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Focus: Carbon Farming Initiative

25 November 2010

In brief: The Federal Government has released a consultation paper on the design of a scheme for the recognition and accreditation of land-based greenhouse gas abatements. This scheme, known as the Carbon Farming Initiative, will enable landholders and others to create tradable carbon credits from projects that reduce or sequester greenhouse gases. Partner Grant Anderson reports on the proposals.

How does it affect you?

  • By providing for the creation of tradable carbon credits out of land-based carbon abatement and sequestration, the Carbon Farming Initiative will enable landholders, farmers and foresters to earn an additional source of revenue from these activities.
  • However, participants in the Carbon Farming Initiative need to be aware of the obligations and liabilities that they will incur in terms of maintaining the carbon stock which is used to generate these credits.
  • Before undertaking a project for the purposes of the Carbon Farming Initiative, participants will also need to be familiar with the requirements of the National Carbon Offset Standard and the approved methodologies that must be complied with for the project to qualify to create carbon credits under the Carbon Farming Initiative.
  • Submissions on the consultation paper are due by 21 January 2011.

Background

One of the Federal Government's election commitments was to put in place a scheme to recognise greenhouse gas abatements achieved in the land sector. The Government has started this process with the release of its consultation paper, Design of the Carbon Farming Initiative. Submissions in response to the Consultation Paper are due by 21 January 2011, with legislation to establish the scheme proposed to be introduced into the Federal Parliament in the first half of 2011.

Abatement activities

The kinds of abatement activities that are being considered for eligibility to generate carbon credits under the Carbon Farming Initiative are land-based activities such as reforestation and revegetation, reductions in methane emissions from livestock, reductions in fertiliser emissions, manure management, reductions in emissions from agricultural soils, soil carbon sequestration, savanna fire management, avoided deforestation, and reductions in emissions from landfill waste that is deposited before 1 July 2011.

Some of these abatement activities (such as reforestation – see Focus: Detailed analysis of White Paper forestry, agriculture, offsets and energy efficiencies) are recognised under the Kyoto Protocol, with the result that Carbon Farming Initiative credits generated from them will be able to be exchanged for Kyoto Protocol units (such as Emissions Reduction Units and Assigned Amount Units held by the Federal Government)1 and traded on the international compliance market. Others of these abatement activities are not recognised under the Kyoto Protocol, although some of them (such as avoided deforestation and soil carbon sequestration) may subsequently be recognised under any international successor to the Kyoto Protocol. The Carbon Farming Initiative credits generated from these activities will only be tradable on voluntary markets, most likely at a discount to the compliance units. Because the abatement represented by these voluntary units does not count towards Australia's international greenhouse gas reduction commitments, the Federal Government is assuming the risk of any difference in the achievement of its domestic and international targets that may result from such abatement.

Carbon Farming Initiative credits will be recorded in Australia's National Registry of Emissions Units and there is the potential to facilitate trading in these credits by linking this registry with other voluntary scheme registries.

National Carbon Offset Standard

Carbon Farming Initiative credits will only be able to be created for projects that meet the requirements of the Federal Government's National Carbon Offset Standard that came into effect on 1 July 2010. The key requirements that need to be met under this standard are that the emissions abatement achieved by the project must be 'additional', in the sense that the abatement is not being undertaken as part of business-as-usual investment (or to comply with regulatory requirements), and that the carbon sequestration must be permanent, which typically means that the carbon must be stored for at least 100 years.

Additionality can be difficult to establish where the project has the effect of materially increasing business profits or agricultural production because this may lead to the conclusion that the project would have been undertaken in any event.

The consultation paper indicates that the requirement of permanence will be facilitated by the following proposed design features of the scheme:

  • Projects will be required to incorporate a risk-of-reversal buffer under which the Federal Government will withhold a proportion of the carbon credits attributable to the sequestered carbon (initially 5 per cent) as 'insurance' against natural events such as bushfires, disease and pests that may result in the release of the stored carbon. A project that suffers an event of this kind will not be permitted to generate Carbon Farming Initiative credits until the carbon stores have been replenished to their previous level and the proponent will be required to take action to facilitate the restoration of these carbon stores.
  • Only a proportion of the carbon credits attributable to avoided deforestation will be provided to the project proponent over the long term (eg 20 years) in recognition of the ease with which forests can be harvested and their carbon sequestration reversed.
  • The project proponent will be required to relinquish all Carbon Farming Initiative credits received if it determines to terminate the project prematurely or if the carbon stock is diminished other than because of natural events (eg through harvesting).
  • A carbon maintenance obligation, under which the landholder is required to maintain the existing carbon stock but not to add to it, will attach to the land where the relevant land is transferred without the carbon abatement project, eg as where the land passes to another landholder as a result of the death or insolvency of the original landholder or the termination of the lease under which the original landholder occupied the land. Such an obligation will also apply where the previous landholder has failed to comply with a requirement to relinquish Carbon Farming Initiative credits (see above).
  • Carbon Farming Initiative obligations will be required to be noted on the land title so that those dealing with the landholder are aware of their potential obligations.

Approval of projects

To qualify under the Carbon Farming Initiative, a project will need to be approved by the scheme administrator. This approval will entail the following:

  • Approval of the methodology that is to be used to determine the baseline for the project, measure the greenhouse gas abatement and monitor the project. It is anticipated that a suite of methodologies will be developed by the Departments of Climate Change & Energy Efficiency and Agriculture, Fisheries & Forestry, in consultation with industry, for approval by the Minister for Climate Change and Energy Efficiency. This will require some considerable effort because there are not widely accepted methodologies applicable to all of the activities that are potentially to be covered by the Carbon Farming Initiative. While project proponents will be able to develop their own methodologies for approval, it may be expected that it will take some time to have those methodologies evaluated and approved by the Minister.
  • Establishment of the project proponent's entitlement to the sequestered carbon. In this regard, a number of states already have legislation in place that establishes registrable legal rights in carbon sequestered in trees and Victoria has recently extended the scope of its legislation so that it also recognises rights to carbon sequestered in other vegetation, as well as soil.
  • Setting the crediting period for the project. This period is generally expected to be no longer than three years to allow for improved methodologies to be implemented progressively through the life of the project.
  • Setting the frequency with which abatement reports must be made, which will need to be at least once during the crediting period. Such reports will be required to be audited by auditors qualified under the National Greenhouse and Energy Reporting Scheme because the reports will form the basis for determining the carbon abatement that has occurred and therefore the number of Carbon Farming Initiative credits that may be issued. In certain circumstances (eg as where carbon stocks are subject to significant annual variability) the crediting might be based on a long-term rolling average of those carbon stocks.
  • It is possible that some projects will not qualify under the Carbon Farming Initiative on the basis of their adverse impact on food production, water use or biodiversity. While the Federal Government does not seem to be proposing any such restrictions at the moment, the consultation paper leaves open the possibility of environmental and planning laws dealing with these matters or with the scheme subsequently being amended to do so if these matters become significant.

If you would like further information about the Carbon Farming Initiative or would like assistance in drafting a submission in response to the consultation paper, please contact any of the people below.

Footnotes
  1. Because the first commitment period under the Kyoto Protocol expires on 31 December 2012, there is a limited window within which this exchange can take place. The Federal Government has indicated that it will only be prepared to make such an exchange if application is made before 31 March 2013.

For further information, please contact:

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