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Focus: Carbon Farming Initiative legislation passed

25 August 2011

In brief: The Federal Parliament has passed legislation to implement the Government's previously announced Carbon Farming Initiative, under which landholders may establish land-based carbon abatement and sequestration projects that generate tradeable carbon credits. Partner Grant Anderson and Lawyer Naomi Snyder report.

How does it affect you?

  • By providing for the creation of tradeable carbon credits out of land-based carbon abatement and sequestration, the Carbon Farming Initiative will enable landholders, farmers and foresters to have an additional source of revenue. In particular, some types of these credits will be able to be surrendered to meet liabilities under the Federal Government's proposed carbon pricing scheme, which will provide a ready source of demand for them.
  • However, project proponents of sequestration projects, in particular, need to be aware of the obligations and liabilities they will incur in terms of maintaining the carbon stock used to generate these credits.
  • Because of the ongoing obligations associated with carbon sequestration projects, and the fact that those obligations (which may include a requirement to maintain carbon stocks and/or relinquish carbon credits) run with the land, purchasers and mortgagees of land will need to be familiar with these obligations, and will need to search not just state-based land title registers to identify whether the land in which they are interested may be subject to such requirements but also the federal register of offsets projects.
  • There will be a two-year window during which offsets projects under existing schemes (eg the Greenhouse Friendly program and the NSW Greenhouse Gas Reduction Scheme) can be transitioned into the Carbon Farming Initiative.
  • While the carbon credits created under the Carbon Farming Initiative constitute personal property over which equitable interests (including security) can be granted, those interests are not registered, and so lenders and other equitable interest holders will need to make alternative arrangements to notify, and preserve the priority of, their interest.
  • Carbon credits created under the Carbon Farming Initiative are financial products and so attract the financial service regulation provisions of the Corporations Act 2001 (Cth).
  • There are substantial penalties for breaching requirements associated with the Carbon Farming Initiative, and these extend to company officers who should, but fail to, prevent such breaches.
  • Much of the detail of the scheme is to be included in regulations. Project proponents should actively engage with the Federal Government in the development of these regulations and relevant methodology determinations.

Background

On 23 August, the Federal Parliament passed the Carbon Credits (Carbon Farming Initiative) Act 2011 (Cth) (the CCA). The stated objects of the CCA are to:

  • implement certain of Australia's obligations under the United Nations Framework Convention on Climate Change (the UNFCCC) and the Kyoto Protocol;
  • create incentives to undertake certain emissions avoidance and sequestration offsets projects in the land use sector; and
  • increase carbon abatement in a manner that is consistent with the protection of Australia's natural environment and improves resilience to the effects of climate change.

The CCA follows on the heels of a consultation paper and exposure draft legislation that were released late last year. It establishes a scheme under which landholders (including farmers and forest growers) may establish carbon abatement and sequestration projects that generate tradeable carbon credits.

The scheme will be administered by a Carbon Credits Administrator (the Administrator), who will be a Commonwealth public servant (s246)1. In addition, the CCA establishes the Domestic Offsets Integrity Committee, which will advise the Minister in relation to methodology determinations. The committee will comprise between five and six members appointed by the Minister for Climate Change and Energy Efficiency, two of whom must be a Commonwealth public servant and an officer of the Commonwealth Scientific and Industrial Research Organisation, but the majority of whom (including the chair) must not be Commonwealth office holders or employees (ss 254, 256, 257).

However, while the CCA sets out the overarching architecture for the scheme, there is much detail that will have to be prescribed by the regulations.

Eligible projects

For a project to qualify under the CCA scheme, it must first be declared by the Administrator to be an 'eligible offsets project' (such a declaration can be made on application by the project proponent) (ss 22(1), 27(2)(a)(i), (b)(i)). The Administrator can only declare a project to be an eligible offsets project if:

  • the project is a kind of offsets project that is recognised under the CCA (see also s27(4)(a), (m), (n));
  • the project proponent is a recognised offsets entity (s27(4)(e), (f));
  • the project passes the 'additionality' test (s27(4)(d)); and
  • the project is covered by, and complies with any requirements specified in, an applicable methodology determination (s27(4)(b), (c)).

Projects that involve the sequestration of atmospheric carbon dioxide ('sequestration offsets projects') must also satisfy additional criteria relating to the holding and integrity of carbon sequestration rights in relation to the project (s27(4)(g), (h), (i), (k)).

These requirements are described in further detail below.

Recognised offsets projects

An offsets project will only be eligible to participate in the CCA scheme if it is, or is to be, carried on in Australia (s27(4)(a)). Importantly, eligible offsets projects are not limited to projects that are implemented after the scheme commences. Existing projects may also qualify, even though they would necessarily not be 'financially additional' (see 'Additionality test' below). In this way, 'early movers' will not be penalised. However, the earliest time from which an existing project can be declared to be an eligible offsets project is 1 July 2010 (s27(16)), so only post-1 July 2010 carbon abatement under an existing project will qualify to generate carbon credits under the CCA scheme.

The CCA also contains a number of provisions that are designed to facilitate the transition of projects under existing offset schemes (such as the Federal Government's Greenhouse Friendly program and the NSW Greenhouse Gas Reduction Scheme) to the CCA scheme.

To qualify as an eligible offsets project, the project must be either an 'emissions avoidance offsets project' or a 'sequestration offsets project'.

An emissions avoidance offsets project may be:

  • an 'agricultural emissions avoidance project', ie a project that avoids methane or nitrous oxide emissions from soil (eg through fertiliser use), livestock, the decomposition of livestock urine or dung, rice fields or plants, or the burning of savanna, grasslands, crop stubble or residues in fields, or sugar cane before harvest2 ;
  • a 'landfill legacy emissions avoidance project', ie a project (such as methane destruction, waste diversion or alternative waste treatment activities) that avoids greenhouse gas emissions from solid waste in a landfill where the emissions are attributable to waste accepted before a prescribed cut-off date (this cut-off date has been flagged as the date the Federal Government's proposed carbon pricing scheme will commence3); or
  • an 'introduced animal emissions avoidance project', ie a project that avoids methane or nitrous oxide emissions from undomesticated non-native animals (eg feral camels) or the decomposition of their urine or dung.

Additional emissions avoidance offsets projects may also be specified in regulations (s53).

A sequestration offsets project is a project that sequesters atmospheric carbon dioxide in, and/or avoids greenhouse gas emissions from (ie preserves carbon stores in), living biomass (eg forests), dead organic matter (eg leaf litter) or soil. Examples of such projects include reforestation, revegetation, native forest preservation, avoided de-vegetation, improved forest or vegetation management, reduced forest degradation, forest or rangeland restoration, enhanced or managed regrowth and enhanced soil carbon.4

However, the CCA contemplates that certain projects, which will be prescribed by regulation, will not be able to qualify as eligible offsets projects. These projects ('excluded offsets projects') will typically be those for which there is a material risk they will have a material adverse impact on the availability of water, the conservation of biodiversity, employment and/or the local community and/or land access for agricultural production (ss 27(4)(m), 56). Exposure draft regulations released by the Government include in this 'negative list' of excluded projects the conversion of harvest plantations into permanent carbon sinks, (this is considered to carry a high fire risk), the establishment of forests under forest managed investment schemes, the establishment of vegetation on land that has been cleared of native forest in the previous three years, and projects that were mandated by law5 . Projects will also not qualify as eligible offsets projects if they involve the clearing of non-plantation native forest (even if the forest has been established with human assistance, eg following a bushfire) or the use of material obtained from the clearing or harvesting of such forest (s27(4)(j)). So, for instance, the clearing of low-density native forest to establish a higher-density plantation, or the production of biochar using materials from native forests, will not qualify as eligible offsets projects.6

There has been considerable debate about the adverse effect that offsets projects may have on food and water security and biodiversity.7 However, it is also the case that some projects may in fact have additional positive environmental benefits, and the Government has stated that it will develop a co-benefits index that will enable project proponents to sell carbon credits generated by such projects at a premium.8 Such information will be publicly available through the register of offsets projects (s168(1)(o)) (see below).

Finally, it is contemplated that the regulations will exclude from the CCA scheme offsets projects that are undertaken on land that is already covered by an existing offsets scheme (s27(4)(n)). Having said this, there will be an initial two-year transition period during which the project proponent can apply to have an existing offsets project (eg one established under the Greenhouse Friendly program or the NSW Greenhouse Gas Reduction Scheme) transitioned out of an existing offsets scheme and into the CCA scheme.9

Recognised offsets entity

To be eligible for declaration as an eligible offsets project, the proponent of it (ie the entity that is responsible for carrying out, and that has the legal right to carry out, the project) must have been accorded recognition by the Administrator as an 'offsets entity'10 (an entity may be accorded this status on application to the Administrator) (ss 27(4)(e), (f), 60).11 Before the Administrator can recognise an entity as an offsets entity, it must be satisfied that the entity is a fit and proper person, and is not insolvent or under some form of external administration (s64). If the project proponent ceases to be a recognised offsets entity, the declaration of the project as an eligible offsets project may be revoked (ss 36, 37) and, where the offsets project is a sequestration offsets project, the Administrator may then require the project proponent to relinquish CCA carbon credits (s89).

Additionality test

To be eligible for declaration as an eligible offsets project, the project must also pass the 'additionality test' (s27(4)(d)), which means that it must be of a kind that is prescribed by regulation and must not be mandated by law (s41(1)).

Unlike the consultation package, the CCA does not include a requirement that an offsets project must be 'financially additional', ie that it must be demonstrated the project would not have been economically feasible in the absence of income generated by the CCA carbon credits. In his Garnaut Climate Change Review update Professor Garnaut recommended against such a requirement, observing that '[w]hat matters is that the sequestration is new and is real', rather than what is profitable. The Federal Government has obviously heeded this recommendation. Accordingly, projects that improve agricultural productivity (eg improved livestock feeding and fertiliser management practices) could qualify as eligible offsets projects.

As stated above, regulations will prescribe projects that are considered to be additional – ie the additionality test will not be applied on a case-by-case basis. In this regard, the Government's position is that abatement practices and activities that are in wide use (ie that are common practice within an industry or region other than as a result of the CCA scheme) will not qualify as eligible offsets projects (s41(2)-(5)). Exposure draft regulations released by the Government contain a 'positive list' of activities that are considered to be additional (and are not common practice).12 This list includes the establishment of permanent plantings of native species, the re-establishment of native vegetation from residual seed sources through animal and plant management, the application of biochar to soil, the management of enteric emissions from livestock, and the application of urea inhibitors to livestock manure and fertiliser.

Additional activities may be added to the positive list where they are not common practice. Moreover, activities that are included on the positive list will be removed from it if they become common practice for reasons other than the CCA scheme (although the proponents of such projects might continue to receive CCA carbon credits until the end of the reporting period)13. For these purposes the assessment of whether an activity is common practice will depend on the relevant comparison group and the proportion of uptake (ie the percentage of landholders in the comparison group undertaking a comparable activity). An activity will be considered to be uncommon if 5 per cent or less of the comparison group undertakes the activity. If more than 5 per cent of the comparison group undertakes the activity, further assessment will be required to determine the 'take-off' point, ie the point at which the activity becomes common practice.14

The requirement that a project must not be mandated by law is one that requires further clarification. The CCA Explanatory Memorandum states that this requirement is not intended to exclude activities undertaken for the purposes of generating carbon credits or offsets which are to be used to meet an obligation under a regulatory approval to offset emissions from a project15. However, whether the projects (such as mine rehabilitation projects) will be considered to be mandated by law would seem to depend on the specificity of the obligation pursuant to which the project is undertaken. For example, while a project that is undertaken in compliance with a direct legal requirement to rehabilitate a mine site to a specified standard could be said to be mandated by law, this might not be the case where the obligation is simply to comply with a rehabilitation plan that is developed by the mine owner under a general requirement to rehabilitate the mine site in accordance with an approved plan.

Methodology determinations

Finally, to be eligible for declaration as an eligible offsets project, the project must be covered by, and comply with the requirements specified in, an applicable methodology determination (s27(4)(e), (f)). Methodology determinations are to be promulgated by the Minister for Climate Change and Energy Efficiency. Such determinations will specify the method for calculating the carbon abatement of the project, a project baseline (ie the emissions that would have occurred if the project were not carried out (s107)), and requirements relating to reporting, notification, record keeping and project monitoring (ss 106(1)-(3), 193, 194). A methodology determination may only be made if the proposed methodology determination has been endorsed by the Domestic Offsets Integrity Committee following public consultation on it (ss 108, 112(5)). A methodology can be proposed to the committee by any person (including government agencies). To qualify for endorsement and adoption, a methodology must comply with the 'offsets integrity standards'. This means that the methodology must not only apply to projects that are prescribed by regulation for the purposes of the additionality test (see above), but also:

  • be such that the emissions abatement is measurable16 and capable of being verified;
  • not be inconsistent with the method set out in the Federal Government's National Inventory Report prepared under the UNFCCC;
  • be supported by peer-reviewed published scientific results or adopt measurement methods that are set out in the National Greenhouse and Energy Reporting Measurement Determination (to the extent applicable);
  • take into account greenhouse gas emissions resulting from the project, whether these are direct (eg emissions from nitrogen fertilisers used to enhance soil carbon) or indirect (eg leakage as a result of the displacement of an emissions-producing activity to another area);17
  • adopt conservative estimates, projections and assumptions; and
  • in the case of sequestration offsets projects, provide for any necessary adjustments to take account of significant cyclical variations in the sequestered carbon (eg fluctuations in annual average rainfall, which will affect the levels of carbon stored in agricultural soils and some forms of vegetation) (ss 112, 133).

An interim domestic offsets integrity committee, together with the Departments of Climate Change & Energy Efficiency and Agriculture, Fisheries & Forestry, have been progressing a number of methodologies. To the extent that any of these are formalised on or before 30 June 2012, they will be deemed to have applied since 1 July 2010 (s122(3); see also ss 131-132). Among other things, this will facilitate the transition of existing projects under the Greenhouse Friendly program and the NSW Greenhouse Gas Reduction Scheme into the CCA scheme, by applying those methodologies retrospectively.

The need to comply with approved methodologies means that projects with relatively straightforward measurement and verification methodologies (eg carbon forestry) are likely to be among the first that proceed under the CCA scheme, with it potentially taking considerably more time for methodologies for less well-established activities to be developed and approved.

The Minister is empowered to vary methodology determinations subject to a similar procedure to that described above being followed for the variation (ss 114, 116, 120). This may be done if, for example, scientific advances identify methodological improvements that should be made. However, the methodology determination that applies to a project during a crediting period cannot be unilaterally changed by the Minister or the Administrator – any such change can only apply to the crediting period that commences after it is made. Conversely, on request by a project proponent, the Administrator may approve the application of a different methodology determination for the project from the start of its then-current reporting period (ss 128, 130).

Sequestration offsets projects – carbon sequestration rights

Where the offsets project is a sequestration offsets project, the land on which the project is carried out (the 'project area') must be Torrens system land, Crown land or native title land (as opposed to general law land) (s27(4)(g), (5)), and each person who holds any legal interest in the project area (or a mortgage or charge over such an interest) must have consented to the declaration of the offsets project as an eligible offsets project (ss 27(4)(k), 44, 45, 45A). This is necessary because, in limited circumstances, the project area could become encumbered by a carbon maintenance obligation (see below). The requirement for consent is likely to prompt negotiation between interest holders: eg an interest holder might consent to the project being declared as an eligible offsets project on the basis that it receives some of the CCA carbon credits the project generates.

The project proponent for a sequestration offsets project must also hold the carbon sequestration right for the project area (s5 (definition of 'project proponent')), which (broadly speaking) it will do if it holds the exclusive legal right to obtain the benefit of sequestered carbon in the biomass, dead organic matter or soil (as the case may be) (s4318 ). Carbon sequestration rights are not created by the CCA but, instead, are created under state-based legislation.19 Such rights typically run with the land either because they are themselves recognised proprietary rights or because they accrue to the holder of a proprietary interest in the land.

This means that, where a sequestration offsets project covers land owned by different people, the project proponent will need to acquire the carbon sequestration rights from each of the land owners.

Moreover, where the land is Crown land, the project proponent will generally be required to obtain a certification from the responsible Minister that the project proponent holds the carbon sequestration right and that the relevant government will not deal with (or consent to another person dealing with) the project area in a way that is inconsistent with the carbon sequestration right (ss 27(4)(h), (i)).

Other requirements

Crediting period

Each eligible offsets project is required to have a 'crediting period' (ie a period in respect of which carbon abatement by the project may generate CCA carbon credits). Where the project is a 'native forest protection project' (ie a non-plantation stand that sequesters atmospheric carbon dioxide or is protected from clearing or clear-felling), the crediting period will be 20 years. For all other eligible offsets projects, the first crediting period will be seven years but the project proponent may apply to the Administrator for the approval of subsequent crediting periods20 (each of seven years' duration)21 (ss 69, 70).

Reporting

The project proponent for an eligible offsets project is required to provide an 'offsets report' to the Administrator for each 'reporting period'. A reporting period is a period chosen by the project proponent for the project, and must be between 12 months and five years (s76). This is the period for which the project proponent is entitled to claim CCA carbon credits attributable to carbon abatement that has occurred during that period. An offsets report will include information about the calculation of that carbon abatement, and the report will generally need to have been audited by a registered greenhouse and energy auditor (s76(4), (5)).22 Australian carbon credit units are issued in respect of reporting periods that are included in a crediting period for the project (s15(2)(c)).

The project proponent is also required to notify the Administrator of any changes to an applicable regional natural resource management plan that renders the offsets project inconsistent with the plan (s83). In addition, where the offsets project is a sequestration offsets project, the project proponent is required to notify the Administrator of any:

  • natural disturbance (eg flood, bushfire, drought, pest attack or disease); or
  • third-party conduct outside the project proponent's reasonable control,

that causes, or is likely to cause, a significant reversal of the carbon sequestration (ss 81, 82). In these circumstances, the project proponent will generally not be required to relinquish CCA carbon credits because this risk of reversal is covered by the risk of reversal buffer (see below).

Provision is also made for project proponents to make and retain specified records relating to their offsets projects (ss 191, 192).

Sequestration offsets projects: relinquishment of credits and carbon maintenance obligation

Where the offsets project is a sequestration offsets project and, within 100 years of the first CCA carbon credits being issued in respect of the project, there is a significant reversal of the carbon sequestration:

  • due to a natural disturbance, or third-party conduct that is outside the project proponent's reasonable control, and the project proponent has not taken reasonable steps to mitigate the effect of the disturbance or conduct; or
  • other than due to a natural disturbance, third-party conduct that is outside the project proponent's reasonable control or reasonable actions taken to reduce the risk of bushfire,

then the project proponent may be required by the Administrator to relinquish up to the number of CCA carbon credits that have been issued in respect of the project (ss 35, 87, 90, 91; see also ss 175-178). Until it complies with this relinquishment requirement, the project proponent will not be entitled to receive further CCA carbon credits (s15(2)(f)).

A failure (or likely failure) to comply with any such relinquishment requirement may also result in the imposition of a mandatory penalty (s179; see also s180) and/or in the Administrator declaring the relevant project area as being subject to a 'carbon maintenance obligation' (s97(1), (2)). The consequence of the imposition of a carbon maintenance obligation is that a person is prohibited from doing anything likely to result in the diminution of the sequestered carbon, and the owner or occupier of the land must take all reasonable steps to rectify any diminution that may occur (s97(8)-(10)). The carbon maintenance obligation will remain in place until any outstanding monetary penalty has been paid or, if it is not paid, for 100 years commencing from the time the first CCA carbon credit was issued in respect of the project (s97(14)). Alternatively, the obligation will be lifted on relinquishment to the Administrator of such a number of CCA carbon credits as equals the number of credits that have been issued in respect of the project (s99).

A project proponent may cease a sequestration offsets project (ie have the declaration of the project as an eligible offsets project revoked) if the project proponent relinquishes a number of CCA carbon credits that is equal to the number issued in respect of the project (s32(2)(c), (d)). This will enable landholders to use their land for alternative uses if it is cost-effective to do so (taking into account the need to relinquish the requisite number of CCA carbon credits).

Creation of CCA carbon credits

Types of credits

An eligible offsets project will be capable of generating 'Australian carbon credit units' (referred to in this article so far as 'CCA carbon credits'). In this regard, an eligible offsets project will be classified as either:

  • a 'Kyoto offsets project', which will be the case if the emissions that it avoids or sequesters can be counted towards Australia's climate change targets under the Kyoto Protocol or any successor to it (ss 27(2)(a)(ii), (12), 55(1)-(3)) (as is the case with, eg, emissions from agricultural production and landfill);23 or
  • a 'non-Kyoto offsets project', which is an eligible offsets project that is not a Kyoto offsets project (ie where its carbon abatement does not count towards the achievement of Australia's international climate change targets, as is the case with, eg, improved forest management and enhanced carbon in agricultural soils) (ss 27(2)(b)(ii), (13), 55(5)).

Nonetheless, it is quite possible that a single project will comprise one or more Kyoto offsets projects and/or non-Kyoto offsets projects (ss 27(4)(m), 55(6)) – eg as where reforestation occurs on some land that was cleared before 1990 (Kyoto-compliant land) and on other land that was cleared during or after 1990 (non-Kyoto compliant land).

Where a project's reporting period ends on or before 30 June 2012, the CCA carbon credits that the project may generate will be 'Kyoto Australian carbon credit units' if the project is a Kyoto offsets project. Where the project is a non-Kyoto offsets project, or where the reporting period ends after 30 June 2012 and the project is a Kyoto offsets project, the CCA carbon credits that the project may generate will be non-Kyoto Australian carbon credit units (s11(2)-(4)).24 The CCA contemplates that Kyoto Australian carbon credit units may, before 1 July 2013 (ie the expiry of the first Kyoto commitment period), be exchanged for Kyoto Protocol units (an assigned amount unit, removal unit or emissions reduction unit, as appropriate), in which case the exchanged Kyoto Australian carbon credit units will be cancelled and the Kyoto Protocol units can be sold overseas (ss 154, 155, 157). This will, however, be subject to the Federal Government having sufficient amounts of Kyoto Protocol units to effect this exchange.25

Calculation of number of credits to be issued

In order to be issued with CCA carbon credits, the project proponent must have an account in the Australian National Registry of Emissions Units (s11(5)) and must apply to the Administrator for a 'certificate of entitlement'. Such an application may only be made after the expiry of the relevant reporting period for the project and must be accompanied by the offsets report for that period (as well as the accompanying audit report) (ss 12-13, 15(2), (a), (b)). The certificate of entitlement will set out the number of CCA carbon credits to which the project proponent is entitled (s15(3)) – these are:

  • for emissions avoidance offsets projects, the number of CCA carbon credits equivalent to the net carbon abatement for the project for the relevant reporting period (s18);
  • for sequestration offsets projects other than native forest protection projects, the number of CCA carbon credits equivalent to the net carbon sequestration for the project for the relevant reporting period, reduced by a 'risk of reversal buffer number' (s16); and
  • for most native forest protection projects,26 the number of CCA carbon credits equivalent to a proportion of the net carbon sequestration for the project for the (20-year) crediting period as reduced by a 'risk of reversal buffer number', with that proportion being calculated as the number of years in the relevant reporting period divided by the number of years in the crediting period in which the reporting period occurs (s17(3)). The effect of this methodology is that the CCA carbon credits for the project (which will be generated by the 'once-off' abatement that occurs at the time the forest becomes protected) will be issued pro rata over the (20-year) crediting period so as to avoid these credits flooding the market, to reduce the risk of the forest being subsequently cleared and to provide a revenue stream for the ongoing management of the forest.27

The 'risk of reversal buffer number' for sequestration offsets projects is 5 per cent of the net carbon sequestration for the project, or such different percentage as may have been specified by regulation before the commencement of the relevant crediting period. It is anticipated that the buffer will be periodically adjusted to reflect actual losses of carbon under the CCA scheme.28

Nature of credits

CCA carbon credits will be issued by the Administrator, through making an entry for those credits in the recipient's account in the Australian National Registry of Emissions Units (ss 147-148). This registry is established by a companion Act to the CCA, the Australian National Registry of Emissions Units Act 2001 (Cth) (the ANREUA), as a continuation of the existing register that has been established under the Commonwealth's executive power. The registry is an electronic register that is maintained by the Administrator.29

CCA carbon credits are personal property (s150) and may only be transferred between registry account holders (a transfer is effected by the Administrator, on the instructions30 of the transferor, removing the entry for the credit in the transferor's account and making an entry for the credit in the transferee's account) (ss 151, 152; see also ss 153, 156). However, the CCA does not affect the creation of, any dealings with, or the enforcement of, equitable interests in relation to CCA carbon credits (s158). Accordingly, those who take equitable mortgages and charges over such credits, or are beneficiaries of a trust that includes such credits, will need to take steps to put other affected parties on notice of their interest, and to preserve the priority of those interests, as such interests will not be recorded in the register.

A CCA carbon credit will constitute a 'financial product' (Australian Securities and Investments Commission Act 2001 (Cth), proposed new s12BAA(7)(l); the Corporations Act, proposed new s764A(1)(ka)). The consequence of this is that these credits (as well as Kyoto Protocol units and other tradeable carbon credits issued under international agreements) will be subject to the financial services regulation regime. This means that trade in CCA carbon credits is likely to be restricted to 'wholesale clients', and traders will generally need to ensure that they do not sell such credits to 'retail clients'. Traders might also need to obtain an Australian financial services licence. Characterising CCA carbon credits as financial products also means that the insider trading laws will apply to transactions relating to them.

Linkage with carbon pricing scheme

The emissions sources covered by the CCA scheme are not covered by the Federal Government's proposed carbon pricing scheme.31 Indeed, the rationale for the CCA scheme is to incentivise abatement of these emissions, given that such an incentive will not arise from the imposition of a carbon price in relation to them.

Kyoto Australian carbon credit units will be able to be surrendered to satisfy liabilities under the carbon pricing scheme. During the initial fixed price phase of the carbon pricing scheme, an entity will be able to acquit up to 5 per cent of its annual liability by surrendering such carbon credit units.32 However, during the floating price phase of the carbon pricing scheme, there will be no limit on the number of Kyoto Australian carbon credit units that may be used to acquit liability. This will provide a ready source of demand for Kyoto Australian carbon credit units. Unlike Kyoto Australian carbon credit units, non-Kyoto Australian carbon credit units will generally not be able to be used to acquit liabilities under the carbon pricing scheme.33 However, the Federal Government has set aside $250 million over the first six years of the carbon pricing scheme to fund the purchase of these types of CCA carbon credits.34 This is intended to stimulate the creation of these kinds of carbon credits, which would otherwise be likely to trade at a substantial discount to Kyoto Australian carbon credit units.

Other matters

Public information

The Administrator is required to make publicly available a range of information, including the names of persons to whom CCA carbon credits have been issued and the total number of credits issued to them, as well as details of any relinquishment of credits (ss 160, 164; see also ss 161-163, 165). In addition, the Administrator is required to keep an electronic register of eligible offsets projects that is accessible by the public and contains details of those projects (including details of the CCA carbon credits issued in respect of them) (ss 167, 168). This is intended both to facilitate trade in CCA carbon credits and to provide a source of information about the integrity of the abatement underlying those credits. It will also contain important information relevant to land transactions, by identifying whether the land is supporting an eligible offsets project, the likely magnitude of any relinquishment obligation if the land use is changed and the applicability of any carbon maintenance obligation. Such information might, but will not necessarily, be included on the land titles register.35

Voluntary cancellation

A holder of CCA carbon credits may voluntarily have them cancelled by the Administrator (if the credit is a Kyoto Australian carbon credit unit, the Federal Government must also cancel a corresponding Kyoto unit) (s173).36 This will enable individuals and companies to meet their voluntary carbon obligations (eg to reduce their carbon footprint through using offsets) in accordance with the National Carbon Offset Standard by surrendering CCA carbon credits. Moreover, an offsets project may itself be structured so that CCA carbon credits that are issued in respect of it are automatically surrendered and cancelled (ss 19, 27(3)(e)). This will enable project proponents that have forward sold carbon abatement from the project to participate in the CCA scheme without that abatement being double-counted.37

Information-gathering powers and penalties

The Administrator has extensive coercive information-gathering powers (ss 185-189), and may appoint inspectors who also have broad powers to (among other things) enter and search premises, inspect and copy documents, ask questions and request the production of documents (ss 196, 198-211). In addition, the Administrator may require the conduct of an audit where it has reasonable grounds to suspect that a project proponent has contravened the CCA (s214) or may appoint an auditor to audit a project proponent's compliance with the CCA (s215).

Not only will a project proponent be subject to civil penalties for contravening the CCA, but so will executive officers of a company (ie the company's directors, chief executive officer, chief financial officer and secretary) if they knew (or were reckless or grossly negligent as to whether) the contravention would occur, were in a position to influence the company's conduct and failed to prevent the contravention (s217). The implementation of an effective compliance program is an obvious way of mitigating or avoiding such liability (s218).

Contacts

If you would like further information about the Carbon Farming Initiative legislation, or assistance in establishing an eligible offsets project under it, please contact any of the people below.

Footnotes
  1. If the Federal Government's carbon pricing scheme legislation is passed, the Administrator will be replaced by the Clean Energy Regulator.
  2. Carbon dioxide, which would also be emitted from such burning, is not counted because, under international accounting rules, it is assumed that an equivalent amount of carbon dioxide is removed by the vegetation subsequently regrowing.
  3. For this purpose, the Government has announced a date of 1 July 2012, although legislation to establish the carbon prcing scheme has yet to be introduced into and passed by the Federal Parliament. Emissions from landfill waste that is deposited after that date will be covered by the carbon pricing scheme.
  4. CCA Explanatory Memorandum, par 1.13.
  5. Carbon Credits (Carbon Farming Initiative) Regulations 2011 – Exposure Draft. Consultation on the draft regulations will run until 16 September 2011.
  6. CCA Explanatory Memorandum, par 1.16.
  7. Eg see 'Abatement initiative panned', The Australian Financial Review, 10 March 2011; 'Greens see red over carbon offset sales', The Australian Financial Review, 25 March 2011; 'Food to forest: the price of carbon', The Age, 5 April 2011. This has also led Professor Garnaut to suggest that there is a need to develop biodiversity conversation incentive mechanisms that complement the Carbon Farming Initiative: see Fourth Update Paper, 'Transforming rural land use', p.17.
  8. CCA Explanatory Memorandum, pp.7, 8; par 13.9.
  9. In such a case, the number of CCA carbon credits that are liable to relinquishment (eg if the carbon abatement is reversed) will be calculated so as to include the number of credits issued under the existing scheme (ss 23(1)(e), 92, 95).
  10. A project may have two or more proponents where they have joint responsibility for carrying out the project, jointly have the legal right to carry out the project and (in the case of a sequestration offsets project) jointly hold the applicable carbon sequestration right in relation to the relevant project area. In such a case, one of the proponents may be nominated for the purpose of receiving service of documents and taking certain actions on behalf of the others. However, obligations under the CCA for the project are imposed severally on each project proponent (although they may be discharged by any of them). Importantly, where there is more than one project proponent, they will need to appoint a nominee to open a registry account for the purposes of having CCA carbon credits relating to the project issued to them. Such an account will be designated in the registry as a nominee account and the units in it will be held on trust for all the project proponents (ss 134-135).
  11. Special provision is made where the land on which the project is carried out is subject to native title that confers a right of exclusive possession. In that case, the project proponent will be the registered native title body corporate (if any) and it is this body corporate that will be entitled to open a registry account to receive the carbon credits generated by the project, which will be held in trust for the common law holders of the native title (ss 46, 48-50).
  12. Carbon Credits (Carbon Farming Initiative) Regulations 2011 – Exposure Draft. Consultation on the draft regulations will run until 16 September 2011.
  13. Department of Climate Change and Energy Efficiency, commentary on the exposure draft Regulations dealing with the positive and negative lists of activities under the CFI (August 2011), par 16,17.
  14. Department of Climate Change and Energy Efficiency, commentary on the exposure draft Regulations dealing with the positive and negative lists of activities under the CFI (August 2011), par 13. The Government is currently seeking stakeholder feedback on determining appropriate methods for assessing common practice, however it is expected that the take-off point will be around 30 per cent of the comparison group for many agricultural activities.
  15. CCA Explanatory Memorandum, par 5.45.
  16. This will preclude methodologies that calculate abatement upfront or deem there to be a specified amount of abatement: CCA Explanatory Memorandum, par 5.53.
  17. CCA Explanatory Memorandum, pars 5.57-5.59.
  18. If the project proponent ceases to hold the carbon sequestration right, the declaration of the offsets project as an eligible offsets project could be revoked (ss 35(1), (2), 89(1)(c)(i)).
  19. Eg, see the Climate Change Act 2010 (Vic), Parts 4 and 5, which establishes registrable legal rights in carbon sequestered in trees, other vegetation and soil.
  20. An application for a subsequent crediting period will be refused if, eg, the project is no longer an eligible offsets project or covered by a methodology determination, or the project would no longer pass the additionality test (s74). The expiry, variation or revocation of a methodology determination during a crediting period does not affect the status of the project as an eligible offsets project, which is still only required to continue to comply with the original methodology determination (ss 125-127). However, on the expiry of the crediting period, the project will need to comply with any applicable replacement or varied methodology determination for the following crediting period to be approved in relation to the project.
  21. Regulations made under the CCA may, however, change the duration of the crediting period for any eligible offsets project from these prescribed durations – eg the Government has indicated that it intends to prescribe a 15-year crediting period for reforestation projects: CCA Explanatory Memorandum, par 9.36.
  22. The Government has indicated that uncomplicated, low-risk offsets projects will be excluded from the audit requirement: CCA Explanatory Memorandum, par 9.17.
  23. Such a project could be structured as an Australian-hosted joint implementation project under the Kyoto Protocol.
  24. The 30 June 2012 cut-off date corresponds with the end of the first Kyoto commitment period. If a subsequent commitment period is agreed to, then provision is made for the 30 June 2012 to be extended by regulations.
  25. See Australian National Registry of Emissions Units Act 2011, s41(4).
  26. The exception is native forest protection projects where the forest is protected in perpetuity by, say, a conservation covenant. In that case, the prorating methodology does not apply (s17(1), (2)).
  27. CCA Explanatory Memorandum, pars 5.37, 9.27, 9.37.
  28. CCA Explanatory Memorandum, pars 6.43, 9.23.
  29. The registry is used not just for CCA carbon credits, but also for Kyoto Protocol units (eg assigned amount units, certified emissions reductions, emission reduction units and removal units). It will also be used for carbon units issued the Federal Government's proposed carbon pricing scheme. If the carbon pricing scheme legislation is passed, the registry will be administered by the Clean Energy Regulator.
  30. Instructions are given electronically (see s7).
  31. See the exposure draft Clean Energy Bill 2011 (Cth) (released on 28 July 2011), cl 30(3).
  32. Exposure draft Clean Energy Bill 2011, cl 125(7).
  33. It is intended that non-Kyoto Australian carbon credit units that would have been Kyoto Australian carbon credit units if they had been created before the end of the first Kyoto commitment period will be able to be surrendered to meet liabilities under the carbon pricing scheme: Securing a Clean Energy Future: The Australian government's climate change plan, p. 107.
  34. Securing a Clean Energy Future: The Australian government's climate change plan, p. 127.
  35. Eg the Climate Change Act 2010 (Vic) (s32) only provides for the voluntary recording on title of a forestry and carbon management agreement.
  36. If the Federal Government's carbon pricing scheme legislation is passed, this provision will be included instead in the ANREUA.
  37. CCA Explanatory Memorandum, pars 3.21, 9.88-9.89.

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