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Breakfast with the Clean Energy Regulator

Suggested Reading Suggested Reading

21 November 2016

Carbon Management Institute of Australia and New Zealand in partnership with Sustainable Business Australia

11 September 2014
Chloe Munro, Chair

Introduction

Value of the National Greenhouse and Energy Reporting Scheme

Implementing the Emissions Reduction Fund

Crediting, purchasing and safeguarding under the Emissions Reduction Fund

Opportunities under the Emissions Reduction Fund

Conclusion

Introduction

Usually when I meet a new audience I have to explain what the Clean Energy Regulator does.

The Clean Energy Regulator has some responsibilities under the carbon price that are winding up. Although it has been repealed there is still activity around it and we will keep going with that most of this financial year.

We are also the entity that is intended to be the vehicle for the Emissions Reduction Fund and I'll talk about that a bit later on.

But the way I usually sum up who we are is that the Clean Energy Regulator is an independent economic regulator with an environmental objective.

We administer the market and regulatory mechanisms which create incentives for businesses to measure, manage, reduce or offset their carbon emissions, and invest in renewable energy.

We summarise our purpose statement and objectives as accelerating carbon abatement for Australia.

When I think about Sustainable Business Australia and Carbon Management Institute of Australia and New Zealand, the members are actively making a business case for carbon management in your own industries.

You are truly leading the way in a practical sense. As the survey demonstrates* (footnote with link to the CMIANZ survey), some of you will get on with the job of carbon management regardless of what the Government is doing because different businesses are motivated by different reasons, like corporate social responsibility, economic opportunities in carbon management and strategic positioning for the long term.

But it's no surprise that the survey also demonstrates that government policy matters.

The schemes that we administer set the ground rules for what businesses are required to do, or what they can be prevented from doing, to reduce emissions.

If there is one thing that I hear from business more than any other, it's a plea for policy certainty.

The reality is that businesses are the first to argue for change if they agree with policy settings. The reality is if events don't pan out in the way that was forecast when the policies were first made, the settings are likely to be reexamined.

As the independent regulator I can't promise policy certainty but I can offer some certainty as to how we apply the policy and how we operate the system.

We have built an excellent reputation based on a constructive relationship with our clients.

Our first priority is to administer the law as it is and to keep our clients informed every step of the way about what they need to do to discharge their obligations. As a result we have achieved an extremely high level of voluntary compliance and we expect this to continue in the context of the carbon tax right through to the final true-up in February 2015.

We continue to improve our systems and processes to make it easier to do business with us and we involve our clients in design discussions and user testing.

We will take the same approach with our new responsibilities under the Emissions Reduction Fund.

We will publish plenty of guidance up front, so that clients can understand the steps that are required to get involved.

We will have streamlined processes to keep participation costs as low as reasonably possible and we will consult on these as we go.

We will be open and transparent about the decisions that we are making and we will publish data to help decision making in the market.

You can expect consistency in the approach from the Clean Energy Regulator, even as the rules of the game are changing.

There is great degree of continuity in the schemes that we administer because a number of them are mature and predate the Clean Energy Regulator.

The Renewable Energy Target has been in operation since 2001 and the National Greenhouse and Emissions Reporting scheme since 2007.

The Carbon Farming Initiative is preforming well as the new kid on the block and it will transition into the Emissions Reduction Fund.

The Renewable Energy Target Review has put into play a debate that I think was unavoidable in the context of developments in the energy market. I don't propose to discuss that today but I'm happy to answer questions.

Value of the National Greenhouse and Energy Reporting Scheme

The National Greenhouse and Energy Reporting Scheme is another mature scheme which has grown in significance in its seven years in operation. I was pleased to see the survey results show such strong support for its continuation. The National Greenhouse and Energy Reporting Scheme is a trusted and authoritative source of information covering over 60 per cent of Australia's greenhouse gas emissions.

National Greenhouse and Energy Reporting data are used by many government agencies who report on climate change and energy issues and it is important for government decision making both at a national and state level.

The National Greenhouse and Energy Reporting data are also used by those who report. Obviously there is a cost to reporting but it does contribute to the task of carbon management which is underway in many businesses.

One example is the Commonwealth Bank. In their 2014 annual report they state that through using National Greenhouse and Energy Reporting data they were able to measure and exceed their goal of reducing emissions to 20 per cent by 2008-09 and levels by June 2013.

Commonwealth Bank aims to achieve further reductions by the end of this financial year, 25 per cent cut in scope one emissions and a 35 per cent cut in scope two emissions. Additionally the Commonwealth Bank said that National Greenhouse and Energy Reporting and Australian Energy Market Operator data allowed it to cut costs of conducting emissions profiles of major loans or investments by 75 per cent.

To make it easier for businesses to meet their obligations under the National Greenhouse and Energy Reporting Act we continue to upgrade our systems.

Our new Emissions and Energy Reporting System has been well received and we are taking on board a lot of client feedback to make further improvements.

We are also alert to opportunities to streamline the regulations and measurement determinations in ways which reduce compliance costs without diluting the integrity of the data. We work closely with the Department of the Environment to put changes into practice.

As a reminder now for National Greenhouse and Energy Reporting Scheme reporters, and people who are advising them, we are coming up to the final reporting deadline at the end of October 2014.

There is a lot of information on our website about the key changes and the legislative amendments that have gone through for this year's reporting cycle under the National Greenhouse and Energy Reporting Scheme.

Some of you may have already attended the webinars we're currently hosting around these changes so visit our website for more details.

Implementing the Emissions Reduction Fund

Moving on to the Emissions Reduction Fund. The survey results do reveal some scepticism on the Emissions Reduction Fund and I can understand that, particularly until the legislation has passed.

I would like to start by correcting a couple of misapprehensions that are evident from the survey and the way the questions have been framed, and then give you a quick run-down on how we intend to operate the three elements of the fund: crediting, purchasing and the safeguard mechanism.

The Emissions Reduction Fund is intended to make a substantial contribution towards Australia's 2020 emissions reduction target; however it is important to understand that this does not translate to a quantitative objective for the purchasing element of the scheme.

Our goal as the scheme administrator is simply to buy as much abatement as we can, at the lowest cost, with the funds available. We don't have a target price, quantity or timeframe, and the contracted abatement does not all have to be delivered before 2020, although I imagine most of it will be.

To say that the likely price of Australian carbon credit units will be 8-12 dollars is making assumptions that are just plain wrong. We have no preconceptions about what prices will be offered in the market or what we will be willing to pay.

We expect to purchase abatement at a range of price points because of the diversity of projects that will be required to commit all of the available funds. The average could be higher or lower than the range mentioned, depending on the projects that come forward.

If you're interested in participating, all you have to do is make your best offer, based on the lowest cost price at which it would be worth your while to carry out the project. If you were to win a contract, you should be happy to proceed at this price, and we should be happy that we are not paying too much for the abatement that you produce. If you don't win a contract, you're not obliged to proceed with the project.

Crediting, purchasing and safeguarding under the Emissions Reduction Fund

The Emissions Reduction Fund will operate through three mechanisms: crediting genuine emissions reductions, purchasing emissions reductions and safeguarding emissions reductions.

Talking first about the crediting phase, projects are eligible to participate if they meet some basic additionally tests, are new, they go beyond standard business activities, and are not required by regulation or funded by other government programmes. They also need to comply with a method which enables the abatement to be measured.

When an eligible project submits a report on the abatement that is achieved, measured according to the method, it will receive one Australian carbon credit unit for each tonne of carbon dioxide equivalent of sequestered carbon or avoided emissions. This is exactly how the Carbon Farming Initiative works today. However, the Emissions Reduction Fund will be open to a much wider range of methods.

In addition to the existing land-based methods under the Carbon Farming Initiative, the scheme will apply to a wide range of productivity enhancing activities such as upgrading commercial buildings, improving the energy efficiency of industrial and other facilities, capturing landfill or waste coalmine gas, and upgrading vehicles to improve transport logistics – and there will be many others.

The Emissions Reduction Fund legislation simplifies entry and reporting requirements into the scheme, and we're developing streamlined processes to reduce transaction costs and encourage participation. We have held preliminary consultations with interested parties already, through workshops arranged for us by the Carbon Market Institute.

We're also involved, with business, in the technical working groups run by the Department of the Environment on each new method. Our involvement works to ensure that the rules can be applied in practice and to provide the appropriate level of confidence in the level of abatement we have achieved.

The second phase is the purchasing phase: purchasing emissions reductions. The objective is that the Clean Energy Regulator will enter into contracts with project owners to purchase Australian carbon credit units from them over a number of years.

We have already consulted with stakeholders on the standard forms of these contracts, which are on straightforward commercial terms, based on payment on delivery against a delivery schedule, provided by the contractor.

Purchasing takes place through a simple reverse auction which selects between offers purely on price. The White Paper specifies a simple single round, sealed bid process for the initial auctions. Right now we are developing just exactly how that is going to work, and we will announce the details well before the first auction.

We will have the flexibility to adjust the process as the market develops. There is interest in whether we will introduce spot purchases, and there is an opportunity for a secondary market to be developed to give contractors more flexibility in how they fulfil their scheduled deliveries.

In other words, you don't have to deliver Australian carbon credit units from your own project. The contract is actually indifferent as to the source of the Australian carbon credit units. To participate in an auction you will need to have an eligible project, and you will need to agree to the contract terms in advance.

The Clean Energy Regulator will assess the credibility of the proposed delivery schedule before you can register for the auction. This will prevent the auction from being distorted by offers that are based on highly unrealistic assumptions or projects which have no hope of proceeding because the proponents just don't have the capability or the technology isn't appropriate.

You will be able to include in the offer, conditions, so that for example, you don't need to have your planning consent or financing in place at the time of which you go to the auction, and if those conditions are met the contract remains. However, if they are not met in time then the project will lapse.

We are planning this step now and what we want to do is make sure we are asking for the minimum information that's necessary to make that judgment about credibility and the best way to capture that. If it is a viable project, all that information will be in your business case. We think there is a way of doing this that isn't in itself a barrier to entry.

Finally there is the third element: safeguarding emissions reductions. This isn't in the current legislation and won't come into play for at least another year. It is the third leg of the stool and is very important. It's a mechanism to lock in the gains made through the purchasing mechanism by constraining growth and emissions elsewhere in the economy.

The safeguard mechanism will apply only to the largest emitters but it will still cover a high proportion of emissions across Australia. It will work through the National Greenhouse and Energy Reporting framework.

Businesses covered by the safeguard mechanism will be required to keep their emissions below a set baseline. Department consultations are underway about how baselines will be set and about compliance options if someone exceeds their baseline.

Opportunities under the Emissions Reduction Fund

Please keep an open mind about the opportunities that there may be for your business under the Emissions Reduction Fund. If you have a project in mind that could produce abatement, you can check whether it is likely to be eligible under one of the methods currently scheduled for release at the start of the scheme. Methods are available on the Department of the Environment website.

The first round of methods has been released for public consultation with more on their way. If you want to start your project now and keep open the option to apply to the Emissions Reduction Fund, you can submit a Notice of Intent through our website. This will mean that your project would not fail the newness part of the additionality test – although other eligibility criteria apply.

Projects can continue to be registered under the Carbon Farming Initiative and existing Carbon Farming Initiative projects will be well placed to take early advantage of the contracting and purchasing arrangements available under the Emissions Reduction Fund.

The land sector contributes around 21 per cent of Australia's overall emissions. We've created around 7.5 million tonnes of abatement from the Carbon Farming Initiative projects in just over two years and momentum is building - so there is a pipeline right there.

From our consultations we expect to see a few different business models emerging. We believe there will be specialist aggregators, like those that operate under the Renewable Energy Target and Carbon Farming Initiative and in the state based energy efficiency schemes.

There will be intermediates or project owners who anticipate variable production levels and who operate purely in the secondary market – we've spoken to some of those. There will also be businesses with major facilities that can identify process improvements or plant upgrades that would reduce their emissions, possibly to stay within the baseline set for them under the safeguard mechanism. We think they will be interested in participating too.

So please, don't make the assumption that a particular price target has already been set. In fact, there is plenty of information available to help you decide whether your project could be competitive. We will continue to publish a list of registered projects so that you can see what else might be in the field. We will publish the results of each auction, so that you can see the average price paid and how much we have committed.

I reiterate that the best strategy is to price realistically at the lowest price for which it is worth your while to do the project. Keep an eye on our website for new information as we develop our processes well ahead of the first auction.

Conclusion

In summary, the Clean Energy Regulator operates markets where both the supply and demand are driven by the regulation of our schemes, but participation on the supply side is voluntary.

The Emissions Reductions Fund will only be a success in the purchasing arm of it if there are plenty of participants with a good pipeline of projects. Success will depend on the good work of people who are knowledgeable and capable in carbon management business, and I think this means you – I hope this includes you.

We have a common cause after all – accelerating carbon abatement for Australia.

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