The Carbon Farming Initiative formally commenced on December 8 2011, yet we are still some way off seeing any Australian Carbon Credit Units (ACCUs) being generated for sale. In particular, this is because a draft of regulations to dictate the approach towards reporting on abatement or sequestration, and any associated audit requirements (the precursor to ACCU issuance), has only recently been released for consultation by the Department of Climate Change and Energy Efficiency.
Projects cannot receive approval under the CFI until there is a methodology determination in place for the relevant project type. Although four methodologies have been approved to date, none of them have yet been promulgated as a determination.
So when can we expect to see ACCUs hitting registry accounts, and what kind of volume might we expect?
Our expectation had been that the first projects off the rank would be the existing NSW Greenhouse Gas Abatement Scheme or Greenhouse Friendly projects (see the Guide we authored with RAMP Carbon on behalf of the Carbon Market Institute - http://www.carbonmarketinstitute.org/publications/implementing-the-carbon-farming-initiative-a-guide/). These schemes (plus the ACT GGAS and Verified Carbon Standard) have been deemed “prescribed non-CFI offset schemes”, and the CFI makes specific provision for projects from these schemes to be converted into CFI projects.
In particular, the legislation provides special arrangements for existing landfill gas projects, which are exempt from complying with the “regulatory additionality” hurdle. The regulatory additionality hurdle provides that a project cannot participate in the CFI if it is required to be carried out by or under a Commonwealth, State or Territory law. The approved methodology for landfill gas projects then goes even further, by specifying a default baseline for these projects: 24 per cent for GGAS and 0 per cent for Greenhouse Friendly.
So what is stopping owners of these types of projects from immediately seeking to have ACCUs issued off the back of their existing projects? Well, the latest draft regulations for one.
These regulations (issued in draft by the Department on April 5) provide that it will not be possible to convert existing New South Wales Greenhouse Gas Abatement Certificates (NGACs) into ACCUs (an expected outcome, given recent indications from the Department). They also provide that it will not be possible to convert the actual abatement that has already occurred, or may occur in the future, into ACCUs if that abatement (and the credits it may generate) has already been sold or transferred. Even if such a contractual arrangement is unwound, that abatement still cannot benefit through participation in the CFI.
Although the government has recently confirmed that these provisions are only intended to capture abatement up to July 1 2012 (although this is not clear from the current wording in the exposure draft regulations), and hopefully this will be reflected when the regulations are actually made. These restrictions, however, mean that the possibility of an initial volume of around 7 million ACCUs will not eventuate.
The effect of the above approach is that for existing projects it is likely only to be abatement which occurs after July 1 2012 which will receive ACCUs and even then the ACCUs are unlikely to start to issue until after July 1 2013. This is because the minimum reporting period for a CFI project is one year, and a report certifying that the abatement has occurred needs to have been completed in order to receive ACCUs. Accordingly, it will not be possible to apply for a certificate of entitlement (to receive ACCUs) until a report has been prepared and submitted to the Clean Energy Regulator.
Similar arrangements will apply in relation to new projects seeking to participate in the CFI. Approved projects will need to have been underway for at least a year before they can submit their offsets report, apply for a certificate of entitlement and receive their ACCUs. The prerequisites for receiving project approval include there being a methodology determination in place, satisfying the additionality test and being both a recognised offsets entity and the project proponent.
As mentioned above, given that there are currently no methodology determinations in place, there is no ability at present to apply for project approval under the CFI. Additionally, although we are aware that applications have been lodged by people to become recognised offsets entities, we are not sure whether the Regulator has actually approved any of these applications as yet.
It appears to us that there are unlikely to be many, if indeed any, ACCUs issued during the first year of the Carbon Pricing Mechanism (CPM). This is important when one considers the likely demand, which amounts to 5 per cent of total liability for the facilities covered under the CPM, and up to 100 per cent for landfills which are covered by the CPM – the latter equating to an annual demand of over 11 million tonnes.
The other key variable which will be critical to generating supply is the quick development of methodologies. Although only four have been approved to date, and another six are at various stages in the approval process, we understand that there are a significant amount of methodologies currently in development. There are currently 14 project types on the “positive list”, and the ability for more to be added.
Government support for methodology development has recently been announced with an amount of $19.6 million being allocated to the Methodology Development Program as part of the Carbon Farming Futures package. Now it just remains for the agricultural, farming, landfill and other land based sectors to respond to the opportunities that the CFI presents to produce the 20 plus million tonnes of ACCUs that the government has predicted may be generated in the marketplace by 2020.
Elisa de Wit is an environment and planning, and climate change lawyer based in Melbourne.