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Focus: Detailed analysis of White Paper – forestry, agriculture, offsets and energy efficiency

26 February 2009

In brief: Following on from our summary of the Federal Government's White Paper on its Carbon Pollution Reduction Scheme, Australia's Low Pollution Future, Partner Jim Parker and Senior Associate Robyn Glindemann discuss in greater detail the White Paper's proposals on the treatment of forestry, agriculture, offsets and energy efficiency initiatives under the Scheme. This is the ninth and final in a series of articles that examines in more depth the principal proposals contained in the White Paper.

How does it affect you?

  • While the Carbon Pollution Reduction Scheme will not extend to deforestation, Kyoto-compliant forests will be able to opt voluntarily into the Scheme. This option will be available to entities that have an enforceable right to the carbon in the forest and that satisfy certain other elegibility requirements.
  • By opting into the Scheme, these entities will qualify for carbon permits, the number of which will be calculated using an 'average crediting' approach and taking into account the risk of forest destruction. They will also be liable to surrender carbon permits to account for forest-related emissions (eg due to forest harvesting or destruction), although this exposure will be limited to the number of carbon permits issued for carbon sequestration by the forest.
  • Non-energy emissions from agriculture will not be covered by the Scheme until 2015 at the earliest, with a decision on their coverage to be made in 2013. The Government will commence a work program this year to consider issues arising from the possible inclusion of agriculture in the Scheme, and interested parties should ensure they participate in this process.
  • In 2013 the Government will decide whether – and, if so, what – domestic offsets will be able to be used to acquit Scheme liabilities. However, the scope for such offsets will be very limited, and the costs of monitoring and verifying the associated emissions abatement is likely to be substantial.
  • The federal, state and territory governments are seeking to develop national energy efficiency initiatives that will educate consumers about, and encourage consumers to adopt, energy efficient technologies and practices.

The treatment of forestry

The White Paper position in relation to the treatment of forestry activities under the Carbon Pollution Reduction Scheme (CPRS) is largely the same as that set out in the Green Paper, although more details have now been disclosed in relation to the forestry entities that will be able to participate in the CPRS.

The broad principles are:

  • Because of the complexity and costs of including deforestation in the CPRS (including the fact that it may occur over a large number of small landholdings), and because deforestation is already regulated at a state or territory level, deforestation activities will not be covered by the CPRS. However, the Government will continue to explore incentive-based mechanisms (including offsets) to reduce emissions from deforestation. 1
  • All reforestation activities that meet Kyoto Protocol compliance requirements may opt into the CPRS from its commencement, thereby becoming eligible to generate carbon permits (to be known as Australian Emissions Units (AEUs)) through sequestering carbon dioxide and becoming liable to acquit AEUs to cover the deemed release of such carbon dioxide (eg where the forest is harvested or destroyed by bushfire or disease). The Australian definition of a forest for Kyoto Protocol purposes is one that is established by positive human action on or after 1 January 1990 on previously cleared land, that comprises trees with a potential height of at least two metres and crown cover of at least 20 per cent, and that covers a minimum of 0.2 hectares in area.2
  • For the future, the CPRS will only cover those forests that are recognised under international greenhouse gas accounting rules. For this purpose, the Government appears to be inclined to mandate an improved version of the National Carbon Accounting System and Toolbox as the methodology to be used to estimate emissions and carbon sequestration. However, if the applicable methodology is to change, including as a result of a material unanticipated change in the international accounting rules, the Government will give five years' notice of that change.3

An issue that has been the subject of considerable debate is whether permitting reforestation activities to generate AEUs that can be traded will encourage the conversion of agricultural land to forests, potentially undermining food security. This was raised in a recent Senate inquiry, in the context of changes to the federal income tax legislation to allow tax deductions for carbon sequestration activities.4 Studies by the Australian Bureau of Agricultural and Resource Economics (ABARE) indicate that most forests that will opt into the CPRS will be not-for-harvest forests that will 'lock up' land for a long time, and will tend to be established on marginal or less productive agricultural land.

Who will be able to participate?

To be eligible to participate in the CPRS, the forest entity must have an enforceable right to the sequestered carbon. This will include the owner or lessee of the land on which the forest is situated or, if the owner or lessee has granted a right to the carbon to a third party, may also include the owner of that carbon right.

The White Paper recognises that some state carbon rights regimes may not grant the holders of those rights sufficiently enforceable rights to enable participation in the CPRS, and so it is likely that some state carbon rights regimes will need to be amended before carbon rights holders in those states can opt into the CPRS.

In addition, the forest entity will need to be accredited for CPRS purposes, which means that it will need to meet certain other requirements, such as a demonstrated capacity to meet its CPRS obligations or being a fit and proper person. It may also be required to place a restrictive covenant on the land title,5 or to provide some other form of security (such as a bank guarantee), pending the discharge of its CPRS liabilities in respect of the forest. These liabilities will crystallise if and when the forest is harvested or destroyed and not regenerated, because the accredited forest entity will then be required to surrender AEUs for the carbon that is deemed to be 'released'.

The precise criteria for determining eligibility as an accredited forest entity, and what amendments will be needed to state carbon rights legislation in order to allow holders to participate in the CPRS, is still to be determined.

It has been acknowledged previously in other environmental regulatory reform processes that the development and maintenance of large plantations (whether for timber production or carbon sequestration) has the potential to intercept large volumes of water that might otherwise flow into catchments. The National Water Initiative explicitly recognises this potential impact, and signatory governments are working on a set of common definitions and best practice principles for managing water interception by plantations.6 Relevantly, the White Paper states that the regulator will not have the capacity to access natural resource management implications of reforestation activities when deciding whether a given forest should receive AEUs under the CPRS. Thus, the onus will be on the accredited forest entity to ensure that obligations under or requirements imposed by other natural resources management programs will be met, and to manage the interaction of those programs with CPRS obligations and requirements.

Participating in the Scheme

To include a particular forest in the CPRS, the accredited forest entity will need to:

  • demonstrate the forest is Kyoto compliant and have it registered by the regulator;7
  • submit an initial emissions estimation plan and supporting forest management data;
  • submit emissions estimation reports at least once every five years but not more than once a year;8 and
  • notify the regulator of any major changes in forest management, and of any natural disturbance events, that could materially change emissions estimates.9

Issue of AEUs for sequestered carbon: The regulator will only issue AEUs to an accredited forest entity in respect of a registered forest where the regulator has accepted the entity's emissions estimation report and the claimed sequestration has actually occurred (ie the trees have grown). Where a forest is registered during the first Kyoto Protocol commitment period (2008–12), the accredited forest entity will be entitled to receive AEUs for increases in the 2008 carbon stock. Where a forest is registered after the first Kyoto Protocol commitment period, then, unless the regulator otherwise agrees, the accredited forest entity will generally only be entitled to receive AEUs for net greenhouse gas removals10 from the date of registration of the forest (or, if the forest is registered within two years of its establishment, for all net greenhouse gas removals).

For the purpose of calculating an accredited forest entity's entitlement to AEUs, the regulator will use an 'average crediting' approach under which AEUs will be issued on a stand-by-stand basis for projected net greenhouse gas removals up to a permit limit determined by the regulator. These projected net greenhouse gas removals will be based on the emissions estimation plan submitted by the accredited forest entity (as updated from time to time). The permit limit will be based on projected net greenhouse gas removals over a long period of time (such as 70 years), reduced by a 'risk of reversal buffer' that is to be determined by the regulator and is intended to account for the risk associated with natural events like fire, storms, drought and pests.11  Where a forest is intended to be periodically harvested, its permit limit (and consequent allocation of AEUs) will be less than that of a forest that is never harvested, because its net carbon sequestration over the same period of time will be less. The permit level will be subject to adjustment for changes in forest management, international emissions accounting rules and prescribed estimation methodologies (which, in turn, may entail either the issue of additional AEUs or the surrender of AEUs).

AEUs will not be issued for greenhouse gas removals that have been sold as offsets, because that would mean that this abatement is double-counted.

Liability to surrender AEUs: The use of an 'average crediting' approach, and the incorporation of a risk of reversal buffer, will reduce the likelihood that an accredited forest entity becomes liable to surrender AEUs for forest emissions. In effect, this is only likely to occur if the forest is harvested or destroyed and is not replanted or allowed to regenerate. Moreover, an accredited forest entity's liability to surrender AEUs will be capped at the number of AEUs that have been issued for carbon sequestration by that forest.

Looking overseas, Australia is a participant in the $200 million International Forest Carbon Initiative, which is intended to support developing countries (such as Papua New Guinea and East Timor) in reducing emissions from deforestation and forest degradation. The Government has also indicated that it supports incentives to reduce emissions from these sources being included in any post-2012 international climate change agreement.12 However, the Government is not prepared to accept credits generated by these activities into the CPRS until robust methodologies for estimating and accrediting these kinds of abatement have been established, and those credits are recognised for the purpose of compliance with international emissions reduction targets.13

The treatment of agriculture

Non-energy emissions from agriculture (eg emissions from livestock and cropping) are Australia's second-largest source of greenhouse gas emissions, making up approximately 16 per cent of the nation's account.

In its Green Paper, the Government stated that, while it was not practical to include agriculture as a covered sector from the start of the CPRS, it was disposed to extend the CPRS to non-energy agricultural emissions in 2015, although a final decision on this matter would be made in 2013. This position remains unchanged in the White Paper. However, this does not mean that the agriculture sector will not be affected by the CPRS: the prices of fuel, fertilisers, electricity and freight will increase, potentially causing a substantial reduction in farm profits.14

Recognising both the complexity of measuring non-energy agricultural emissions (which vary substantially depending on farming practices, climate and geography) and the administrative costs and difficulties of covering the high number of relatively small participants in this sector, the Government has proposed a work program, to commence this year, to consider the following issues in consultation with the agriculture sector:

  • economic analysis of the impacts of coverage and of different points of liability under the CPRS;
  • analysis of the supply chains for agricultural products to identify cost-effective points of obligation;
  • research aimed at improving emissions estimation techniques and the development of emissions reporting capability; and
  • a voluntary trial of reporting under the National Greenhouse and Energy Reporting Scheme, commencing no later than 2011.15

However, the Government's preliminary view is that, if the agriculture sector is included in the CPRS, the liability to surrender AEUs should be imposed 'off-farm' (eg on fertiliser suppliers, abattoirs and dairies), rather than on farming entities themselves, and that 'on-farm' abatement should be encouraged by other measures. If the Government does decide to include agriculture in the CPRS, the eligibility of the agriculture sector for emissions-intensive trade-exposed industry assistance will be evaluated against the general principles that apply to that assistance. This has the potential to increase considerably the proportion of AEUs that are allocated for free rather than auctioned.

Offsets

The potential for generating domestic offsets that can be used to acquit CPRS liabilities will be relatively limited because such offsets will only be able to be created in the small number of sectors that are not covered by the CPRS. Moreover, even in uncovered sectors, it may be difficult to demonstrate that any emissions abatement is truly additional, because the Government intends, where practicable, to achieve emissions reductions in these sectors by imposing other mandatory emissions reduction measures. This, together with the cost and complexity of establishing the required baselines and monitoring and verifying the level of emissions abatement, suggests that there will, in practice, be very little scope for the creation of domestic offsets that can be used to acquit CPRS liabilities. (Equally, there is very little scope for the creation of domestic offsets that can be traded in the voluntary market and that meet the Government's proposed National Carbon Offset Standard. In the White Paper, the Government identifies the management of emissions from savanna burning as an activity that could potentially create offsets for use in the CPRS.

In any event, the Government has stated that it will only consider the scope for including domestic offsets in the CPRS in 2013, when the Government makes its decision on the inclusion of agriculture in the CPRS. Pending that decision, offsets from activities such as soil biosequestration will not be included in the CPRS. But, even then, the Government may be reluctant to allow offsets to be included in the CPRS where they are not recognised under international greenhouse gas accounting rules. To do so would create a discontinuity between Australia's international obligations and its ability to meet those obligations through the CPRS.16

In contrast to the Government's position, the federal Liberal Party's recently announced 'Green Carbon Initiative' highlights biosequestration and improved farming practices as a means of reducing Australia's greenhouse gas emissions, and proposes a biocarbon strategy that will focus on increasing sequestration in soils through improved management practices, the production of biochar or charcoal for addition to the soil, and increased tree planting and revegetation.17

Energy efficiency

Action on energy efficiency is one of the major elements of the Federal Government's climate change mitigation strategy. Many forms of energy efficiency improvements are economic even without the CPRS but, because they generally involve up-front capital investment (as in the case of solar water heating), they have been unpopular with consumers and businesses. Although the CPRS will increase energy costs, and so encourage improvements in energy efficiency, the Government is concerned to ensure that businesses and households are made aware of available low-emissions technologies and practices. It therefore intends to use some of the $130 million that it has allocated to the Climate Change Action Fund information stream to fund awareness of these technologies and practices over the first five years of the CPRS.

In addition, at the Council of Australian Governments (COAG) meeting on 2 October 2008, COAG agreed to develop a National Strategy for Energy Efficiency to put in place programs designed to assist households and businesses to reduce their energy costs prior to the introduction of the CPRS. One aspect of this program is the development of national legislation for appliance energy performance standards and labelling. Further, in response to the global financial crisis, the Federal Government will provide $3.9 billion towards (among other things) home insulation. At a subsequent meeting, COAG will consider increasing building energy efficiency requirements and mandating the disclosure of building energy efficiency. Meanwhile, some states, such as Victoria, are introducing energy efficiency schemes that incentivise electricity retailers to encourage household consumers to become more energy efficient.

Having said this, there is much more work that could be done in promoting energy efficiency, including through providing tax incentives for the construction of new green buildings and the retrofit of existing buildings to green standards.

The next step

The Federal Government is proposing to release an exposure draft of the CPRS legislation for public comment in March 2009. If you would like further information in regard to the White Paper proposals that will form the basis of this draft legislation, or any other information, please contact any of the people below.

Footnotes
  1. White Paper, p.6-59.
  2. White Paper, pp.6-46 to 6-50.
  3. White Paper, p.6-48.
  4. Standing Committee on Rural and Regional Affairs and Transport, Implementation, operation and administration of the legislation underpinning Carbon Sink Forests, September 2008.
  5. Although consideration might need to be given to State Transfer of Land legislation to ensure such that a covenant could be created and registered.
  6. See the National Water Commission website, www.nwc.gov.au, for more information about forestry and water management: in particular, the NWC's Waterlines Report No 5 – February 2008, Approaches to, and challenges of, managing interception.
  7.  This could occur in advance of the planned commencement of the CPRS on 1 July 2010.
  8.  The Government is also investigating the alternative of having the regulator prepare such emissions estimates.
  9.  White Paper, p.6-54.
  10. Net greenhouse gas removals are calculated as sinks less sources.
  11. Alternatively, the risk of reversal buffer could be implemented by reducing the periodic allocation of AEUs to the accredited forest entity, enabling the buffer reduction to be tailored to the forest's risk profile over time.
  12. White Paper, pp.3-6 to 3-7.
  13.  White Paper, p.11-21.
  14.  The Australian Financial Review, 'Emissions trading costs to hurt farmers study shows', 10 September 2008; The Age, 'Carbon scheme to slug farmers', 23 February 2009.
  15.  White Paper, pp.6-45 to 6-46.
  16.  White Paper, pp.6-62 to 6-64.
  17. The Australian Financial Review, 'Carbon shift would clear air: Turnbull', 28 January 2009; The Age, 'Coalition targets carbon policy gap', 30 December 2008, 'Turnbull to go hard on emissions', 25 January 2008

For further information, please contact:

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