INSIGHT

Carbon farming and the Emissions Reduction Fund / Climate Solutions Fund

Climate Change Energy Environment & Planning Financing Funds

An opportunity for some to generate new income streams and offset emissions

The legislative regime for the generation of carbon credits from voluntary emissions reduction projects (otherwise known as 'carbon farming') in Australia was first established in 2014.

This regime allows land owners and managers to earn Australian Carbon Credit Units (ACCUs) by undertaking emissions avoidance or sequestration projects that comply with approved methodologies.

There are currently more than 30 approved methodologies, including those relating to:

  • agricultural practices and vegetation management;
  • increasing energy and fuel efficiency in public, commercial and industrial settings; and
  • abatement projects in the mining, oil, gas, transport sectors, waste and wastewater sectors.

The Climate Solutions Fund (CSF) is a fund established by the Federal Government to support emissions reduction projects in Australia and to drive the Government's aim to reduce emissions 26-28% below 2005 levels by 2030.

Landholders throughout every state and territory have signed up to over 730 different carbon projects.1

The CSF was originally established as the Emissions Reduction Fund (ERF) in 2014 with an initial $2.55B in funds. The ERF has since been rebranded as the CSF and has been provided with an additional $2B in funds, which is intended to extend the CSF for a further 15 years.

Funds in the ERF/ CSF are used by the Federal Government to enter into contracts to acquire ACCUs directly from individuals and businesses undertaking emissions reduction projects. Contracts are awarded via a reverse auction system.

ACCUs can also be sold into the voluntary market.

Key risks and opportunities

These projects are an opportunity for individuals and businesses to generate new income streams through the generation and sale of ACCUs. ACCUs are priced higher than many other types of international carbon credits, and their price has remained relatively stable.

New methodologies are developed by the Government from time to time, and it is open to individuals or businesses suggesting new methodologies or taking part in working groups.

In addition, in May 2020 the Federal Government agreed to investigate and implement a range of mechanisms to enhance and incentivise participation in the CSF / ERF, including:

  • allowing for the earlier release of ACCUs for some types of projects which have significant upfront costs, instead of having to wait until the emissions abatement has occurred;
  • creating a new carbon credit which can be granted where a facility covered by the Safeguard Mechanism reduces their emissions below their baseline (see here for the Safeguard Mechanism); and
  • other incentives such as co-investment programs and fixed-price

Landholders throughout every state and territory have signed up to over 730 different carbon projects.3

The key risks arise from political volatility in  climate change policies. Although the scheme is a survivor of the previous government's carbon pricing mechanism, and a functioning high-quality carbon farming scheme is likely to  have a place in the policy suite of any government on either side of the political spectrum, it still relies on a market for emissions which is generated from policy cycle to policy cycle and is not underpinned by a long-term mandatory emissions market.

Emissions reduction projects are often land-based, and it has been speculated that the devastating bushfires in NSW and Victoria may have damaged or destroyed many emissions reduction projects funded through the /ERF CSF.2 The risk posed by bushfires to land-based projects highlights the importance of considering the effect of natural disasters in the drafting of contracts (eg under force majeure provisions).

Key questions

  • What emissions avoidance or abatement methodologies are relevant to your organisation's assets and operations?
  • Is your organisation interested in creating a carbon farming project, either to generate additional income or to offset its own emissions (particularly those under the Safeguard Mechanism – see here).
  • Where emissions abatement activities are going to be undertaken jointly (eg by a principal/landowner and its contractor/operator):
    • how does your contract deal with the splitting of risk and revenue?
    • do existing contracts require amendment to allow you to undertake this project?
  • What expertise will your organisation need to draw upon to develop this project?
  • Will your organisation seek to enter into a contract with the Federal Government for the sale of ACCUs as a guaranteed revenue stream, or does your organisation have the interest and resources to sell ACCUs on the voluntary market?

Climate change guide

This insight is part of our climate change guide for legal and compliance teams in Australia