Regulatory additionality

Most offset schemes including the ERF contain some form of regulatory additionality test, which is intended to ensure that ERF projects (activities) to reduce emissions or sequester carbon do not receive credits if those activities are already required by law.

Contents

• Recent developments
  
• Our approach
  
• Implementation
  
  • Agreement between the Clean Energy Regulator and states and territories
    
  • Agreement between the Clean Energy Regulator and entities with a state or territory obligation
    
  • Participating in an Emissions Reduction Fund auction
    
• Interaction with the Australian Government’s safeguard mechanism
  
• Compliance
  
  • Other requirements continue to apply
    
• Background
  
• Process at a glance
  

Recent developments

In recent times, state and territory governments have put in place emissions reduction obligations on government and non-government entities, which do not specify or reference particular projects (activities) or ways to reduce emissions.

• For example, a state water corporation could be required to have net zero emissions from its operations by 2025 or a state car fleet could be required to be carbon neutral by 2020.

These emission reduction obligations take various forms such as emissions reduction targets, directives to reduce emissions, or through the requirement to purchase and surrender a specified amount of emissions offsets.

Some states and territories have expressed interest in using the ERF framework for crediting emissions offsets from projects undertaken to meet a directive or state or territory obligation as it provides a robust and established mechanism for carbon accounting.

In the past the Clean Energy Regulator has taken the view it is not possible to assess whether ERF projects go beyond state or territory requirements if the requirement does not specify particular activities to reduce emissions or store carbon but instead requires a given amount of emissions reductions through emissions reduction targets or offsets.

Under the previous Clean Energy Regulator approach to regulatory additionality, if businesses wished to generate Australian carbon credit units (ACCUs) to meet a state or territory obligation, they would need to do so via third parties, purchase the ACCUs in the secondary market, or create a related company to register an ERF project. A business would not, however, be able to establish an ERF project on its own behalf. Feedback from stakeholders suggests these alternative available mechanisms to source ACCUs are inefficient.

Our approach

In keeping with developments in the carbon market, the Clean Energy Regulator has considered how it will allow entities with state or territory obligations (regulated entities) to participate in the ERF, while still ensuring the integrity of ACCUs and the ERF scheme.

The Clean Energy Regulator takes the view that regulatory additionality will be met if:

1. the Regulator is satisfied the activity goes beyond any existing legal requirement; or
2. the activity is covered by an ‘in lieu’ provision in the applicable ERF method; or
3. the Commonwealth, state or territory regulatory requirement refers to reducing or offsetting emissions, but does not specify a particular activity to do so; and to help fulfil or meet a state or territory requirement to reduce or offset emissions, the regulated entity establishes an ERF project and transfers ACCUs from that project into a specified Commonwealth holding account in the Australian National Registry of Emissions Units (ANREU).

For a project to satisfy the third requirement, any ACCUs generated by a regulated entity from an ERF project it establishes, which are used to meet its state or territory regulatory requirement, must be put aside permanently in the Commonwealth holding account in ANREU and not be made available to the carbon market (see Implementation section below).

This is to ensure that the project would remain additional, and no financial benefit could be gained from the ACCUs generated that are used to meet the regulatory requirement.

There are a number of benefits from using this approach:

1. Any ACCUs resulting from the project that are not used to meet the state or territory obligation could be made available to the market, potentially bringing on further additional supply.
2. It allows states and territories to encourage participation in the ERF and use that framework for their carbon accounting.
3. The Commonwealth would have greater visibility as to how the ACCUs used by entities to meet their state or territory obligations are used into the future, potentially reducing the risk of double counting if they are on-sold.

Implementation

The Government supports state and territory government use of the Commonwealth’s ERF crediting architecture in their emissions reduction policies, because it is a robust and well-established carbon accounting mechanism.

As outlined in the Commonwealth Government’s Response to the expert panel report examining additional sources of low-cost abatement (the King Review), the ERF was set up to help Australia meet its international obligations to reduce emissions. It is important that state and territory efforts contribute to meeting Australia’s international emissions reduction obligations. To facilitate this ACCUs will need to be transferred to a specified Commonwealth holding account. The ACCUs will be held in this account in perpetuity - they will not be cancelled, surrendered or retired.

Agreement between the Clean Energy Regulator and states and territories

The Clean Energy Regulator will work collaboratively with relevant state and territory regulatory authorities to implement this approach through a Memorandum of Understanding (MOU) or an exchange of letters. These could contain a schedule of projects covered by the agreement, which could be added to over time.

The Clean Energy Regulator can arrange to share information with the states and territories on the transfers made by their regulated entities to the Commonwealth holding account. All ACCUs can be traced to their originating source through ANREU.

Agreement between the Clean Energy Regulator and entities with a state or territory obligation

At the time an entity with obligations under state or territory legislation applies to register an ERF project, they will be required to supply the Clean Energy Regulator with information including the relevant details of the state or territory regulatory obligation.

The regulated entity would also be required to declare to the Clean Energy Regulator that:

• ACCUs from its ERF project will only be used to meet its state or territory regulatory requirement to reduce or offset emissions if the ACCUS are placed in a specified Commonwealth holding account, and
• ACCUs from its ERF project will not be used to meet its state or territory regulatory requirements through another means such as voluntary cancellation.

ACCUs that are not placed in the Commonwealth holding account to meet the state or territory obligation can be sold to the Commonwealth or in the secondary market.

This agreement does not prevent the regulated entity from using other ACCUs sourced from the secondary carbon market to meet its state or territory obligations.

Participating in an Emissions Reduction Fund auction

In some circumstances, regulated entities may be able to participate in an ERF auction process and contract with the Australian Government using ACCUs from their ERF projects. However, the amount of abatement that can be contracted through an ERF auction will need to exclude ACCUs that have been or will be placed in the designated Commonwealth holding account. This helps ensure that projects can only earn a financial benefit for surplus abatement once their regulatory requirements are fulfilled.

Interaction with the Australian Government’s safeguard mechanism

Under the Australian Government’s Safeguard Mechanism, entities may surrender ACCUs to meet their safeguard obligations. These ACCUs are cancelled by the Clean Energy Regulator. This means that ACCUs held in a Commonwealth holding account for the purposes of meeting the regulatory additionality requirement cannot be used to meet safeguard obligations.

However, states and territories may decide to recognise ACCU surrenders made for the purposes of the Safeguard Mechanism as eligible under their own offset or emissions reduction schemes. Information about safeguard surrenders is published on our website. We are also able to provide this information directly to the relevant states and territories.

Note: Safeguard entities undertaking an ERF project at their facility to meet their Safeguard Mechanism requirements are not subject to the regulatory additionality test under section 27(4A)(b)(i) of the Carbon Credits (Carbon Farming Initiative) Act 2011.

Compliance

ERF participants should be aware that the Clean Energy Regulator will check compliance with regulatory additionality statements at the time of project registration and crediting. Participants who try to meet state and territory obligations using ACCUs that have not been transferred to the Commonwealth holding account may have their projects revoked through the powers available to the Regulator within the Carbon Credits (Carbon Farming Initiative) Act 2011. The Clean Energy Regulator’s priority is to only credit additional abatement.

Other requirements continue to apply

The Carbon Credits (Carbon Farming Initiative) Act 2011 requires that no part of a project area is used to meet an obligation under a Commonwealth, state or territory law to offset or compensate for the adverse impact of an action on vegetation (section 20A of the CFI Rule).

If the project area generates biodiversity credits, which are used to offset the adverse impact of an action on vegetation elsewhere—the project is unlikely to be compliant with this requirement.

Projects may not conflict with this requirement if the biodiversity credits are generated and retired only for philanthropic purposes and are not used to offset activities with adverse impacts on vegetation such as developments.

Further to this, the project cannot conduct an activity that was mandatory under a Commonwealth, state or territory law, but is no longer mandatory because the law was repealed, or amended to be less onerous, after 24 March 2011. This is specified in paragraph 3.36(a)(i) of the Carbon Credits (Carbon Farming Initiative) Regulations 2011.

Background

The Carbon Credits (Carbon Farming Initiative) Act 2011 requires that for the Clean Energy Regulator to register a project as an ‘eligible offsets project’, the project must meet, among others, the regulatory additionality requirements in paragraph s27(4A)(b), as follows:

1. the requirement (the regulatory additionality requirement) that the project is not required to be carried out by or under a law of the Commonwealth, a State or a Territory (other than the National Greenhouse and Energy Reporting Act 2007); or
2. if the methodology determination that covers the project specifies, for the purposes of this subparagraph, one or more requirements that are expressed to be in lieu of the regulatory additionality requirement—those requirements.

Process at a glance

These key steps have been designed to help guide a regulated entity through the process needed to meet the regulatory additionality requirement on an ERF project.

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