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Carbon Farming Initiative/Emissions Reduction Fund

Accelerating carbon abatement for Australia by providing incentives for projects that reduce emissions.

Purpose

The Emissions Reduction Fund contributes to a reduction in Australia's net greenhouse gas emissions by providing incentives to reduce emissions. The aim is to help Australia meet its emissions reduction target of five per cent below 2000 levels by 2020.

Performance

In summary, the Emissions Reduction Fund is on track as at 30 June 2015 to achieve this aim, with 278 projects registered to participate and 9 318 106 Australian carbon credit units issued during the financial year, equating to a reduction in emissions of one tonne of carbon dioxide equivalent per unit.

In the first auction held in April 2015 more than 47 million tonnes of future abatement was contracted, with more than half expected to be delivered by 2020.

How it works

The Emissions Reduction Fund is a voluntary scheme that provides incentives for industry, businesses, land owners, state and local governments, and other organisations to adopt new practices and technologies to reduce emissions.

There are three components: crediting; purchasing; and safeguarding emissions reductions.

The crediting component involves participants receiving one Australian carbon credit unit (ACCU) for each tonne of carbon dioxide equivalent (CO2-e) stored or avoided through registered projects, which must be based on eligible methods.

The purchasing component of the scheme involves the Clean Energy Regulator purchasing ACCUs from participants who hold a contract, through an auction process. Some participants may choose not to enter into a contract with the government, but instead sell their ACCUs in the secondary market or hold them to offset their own emissions.

The safeguarding component will be introduced on 1 July 2016 through a mechanism designed to ensure that emissions reductions are not overcome by significant emissions increases above business-as-usual levels elsewhere in the economy.

Figure 2: The crediting and purchasing components of the Emissions Reduction Fund

Figure 2: The crediting and purchasing components of the Emissions Reduction Fund 

Establishing the Emissions Reduction Fund

Legislation to implement the Emissions Reduction Fund came into effect on 13 December 2014.

The Clean Energy Regulator is responsible for registering projects and issuing ACCUs, running auctions and managing contracts for the purchase of emissions reductions.

The agency transitioned existing infrastructure and capability during the year in order to implement the Emissions Reduction Fund successfully.

Priorities to ensure the successful implementation included:

  • developing the systems and processes needed to operate and regulate the Fund
  • preparing clients, staff and stakeholders for the new policy and activities
  • liaising closely with the Department of the Environment to contribute to the draft legislation and methods (types of projects possible under the Fund) to ensure efficient administration, for both participants and the Clean Energy Regulator
  • transitioning clients from the Carbon Farming Initiative into the Emissions Reduction Fund
  • supporting people applying to participate, and
  • conducting the Fund's first auction.
The Clean Energy Regulator administers schemes that reduce emissions and increase use of clean energy. The agency works closely with business and industry to encourage participation and compliance while reducing unnecessary burden.

Transitioning the Carbon Farming Initiative

The Carbon Farming Initiative was a voluntary carbon abatement scheme that operated from September 2011 to December 2014. Participants were issued ACCUs for land-based projects that stored or reduced greenhouse emissions. Participants could use the ACCUs themselves to offset carbon price liability or to voluntarily offset their emissions, or sell them to others for a similar purpose.

With the introduction of the Emissions Reduction Fund, all Carbon Farming Initiative projects transitioned to the new scheme.

Applications

The Clean Energy Regulator received a significant increase in applications for the Carbon Farming Initiative/Emission Reduction Fund in 2014–15 compared with the previous year:

  • the number of applications for recognition as an offset entity/client information2 increased from 98 in 2013–14 to 148 in 2014–15
  • the number of project applications received increased from 100 in 2013–14 to 358 in 2014–15
  • the number of applications for certificates of entitlement to be issued with ACCUs increased from 85 in 2013–14 to 185 in 2014–15
  • the number of ACCUs issued increased from 4 380 473 in 2013–14 to 9 318 106 in 2014–15.
Table 1: Number of applications received and/or processed under the Carbon Farming Initiative/Emissions Reduction Fund in 2014–15
TypeOn hand at 30 June 2014 ReceivedApprovedWithdrawn or refusedProcessed within 90 days (%)On hand at 30 June 2015
Recognition as an offsets entity 8464591000
Project application 15358139171002173
Certificate of entitlement218518421001
Table 2: Number of ACCUs issued
2012–13 2013–14 2014–15 Total
ACCUs issued1 750 1794 380 4739 318 10615 448 758

Auction process

SNAPSHOT

More than 47 million tonnes of carbon abatement contracted at the first Emissions Reduction Fund auction.

Participants with registered projects can apply to enter into a contract with the Clean Energy Regulator to sell their ACCUs to the government. This provides a financial incentive to undertake projects that help meet Australia's emissions reduction targets. To secure a contract, they need to bid successfully at an auction.

From February to April 2015, ahead of the first auction, 50 new projects were registered. The Clean Energy Regulator held the first auction on 15–16 April, contracting 47 333 140 tonnes of carbon abatement (see the feature on page 32).


FEATURE

An auction mallet to represent auctions under the Emissions Reduction Fund.

Accelerating carbon abatement for Australia

First Emissions Reduction Fund auction a success

On 15–16 April 2015 the Clean Energy Regulator held the first auction under the Emissions Reduction Fund. This major milestone resulted in successful bidders committing to deliver more than 47 million tonnes of abatement.

In total, 107 carbon abatement contracts were awarded to 43 contractors for 144 projects. The average price per tonne of abatement was $13.95, with the total value of the contracts exceeding $660 million. The term of the contracts varied from three to 10 years. Contractors will be paid on delivery of Australian carbon credit units according to the schedule in their contracts.

There was intense preparation in the lead up to the first auction by both the Clean Energy Regulator and participants, in particular from December 2014 when the Emissions Reduction Fund legislation came into effect. The auction date was announced on 13 February to allow time for clients to prepare their project applications and their bidding strategy and to understand the auction process. Also during this period, new methods were released allowing more scope for participation across the economy. Following the announcement of the auction date, more than 50 new projects were registered.

In the lead up to the auction, the Clean Energy Regulator focused on ensuring clients understood what would be required to participate in the auction and engage in a contract with the Commonwealth.

The auction was a competitive process which allowed the Clean Energy Regulator to choose the lowest priced abatement on offer (a 'reverse' auction). The auction had an undisclosed benchmark price, which was the maximum amount the Clean Energy Regulator would pay for emissions reductions. Bids were accepted in price order up to 80 per cent of the volume offered below the benchmark price.

As expected, many bids in the first auction were from existing Carbon Farming Initiative projects, with most contracts being awarded to sequestration, landfill and alternative waste treatment projects. However, more commercial and industrial projects are expected in future auctions, as more methods become available.

Deloitte Touche Tohmatsu attended the first auction as an independent observer. Its report on the probity of the first auction found the 'process was fair and transparent, decisions were made with accountability, and the confidential information associated with the auction was treated appropriately'.

Publication of the auction results resulted in more than 870 media reports in five days in and reached more than 5.4 million Australians. This demonstrated a high level of public interest in the Emissions Reduction Fund.

More than half the contracted abatement from the first auction is expected to be delivered by 2020—accelerating carbon abatement and contributing to Australia's emissions reduction target of five per cent below 2000 levels by 2020.

Image acknowledgment: Clean Energy Regulator. An auction mallet to represent auctions under the Emissions Reduction Fund.

Figure 3: First Emissions Reduction Fund auction results

Figure 3: First Emissions Reduction Fund auction results 

Figure 3 - First Emissions Reduction Fund auction results

First Emissions Reduction Fund auction results:

  • 107 contracts awarded
  • Over 47 million tonnes of CO2-e contracted abatement
  • Volume of abatement by method:
    • Sequestration (this includes multiple methods under the Emissions Reduction Fund) – 29.8 million tonnes
    • Landfall and waste (this includes multiple methods under the Emissions Reduction Fund) –  16.6 million tonnes
    • Savanna burning – 0.5 million tonnes
    • Piggeries – 0.3 million tonnes
    • Transport – 0.15 million tonnes
  • 144 projects under contract
  • Average price per tonne of abatement $13.95
  • Contract duration:
    • 3 years
    • 7 years (standard contract)
    • 10 years
  • 43 contractors
  • $2.55 billion - Emissions Reduction Fund. $660 million contracted
  • Contracted abatement: smallest - 12 thousand tonnes, largest 3.5 million tonnes

Projects

In 2014–15, a total of 139 new projects were declared eligible under the Carbon Farming Initiative/Emissions Reduction Fund, bringing the total number of projects registered in the scheme to 278.

The Emissions Reduction Fund extends beyond the former Carbon Farming Initiative's land-based projects to include a wider variety of methods. As at 30 June 2015 these included:

  • capture and destruction of coal mine fugitive emissions
  • reducing emissions-intensity of transport
  • commercial, industrial and aggregated energy efficiency improvements
  • capture and combustion of biogas from wastewater.
Table 3: Number of projects declared eligible under the Carbon Farming Initiative/Emissions Reduction Fund in 2014–15, by method category
Method New projects
in 2014–15
Cumulative projects
to 30 June 2015
Percentage of
total projects
Agriculture*7145
Energy efficiency221
Industrial fugitives000
Savanna burning243513
Transport221
Vegetation#901344
Waste^149133
Total 139 278 100

* including livestock
† New methods since 13 December 2014
# including soil carbon
^ Previously landfill and alternative waste

Carbon credits

A total of 9 318 106 ACCUs were issued in 2014–15, representing 9 318 106 tonnes of CO2-e abated through the Carbon Farming Initiative/Emissions Reduction Fund.

This included a spike in January–February 2015 of 2 743 820 due to the number of Carbon Farming Initiative projects reporting close to the final surrender period under the carbon pricing mechanism in order to maximise their revenue from sales to liable entities. (see the Feature on page 38 – 39).

A cumulative total of 15 448 758 tonnes of CO2-e abatement has been delivered by projects since December 2011 when the Carbon Farming Initiative began.

Table 4: Number of ACCUs issued under the Carbon Farming Initiative/Emissions Reduction Fund in 2014–15
Method categoryProject issued
with ACCUs
Number of
ACCUs issued
Percentage of ACCUs issued in 2014–15
Agriculture*553 9751
Savanna Burning17934 16310
Vegetation#534 673 25250
Waste^813 656 71639
Total 156 9 318 106 100

* including livestock
# including soil carbon
^ Previously landfill and alternative waste

Table 5: ACCUs issued under the Carbon Farming Initiative in 2012–13 and 2013–14 and under the Carbon Farming Initiative/Emissions Reduction Fund in 2014–15 by method
Method category2012–132013–142014–15Total
Agriculture8 16939 06853 975101 212
Savanna burning25 884441 658934 1631 401 705
Vegetation11 9621 368 1514 673 2526 053 365
Waste1 704 1642 531 5963 656 7167 892 476
Total 1 750 179 4 380 473 9 318 106 15 448 758

Looking forward

The Clean Energy Regulator is now preparing for future auctions and contract deliveries, and will continue to enhance the capabilities that support the Emissions Reduction Fund. The introduction of new methods will broaden the opportunities within the scheme to new industries and increase the number of project registrations.

In addition, the Clean Energy Regulator is preparing to implement the safeguard mechanism on 1 July 2016. This aims to ensure purchased emissions reductions under the Emissions Reduction Fund are not displaced by significant emissions increases elsewhere in the economy. Under the safeguard, Australia's largest emitters will be required to keep their emissions below a set baseline or surrender credits to offset any emissions over the baseline. The safeguard will work through the National Greenhouse and Energy Reporting Scheme (see page 47), with baselines set using data reported under that scheme.

FEATURE

Piggeries can participate in the Emissions Reduction Fund.

Trusted, relevant, expert institution

Issuing ACCUs ahead of the final carbon pricing surrender period

The final deadline for surrendering carbon units under the carbon pricing mechanism was 3 February 2015. This was the last opportunity for liable entities to surrender enough units to avoid a shortfall charge.

Liable entities had to purchase and surrender one carbon unit for each tonne of greenhouse gas they produced. The units surrendered could be carbon units, purchased at a set price from the Clean Energy Regulator, or Australian carbon credit units purchased from participants in the Carbon Farming Initiative.

In early 2015 there was a sharp increase in the volume of ACCUs issued to Carbon Farming Initiative projects, as many Carbon Farming Initiative participants anticipated the surge in demand for ACCUs ahead of the final carbon price deadline.

In January–February 2015, the Clean Energy Regulator received 45 applications to issue ACCUs from Carbon Farming Initiative participants, close to four times the number (12) received at the same time in 2014. The agency assessed the applications and issued 2 743 820 ACCUs, compared with 436 988 during the same period in 2014. Out of the 362 liable entities, 171 used ACCUs to acquit part of their liability.

Staff worked hard to guide applicants through each step in the process. This ensured that applications received met all the necessary requirements, so they could be processed as quickly as possible.

This work has provided a strong basis for the effective administration of the new Emissions Reduction Fund.

It has also reinforced the Clean Energy Regulator's reputation as a trusted, relevant and expert institution. The agency issued the ACCUs into the market in time to ensure liable entities had the option to purchase ACCUs to meet their liability, and project participants got a return on their investment.

The Clean Energy Regulator and the Minister received positive feedback from satisfied clients commenting on the agency's 'great work' over the period, particularly in reviewing ACCU applications in the lead up to the final carbon pricing mechanism period.

The Clean Energy Regulator's efficiency during this period also improved the market's confidence in the agency, as noted in this client feedback:

'This sets a great precedent for the upcoming Emissions Reduction Fund. Knowing that we are working with a proactive and supportive regulator certainly encourages the carbon abatement and sequestrations industry to approach this scheme with the heightened feeling of optimism and will definitely encourage increased participation in the new scheme.'

Image acknowledgment: Clean Energy Regulator. Piggeries can participate in the Emissions Reduction Fund.

Figure 4: Total number of ACCUs issued under the Carbon Farming Initiative/Emissions Reduction Fund and surrendered under the carbon pricing mechanism and number of projects registered per month July 2014 – June 2015

Figure 4: Total number of ACCUs issued under the Carbon Farming Initiative/Emissions Reduction Fund and surrendered under the carbon pricing mechanism and number of projects registered per month July 2014 – June 2015

Figure 4: Total number of ACCUs issued under the Carbon Farming Initiative/Emissions Reduction Fund and surrendered under the carbon pricing mechanism and number of projects registered per month July 2014 – June 2015
MonthNumber of Projects Declared per MonthTotal ACCUs Issued per MonthTotal ACCUs Surrendered per Month
Jul-14143479560
Aug-14514241750
Sep-1487499780
Oct-1456297566150
Nov-147125948637324
Dec-14151305592786784
Jan-15927438207910842
Feb-15500
Mar-152800
Apr-1522677620
May-1591454800
Jun-15126441010

2 To run a project under the Carbon Farming Initiative, participants had to be recognised as an offsets entity. This no longer applied when the Carbon Farming Initiative transitioned into the Emissions Reduction Fund from December 2014. Under the Emissions Reduction Fund, project registration includes a 'fit and proper person test' which is a similar assessment.

3 Note 209 new project applications were received during the last week of June 2015.

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