The Emissions Reduction Fund is a key element of the Australian Government’s suite of climate change policies. Introduced in late 2014, it provides an incentive for industry, businesses, land owners, state and local governments and other organisations to adopt new practices and technologies to reduce emissions or store carbon (referred to as carbon abatement).
The Emissions Reduction Fund is in its third year of operation and has moved into a more business-as-usual phase of the scheme. We have seen the volume of abatement purchased at auctions stabilise and participants focus on meeting their project and contract obligations.
The Emissions Reduction Fund has three elements.
We are joint stewards of the Emissions Reduction Fund with the Department of the Environment and Energy and the Emissions Reduction Assurance Committee (ERAC). The Department’s role is to set policy direction and develop methods for project activities, as well as manage other legislative matters. The ERAC is an independent, expert committee, which assesses whether methods meet the requirements of the Emissions Reduction Fund and provides advice to the Minister for the Environment and Energy. Our role is to administer the scheme, including registering projects, issuing ACCUs, processing reports and audits, managing contracts and ensuring compliance.
The Emissions Reduction Fund is making a significant contribution to Australia’s international emissions reduction commitments.
In 2017–18 there was an increase in project registrations as the Emissions Reduction Fund moved into its fourth year.
We approved 135 applications to register new projects, compared with 84 last year.
Most new projects use land sector methods, involving vegetation regeneration for native forests (see Table 1).
As at 30 June 2018, there were 738 Emissions Reduction Fund projects in total.
The Emissions Reduction Fund is making a significant contribution to Australia’s international emissions reduction commitments.
Projects can apply for ACCUs based on the amount of carbon abatement they achieve through their activities to store carbon or reduce emissions. These are known as crediting applications.
We received 553 crediting applications and issued a total of 12,207,903 ACCUs in 2017–18.
This was less than the 13,151,991 ACCUs issued in 2016–17. This partly reflects variability in the timing of Emissions Reduction Fund projects generating ACCUs and reporting. We expect the number of ACCUs issued to grow in future years.
There were also 64 crediting applications on hand to be processed at the end of 2017–18.
As shown in Table 3, carbon abatement was increasing year-on-year. We expect this longer-term trend to continue as we process those 64 on hand crediting applications in 2018–19 and as more new projects begin to achieve carbon abatement.
In total, more than 51.5 million tonnes of CO2-e has been achieved under the Carbon Farming Initiative and Emissions Reduction Fund.
In 2017–18 more than 60 per cent of all ACCUs were issued to projects using vegetation methods. This was followed by alternative treatment of organic waste and savanna burning.
The agency continues to investigate and strengthen posture and guidance to protect the integrity of ACCUs issued. As our largest contributor, vegetation projects have been an area of focus including issues related to permanence requirements and particular methods.
For example, the Clean Energy Regulator has been engaging with state law societies to increase awareness of the existence of sequestration projects and associated permanence obligations. Law societies have agreed to distribute guidance material to their members to help them search the Emissions Reduction Fund Project Register to identify individual properties during land dealings such as land sales.
To increase certainty for proponents and maintain the integrity of ACCUs issued under the methods, the agency released Guidance on stratification, evidence and records for projects under the Human-Induced Regeneration of a Permanent Even-Aged Native Forest and Native Forest from Managed Regrowth methods. The guidance is designed to clarify the requirements for satisfying carbon estimation area (CEA) eligibility to ensure only eligible land is credited. It was co-designed with industry to provide practical and flexible assessment and reporting practices.
We use reverse auctions to offer interested participants the opportunity to enter into a contract to sell carbon abatement to the government. We have run seven auctions since 2015, each in a single-round, pay-as-bid, sealed-bid format.
We purchase abatement based on bid price, consistent with our statutory requirement to purchase lowest cost abatement. We advise participants their bids should reflect their most competitive price.
We held our sixth auction on 6–7 December 2017 and our seventh auction on 6–7 June 2018. At those auctions, we committed to purchase a combined total of 15 million tonnes of carbon abatement across 58 contracts, worth more than $194 million. At both auctions we purchased the majority of carbon abatement offered below the benchmark price. This indicates that participants continue to offer competitive prices for abatement at auction.
Across all seven auctions held to date, total contracted abatement is 192 million tonnes.
Diversity of abatement across methods remained consistent with previous auctions. The majority is from vegetation projects, totalling more than 125 million tonnes of abatement. This significant volume reflects the land sector’s experience in carbon abatement projects, and demonstrates the volume of abatement available within the land sector.
The first contract for a project using the new plantation forestry method, introduced in August 2017, was awarded at the sixth auction and another four projects using this method were awarded contracts at the seventh auction. One contract was also awarded to a project using the new soil carbon sequestration in agricultural systems method at the seventh auction.
Overall, to date we have awarded 445 contracts for 493 projects, with most contracts having a duration of seven to 10 years. Contracted abatement amounts range from 5000 tonnes to 15 million tonnes. The average price per tonne of abatement was $13.08 at the sixth auction and $13.52 at the seventh, bringing the average across all auctions to $11.97.
We publish summary statistics for each auction on our website.
Each carbon abatement contract includes a delivery schedule for when the seller will deliver ACCUs to us. The sellers nominate their schedule in their contract offer, and we provide payment on delivery for the price agreed in the contract. In some circumstances, delivery schedules can be varied by negotiation if required as project implementation evolves.
In 2017–18 projects delivered 10.9 million tonnes of contracted ACCUs. Since the start of the scheme in late 2014, projects have delivered 32.8 million tonnes of the 192 million tonnes of carbon abatement currently contracted. This represents close to 100 per cent of the volume scheduled as at 30 June 2018.
However, contract deliveries vary significantly. The flexibility built into carbon abatement contracts allows some participants to deliver early or request to vary delivery milestones. Where sellers choose to deliver abatement early, this may indicate that some projects are performing ahead of where they had expected, while delays may indicate other projects are taking longer to implement.
The flexibility within contracts also allows participants to meet their delivery obligations by delivering the agreed quantity of ACCUs either from the contracted project or from other projects in their portfolio, or by purchasing ACCUs on the secondary market. In the event a participant is unable to fulfil all or part of a scheduled delivery and negotiating an extension is not possible, we will pursue buyer’s market damages.
We will continue to monitor compliance with the volume of abatement originally agreed when contracts are established, as well as carefully consider requests for revisions to delivery schedules.
A total of 16 of the 445 Emissions Reduction Fund contracts have now completed all delivery obligations.
The Emissions Reduction Fund was designed to encourage participation through the use of conditions precedent in contracts. Conditions precedent allows a project to be contracted while it is still conditionally registered, or subject to external financing.
Delivery obligations begin once a contract has satisfied all conditions precedent (if applicable). If a contract fails to meet or waive any conditions precedent, the contract lapses and the delivery and payment obligations of the contract cease. Funds allocated for the contract are then available for future purchasing. Contracts can also be terminated as a result of certain events, or by mutual agreement between both parties.
In 2017–18 there were 11 terminated and lapsed contracts. The amount of contracted abatement involved was 10.6 million tonnes, or approximately 5.2 per cent of total contracted abatement. Since the start of the scheme, a total of 16 contracts (11.5 million tonnes) have lapsed or been terminated—returning approximately $137 million to the Emissions Reduction Fund for future purchasing. The reasons for the conditions precedent not being met are specific to each contract.
New methods for Emissions Reduction Fund projects made during 2017–18 enabled new types of projects to participate under the scheme, including:
More than 250 Emissions Reduction Fund projects are on determined or claimed native title land—making up around one-third of total contracted abatement under the scheme. However, in discussions with stakeholders, it became clear there was uncertainty about the interaction between the
Carbon Credits (Carbon Farming Initiative) Act 2011 (Cth) and the
Native Title Act 1993 (Cth) as well as the relationship with state or territory law, particularly land ownership and pastoral leases.
We consulted with stakeholders during the year and, as a result, developed and published guidance on native title matters for Emissions Reduction Fund projects to better inform all participants and stakeholders.6
Emissions Reduction Fund projects can provide benefits to both native title groups and participants where these parties are not the same. The key principal in the guidance is that the best way to achieve project success is through genuine and early engagement with native title bodies, and it encourages entering into Indigenous Land Use Agreements.
The guidance also has general information on obtaining consents from eligible interest-holders. Projects on land that is the subject of a native title determination must have consent from registered native title bodies corporate as the eligible interest-holders. This means it is essential for early establishment phases of such projects to allow for the appropriate time and cost of consultation.
The guidance is the culmination of 12 months’ work and consultation with stakeholders including National Native Title Tribunal, Indigenous land councils, state and territory departments, the Australian Government Department of the Environment and Energy, the Attorney-General’s Department, Emission Reduction Fund participants and pastoralist peak body representatives.
It should facilitate more projects on native title land, provide employment opportunities for Indigenous people, unlock commercial opportunities for those involved in Emissions Reduction Fund projects and deliver more land-based carbon abatement.
The safeguard mechanism requires Australia’s largest emitters to keep their emissions below a set baseline. The aim is to ensure emissions reductions purchased under the Emissions Reduction Fund are not offset by significant emissions increases above business-as-usual elsewhere in the economy.
This was the second year of operation for the safeguard mechanism including the end of the first compliance period on 1 March 2018, which resulted in 100 per cent compliance for facilities covered during 2016–17.
A total of 203 facilities were covered under the safeguard mechanism during 2016-177. These facilities are from a broad range of industry sectors including electricity generation, mining, oil and gas, manufacturing, transport, construction and waste. Collectively, these facilities gave rise to 131.3 million tonnes of covered emissions, accounting for a significant amount of Australia’s greenhouse gas emissions.
To comply with the safeguard mechanism, facilities can manage any excess emissions in a number of ways, for example by purchasing and surrendering ACCUs to offset their emissions (see
Scheme compliance for details).
The safeguard mechanism came into effect on 1 July 2016 and we set baselines during 2016–17, in most cases using historical data reported under the National Greenhouse and Energy Reporting scheme (see
National Greenhouse and Energy Reporting scheme). In other cases, facilities that exceeded, or expected to exceed, their baseline could apply for a calculated baseline.
During 2017–18, after receiving applications from affected facilities, we issued:
In total, these determinations covered 73 facilities, as two facilities were granted both a calculated baseline determination and a multi-year monitoring period.
While most facilities are covered by individual baselines, electricity generators connected to the grid are covered by a sector-based approach. This is because the electricity sector behaves more like a single entity, where the output produced is centrally coordinated to meet real-time demand. If the sectoral baseline is exceeded in the future, individual baselines will apply to each generator.
Of the $2.55 billion Emissions Reduction Fund, $249 million remains after the seventh auction. Since the majority of the fund is now committed to existing contracts, our focus has shifted to managing the existing contracts.
We expect some contracted projects will encounter start-up difficulties, such as not obtaining regulatory approvals, eligible interest-holder consents or other third party approvals. As a result, some contracts will lapse if participants cannot meet the contract’s conditions precedent or the scheme’s obligations. Any funding allocated to a lapsed or terminated contract is available for future purchasing.
We will continue to work with clients and stakeholders to improve processes for project establishment, engagement, and reporting, including work for native title, see the feature on below for more information.
The Government released a consultation paper on the operation of the Emissions Reduction Fund and safeguard mechanism in February 2018, outlining a proposed approach to make the safeguard mechanism fairer and simpler, and to ensure baselines reflect current circumstances.
We have been working closely with the Department of the Environment and Energy to prepare for implementation of the policy change in 2018–19, and to ensure responsible emitters are supported to continue to meet their obligations.
The Emissions Reduction Fund is a market-based scheme that involves trading ACCUs through the carbon market. We support participation in the market by encouraging investment in carbon abatement projects, issuing ACCUs for each tonne of carbon abatement these projects achieve, and holding reverse auctions to purchase ACCUs earned.
Over the past year, private sector demand for carbon abatement has begun to increase. As this demand develops, there will be more opportunities for Emissions Reduction Fund participants to sell their ACCUs on the private market, beyond the auction process.
This shift is partly driven by regulated demand through liability under the safeguard mechanism, which in its first year of operation resulted in demand for almost 450,000 ACCUs. It is also due to increasing voluntary demand, related to initiatives such as state and territory carbon neutral targets, and an increase in private sector initiatives driven by corporate social responsibility initiatives.
Part of our role is to assist the operation of the market by engaging with participants and providing them with information and educational resources.
During 2017–18 we worked closely with the Carbon Market Institute to run workshops to explain the supply and demand dynamics that affect the market. Workshops took place in Sydney, Brisbane, Melbourne, Adelaide and Perth, with a broad cross section of attendees including clients from facilities covered by the safeguard mechanism, carbon credit agents, project developers, brokers and financial service providers. Participants received information about sourcing ACCUs and how to make informed decisions. They learned about the supply of ACCUs through Emissions Reduction Fund projects, and demand sources such as our auctions and voluntary surrender of ACCUs by companies.
These workshops are the first in a suite of initiatives planned to educate our clients and increase understanding about how the market operates. Providing analysis about the market helps our clients—particularly those sourcing and surrendering ACCUs—to meet their regulatory obligations in full, and on time. It also supports the operation of the private market. Workshops such as this help us build relationships and ensure our clients understand their options, and have the opportunity to explore and discuss market challenges.
2. Includes livestock and soil carbon.
3. Includes 120 revoked projects.
4. Under the
Carbon Credits (Carbon Farming Initiative) Act 2011 the Clean Energy Regulator has 90 days to process project registrations, variations and crediting applications.
5. The Carbon Farming Initiative began in late 2011 but it was 2012–13 before projects began maturing to the point of delivering carbon abatement. The Emissions Reduction Fund began in late 2014.
6. This guidance is published on
7. The safeguard mechanism applies to facilities with scope 1 greenhouse gas emissions (see
Glossary for definition) of more than 100,000 tonnes of carbon dioxide equivalent per year.
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The Clean Energy Regulator is a Government body responsible for accelerating carbon abatement for Australia.