government) position on the design, implementation and ongoing development of the Emissions Reduction Fund (Fund) and assigns responsibility for administering the Fund to the Clean Energy Regulator. The release of the White Paper is the next step in the development of the Fund, to be followed by the release of the exposure draft legislation (Draft Legislation) by June 2014.
The White Paper sets out the Government’s major decisions on the three key elements of the Fund:

 

  • crediting emissions reductions, including the methods for calculating emissions reductions and the steps for participating in the Fund; 
  • purchasing emissions reductions; and
  • safeguarding emissions reductions.
 

The White Paper is largely consistent with the Government’s initial position under the EmissionsReduction Fund Green Paper (released 21 December 2013) (Green Paper). However, the White Paper has failed to close some of the gaps in the design of the Fund highlighted by the Green Paper. We anticipate that many of these questions will hopefully be answered in the Draft Legislation.


This alert considers the Government’s policy position and major decisions disclosed in the White Paper. This alert does not consider the political obstacles faced by the Government in respect of repealing the carbon price or passing the Draft Legislation.
Although the White Paper has expanded on the Green Paper, there still remains a considerable number of gaps in the policy which will need to be closed in order for the crediting and purchasing elements of the Fund to commence on 1 July 2014.

 

Crediting Emissions Reductions 


The Clean Energy Regulator will issue Australian Carbon Credit Units (ACCUs) for genuine emissions reductions estimated and verified in accordance with approved methods.
The Government proposes two types of emissions reductions methods:

 

  • activity methods: for specific emissions reductions actions; and 
  • facility methods: for aggregated emissions reductions from multiple activities of facilities reporting under the National Greenhouse and Energy Reporting Scheme (NGERS).
 

Some of the emissions reductions methods currently under development through technical working groups include:

 

  • a generic method for emissions reductions at facilities reporting under the NGERS; 
  • capture and destruction of coal mine fugitive emissions; 
  • methods for land sector including increasing soil/carbon and reducing livestock emissions; and 
  • capture and combustion of landfill gas.
 

To ensure that the methods for calculating emissions reductions meet the integrity standards of the Fund, and are delivering genuine emissions reductions, the Government will establish an independent committee (Emissions Reduction Assurance Committee) to provide expert advice on the development of methods. This committee will replace the existing Domestic Offsets Integrity Committee under the Carbon Farming Initiative. 


The steps proponents will need to follow in order to submit their emissions reductions projects into the Fund are summarised in the table below.

 

STEP ACTION
1 Estimate and register project  Participants will:

 

  • use an approved method to estimate the likely emissions from their proposed project; and
  • register their emissions reductions projects with the Clean Energy Regulator.

 

Proponents must also register if they intend to bid in forthcoming auctions.

 

Prior to the auction, the projects will be subject to due diligence checks to ensure (amongst other things) their capability to deliver the proposed emissions reductions.

 

2 Submit auction bids  Participants of approved projects may submit a bid into the auction to sell emissions reductions on the basis of price per tonne of CO2-e.

 

3 Enter into contract  Successful bidders will then enter into contracts with the Government to purchase emissions reductions from their projects.

 

4 Report project abatement and receive payment for contracted credits  

Participants will undertake projects and report their emissions reductions to the Clean Energy Regulator, who will then verify reports and issue credits to the proponent.

 

Payment for credits will be made at the contract price.

 

 

Government Purchasing Emissions Reductions 


Business will be able to bid to undertake projects to deliver emissions reductions. The White Paper confirms that the Government’s final policy position is to use an auction process in order to select projects from the start of the Fund. 


Successful bidders will be required to enter into a contract with the Government for the purchase of the emissions reductions. Although the Government has proposed standard form contracts, proponents may still expect to incur cost in respect of negotiating these contracts.


The Government’s preference is that contracts will be for five years. The Government has however acknowledged industry concerns that the proposed five year period may be too short and, in some circumstances, may prevent proponents from securing project finance.
In response to these concerns, prior to the first auction the Government will conduct a market assessment of projects proposed to be bid into the Fund to ensure the appropriate contractual arrangements (including in relation to alternate contract lengths) are in place. However, if this market assessment exposes issues with the contracting periods there is limited time for the Government to reconsider its position (or contractual terms) prior to the first auction or for bidders to re-assess their bids. 


Although the Government will require participants to agree to be bound by a standard form contract the White Paper has not provided details about the terms of those contracts. The form of the contracts and the obligations imposed on the proponents will be critical because the Government will seek to use a standard contract to facilitate an auction process. In addition to usual commercial terms, the contracts will need to address:

 

  • achievement of the project milestones – under previous funding schemes, the Government has deferred payments until milestones are achieved; 
  • the failure to deliver emissions reductions – the Government has suggested a make good or liquidated damages regime might apply; 
  • confidentiality and intellectual property associated with projects; 
  • financing of the project and matching Fund payments to the financing; 
  • credit support arrangements; and
  • the effect of interfering events (eg, bushfire).
 

Auctions will commence in July 2014 and will be run regularly with four auctions to be scheduled in the first year. The Clean Energy Regulator will be responsible for setting the benchmark price and publishing an indicative 12 month forward schedule of auctions. 

For the first auction only, discretion will be given to the Clean Energy Regulator to publish the benchmark price ahead of the auction. 


Safeguarding Emissions Reductions 


In addition to incentivising participants to reduce emissions, the Fund will also employ safeguarding mechanisms to encourage participants not to exceed historical emissions baselines. It is still unclear how increases in emissions by businesses will be penalised under the Fund. We expect clarification in respect of penalties and disincentives for exceeding emission baselines to be addressed in the Draft Legislation. We see this as a significant issue for business which requires urgent resolution. 


Ensuring emission baselines are effectively determined was one of the key issues raised by industry participants in response to the Green Paper. The Government has now established two separate processes for determining the emissions baselines:

 

  • emissions baselines for existing projects will be based on existing data reported under the NGERS. To accommodate factors such as natural variability in emissions, reductions levels, and changes in the types of inputs used, baselines will be set using the highest level of reported emissions for a facility over the period 2009-10 to 2013-14. 
  • emissions baselines of new facilities or significant expansion at existing facilities where NGERS data does not already exist, will be calculated on the basis of industry best practice. Determining what constitutes “industry best practice” is still subject to further consultation.
 

Timeline For Implementing The Fund 


Below are the key dates for the implementation of the
Fund.

 

May – June 2014 Draft Legislation released
July 2014 Crediting and purchasing elements of the Fund to commence
December 2014 – March 2015 Exposure draft legislation for safeguard mechanism released
July 2015 Safeguard mechanism to commence
End 2015 Review of the Fund

 

The dates above are indicative and the commencement of the Fund depends upon the Government successfully repealing the carbon price.

 

To date, attempts by the Government to pass the suite of bills to repeal the carbon price have been met with opposition from the Senate. As the new Senators do not take their seats until 1 July 2014, it is unlikely that the Draft Legislation will be passed in time for the Fund to commence on 1 July 2014.

 

Ashurst Logo

 

For further information, please contact:

 

Tony Hill, Partner, Ashurst
tony.hill@ashurst.com 


Jeff Lynn, Partner, Ashurst
jeff.lynn@ashurst.com

 

Paul Newman, Partner, Ashurst 
paul.newman@ashurst.com 


John Briggs, Partner, Ashurst
john.briggs@ashurst.com

 

James Bruining, Partner, Ashurst 
james.bruining@ashurst.com

 

Natsuko Ogawa, Partner, Ashurst 
natsuko.ogawa@ashurst.com

 

Peter Limbers, Partner, Ashurst 
peter.limbers@ashurst.com

 

Ashurst Environment Practice Profile in Australia 

Comments are closed.