The Carbon Farming Initiative: removing the
obstacles to its success
Andrew Macintosh
CCLP Working Paper Series 2012/3
ANU Centre for Climate Law and Policy
Sponsored by
About the ANU Centre for Climate Law and Policy
The ANU Centre for Climate Law and Policy (CCLP) is part of the ANU
College of Law. It was established in 2007 with the objective of providing a
focal point for law and policy research related to climate change. The CCLP
also runs courses in climate law and provides consulting services. Additional
details of the CCLP can be found on its website: http://law.anu.edu.au/CCLP/.
The CCLP gratefully acknowledges the support of its founding sponsor, Baker
& McKenzie.
CCLP Working Paper Series
The CCLP Working Paper Series provides a forum for the presentation of
initial findings from CCLP research projects. The publications are intended to
facilitate the exchange of information on climate law and policy issues.
Through this process, the CCLP hopes to improve its final research outputs.
CCLP Working Paper Series 2012/3 corresponding author:
Andrew Macintosh
Ph: 61 2 6125 3832
Email: [email protected]
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ii
Abstract
In December 2011, the Australian Government introduced the Carbon Farming
Initiative (CFI), a project-based, baseline-and-credit offset scheme for emissions and
removals from the land use, land-use change and forestry (LULUCF), agriculture and
waste sectors. The scheme is one of the most robust of its kind, having several
innovative design features developed to deal with integrity and perverse impact risks,
and promote co-benefits. Despite this, there are a number of issues undermining the
capacity of the CFI to realise cheap abatement opportunities and improve
environmental outcomes. This paper provides an overview of the CFI and an analysis
of the obstacles to its success. Suggestions for improvements are made, including
substituting a flexible permanence period-permanence deduction mechanism for the
existing 100 year rule and modifying the risk of reversal buffer and leakage deduction
processes to improve returns to project proponents.
3
Introduction
After almost two decades of debate, and five previous attempts, the Australian carbon
pricing scheme finally commenced on 1 July 2012. While welcomed internationally,
the domestic response has been mixed. Most analysts have judged the scheme to be a
significant, if not a substantial, advance, an opinion influenced by the compromises
that were necessary to get the scheme through Parliament and unambitious nature of
Australia’s likely 2020 mitigation target (5% reduction on 2000 levels) [1-5]. Within
the political sphere, the response has been polarised; the Labor Government and
Australian Greens have hailed it as a great leap forward, the Liberal-National Party
Opposition have claimed it ‘will be like a wrecking ball’ through the economy and put
the ‘a python squeeze’ on growth [100, 101].
In the background to the contentious carbon pricing debate has been the Carbon
Farming Initiative (CFI). Like the Kyoto Protocol’s Clean Development Mechanism
(CDM), the CFI is a project-based, baseline-and-credit offset scheme. Under it,
approved offset projects are able to generate certified offsets, called Australian carbon
credit units (ACCUs), from the land use, land-use change and forestry (LULUCF),
agriculture and waste sectors. Where the removals and/or avoided emissions count
towards Australia’s mitigation targets, the ACCUs (called Kyoto ACCUs) can be used
to meet liabilities under the carbon pricing scheme or exchanged for Kyoto units
(Assigned Amount Units (AAUs), Emission Reduction Units (ERUs) or Removal
Units (RMUs)) and sold into overseas compliance markets. If the removals or avoided
emissions do not count towards Australia’s targets, the project is known as a nonKyoto offset project and receives non-Kyoto ACCUs, which can only be used in
voluntary markets.
Conceptually, the CFI shares much in common with other carbon offset schemes.
What makes it of international interest is its breadth, the statutory framework within
which it operates, and, most notably, the innovative design features developed to deal
with integrity and perverse impact risks, and promote co-benefits. In drafting the
Carbon Credits (Carbon Farming Initiative) Act 2011 (Cth) (CFI Act), the Australian
Government made particular efforts to respond to concerns that the scheme would
suffer a failure to thrive due to the transaction costs that stem from project-level
integrity requirements [6]. Despite this, the scheme faces a number of potential
obstacles and concerns still linger that the CFI may not realise its full potential [7].
The object of this article is to review the design features of the CFI, analyse the
impediments to its success and identify potential solutions. The following section
provides an overview of the CFI. The article then reviews the mechanisms included
within the CFI to deal with integrity and perverse impact risks, and to promote cobenefits. This is followed by an analysis of the obstacles to the scheme’s success,
conclusions and a future perspective.
Overview of the CFI
The policy package that took effect in July 2012 — the Clean Energy Future package
— has three main components: the CFI, an emissions trading scheme (with a three
year fixed priced period) and a collection of equivalent carbon prices (i.e. carbon
taxes). The premise behind the design of the package was that most of Australia’s
emissions and removals should be subject to a direct or equivalent carbon price, or
4
fall within the reach of the CFI [6]. The Clean Energy Act 2011 (Cth) (CE Act),
which contains the emissions trading scheme, imposes a direct carbon price on
selected emissions from the energy, industrial processes and waste sectors. To fill
gaps left by the CE Act in the energy and industrial processes sectors, equivalent
carbon prices are imposed on certain emissions from these sectors via the fuel tax and
ozone and synthetic greenhouse gas regulation regimes. A significant proportion of
the remaining gaps in the coverage of Australia’s emissions and removals from the
agriculture, waste and LULUCF sectors are supposed to be filled by the CFI.
As noted, the CFI divides projects and ACCUs into Kyoto and non-Kyoto based on
whether the avoided emissions or removals are reported against Australia’s mitigation
targets. It also splits projects into ‘sequestration’ and ‘emissions avoidance’ projects.
Sequestration projects are those whose emissions and removals are accounted for in
the LULUCF sector. They involve the sequestration of CO2 in biomass or soils and
avoidance of CO2, CH4 and N2O emissions from the destruction or disturbance of
biomass or soils. Emissions avoidance projects are those whose emissions are
accounted for in the agriculture and waste sectors — the avoidance of CH4 and N2O
emissions from agricultural activities (e.g. livestock, rice production, savannah
burning and crop residue burning) and legacy waste in landfill facilities (i.e. CH4 and
N2O emissions from waste accepted at a landfill facility before 1 July 2012). The CFI
also provides for emissions avoidance projects involving feral animals (known as
‘introduced animal emissions avoidance projects’). CH4 and N2O emissions from feral
animals are not provided for under current international accounting rules because they
are non-anthropogenic. Despite this, the CFI allows for non-Kyoto ACCUs to be
generated for projects involving the avoidance of these emissions. The project types
and coverage of emissions under the CFI is summarised in Table 1.
Table 1 Relationship between sequestration and emissions avoidance projects,
and Kyoto and non-Kyoto projects*
Kyoto offset
projects
Carbon sequestration
Emissions avoidance
Sequestration projects on lands
accounted for by Australia under the
Kyoto Protocol. In the first
commitment period, this was
confined to
afforestation/reforestation and
deforestation.
Agricultural emissions avoidance
projects = projects to avoid CH4 and
N2O emissions from savannah burning,
grassland burning, crop residue
burning, agricultural soils, and
livestock urine and dung, and CH4
emissions from livestock and rice
production.
Landfill legacy emissions avoidance
projects = projects to avoid CH4 and
N2O emissions from waste deposited in
landfill prior to 1 July 2012.
Non-Kyoto offset
projects
Sequestration projects on lands not
accounted for by Australia under the
Kyoto Protocol.
Introduced animal emissions avoidance
projects = projects to avoid CH4 and
N2O emissions from introduced
animals.
* Adapted from [6].
The five steps associated with the issuance of ACCUs under the CFI are summarised
in Table 2.
5
Table 2 Steps in generating ACCUs
No.
Step
Nature of requirement
Responsible authority
1
Approval of
methodology
Provide the basis for determining the number of
ACCUs that a project generates and can include
specific project requirements (e.g. reporting,
incident notification, record-keeping)
All methodologies must be
endorsed by the Domestic
Offsets Integrity Committee
(DOIC) then approved by the
Minister for Climate Change
2
Approval as a
recognised
offset entity
All persons wanting to undertake a CFI project
must be a ‘recognised offset entity’
Clean Energy Regulator makes
decision on basis of whether
applicants are a ‘fit and proper
person’
3
Approval of
eligible offset
project
For a project to generate ACCUs, it must be
approved as an ‘eligible offset project’. The major
requirements are that:
Clean Energy Regulator must be
satisfied the project meets the
statutory and regulatory
requirements

the applicant must be responsible for carrying
out the project and have the legal right to
undertake it

the project must meet the ‘additionality test’

the project must not be on the ‘negative list’

For sequestration projects,
o the project must not involve the clearing of
native forest or use of material obtained as a
result of the clearing or harvesting of native
forest
o the applicant must hold the applicable
carbon sequestration right
o all people with interests in the land must
have consented to the application
4
Reporting
Project proponents must prepare and submit offset
reports within three months of the end of a selfselected reporting period of between 1-5 yrs
The offset reports are required to
be submitted to the Clean Energy
Regulator (usually they must be
audited prior to submission)
5
Crediting
After submitted an offset report, a proponent can
apply for a certificate of entitlement, which triggers
the issuance of ACCUs
Clean Energy Regulator is
responsible for calculating the
unit entitlement for the project
and issuing the ACCUs
Integrity and perverse impact risks, and capturing co-benefits
Like tradable permit schemes (e.g. emissions trading schemes), the main benefit
associated with offsets is that they lower abatement costs [6, 8-9]. Many offset types
also have the capacity to generate co-benefits [10-16]. For example, carbon offsets
involving reforestation can have positive impacts on biodiversity, heritage and
hydrology, as well as sequestering carbon. These characteristics have made offsets an
attractive policy option, particularly in relation to the mitigation of greenhouse gas
emissions, where many view sequestration-related offsets as a way of buying time for
the development of zero- and low-emission energy sources [7, 17-18]. While offering
several benefits, offsets come with risks. In carbon offset schemes, the risks can be
split into two groups: integrity risks and perverse impact risks.
6
Integrity risks
Integrity risks relate to the potential for the actual abatement associated with an offset
to be less than its face value (i.e. the offset is supposed to embody 1 tCO2-e of
abatement but the actual abatement is only 500 kg). In carbon schemes, the main
integrity risks stem from additionality, leakage and permanence [19-22]. Concerns
about these issues has stifled the use of offsets in domestic schemes (most notably in
the European Union’s Emissions Trading Scheme), led to restrictive rules on
reforestation and afforestation projects in the CDM, and hindered the creation of an
international offset scheme for deforestation and forest degradation in developing
countries [23-26].
In most climate offset programs, if the offset credits do not represent their face value
in abatement, the environment bears the cost — the use of the offset results in higher
net emissions and a higher atmospheric concentration of greenhouse gases. The same
applies with non-Kyoto ACCUs under the CFI but not necessarily with Kyoto CFI
projects. If Kyoto ACCUs do not represent their face value in abatement, the impacts
will usually be financial rather than environmental [6, 27]. This is a product of the
fact that Australia’s emissions are subject to a national cap under the Kyoto Protocol.
Where Kyoto ACCUs are issued for non-existent abatement, Australia’s net emissions
will be unchanged, meaning there should be no change in the environmental outcome.
What will change, however, is that, to account for the relative increase in emissions
from the sectors that fall outside of the carbon pricing scheme (the so-called
‘uncovered sector emissions’), the carbon pollution cap under the CE Act will have to
be lowered, thereby reducing the revenues received for carbon units issued by the
Australian Government. Alternatively, if the carbon pollution cap is not reduced, the
Australian Government will be required to purchase offsets from overseas. Either way,
defects associated with the abatement value of Kyoto ACCUs will usually lead to the
Government incurring costs or forgoing carbon revenue. This provides an inbuilt
incentive for the Australian Government to minimise integrity risks, a fact reflected in
the mechanisms that have been built into the CFI to deal with these issues.
Additionality mechanisms
Additionality refers to the risk of offset credits being issued for emission reductions or
enhanced removals that would have occurred anyway [6, 28-30]. The CFI has two
main mechanisms for dealing with this issue: the ‘additionality test’ and the baseline
and measurement requirements.
The additionality test is aimed at excluding projects that would have occurred without
the incentive provided by the capacity to generate ACCUs. It applies to the approval
of methodologies (methodologies cannot be approved unless the projects covered by
the method will pass the test) and eligible offsets projects (projects cannot be
approved as eligible offsets projects unless they pass the test). Other carbon offset
schemes, including the CDM, use a project-level additionality test, which requires an
assessment of whether each project would have been undertaken in the counterfactual.
Although considered initially, this approach was discarded in preference for a
‘project-type’ test based on two requirements:

the projects must be included on a so-called ‘positive list’ contained in
regulations; and
7

projects must not be required under a law of the Commonwealth, or a law of a
state or territory.
The positive list is intended to include activities that are not ‘common practice’ within
an industry or region1 — if the practice is not common, it is presumed that it would
not have been undertaken without the incentive provided by the CFI [31]. At the time
of writing, the list consisted of 15 broad project types, including the establishment of
permanent plantings (reforestation), avoided regrowth clearing (deforestation),
capture and combustion of CH4 from legacy waste (waste), and early dry season
burning of savannah areas and reduction of emissions from ruminants by
manipulation of their digestive processes (agriculture).2
The Government’s intent in using a project-type test was to reduce transaction costs
[6, 31]. The downside of this approach is the ease with which legitimate projects can
be excluded and non-additional projects included. This is partly due to the breadth of
the powers to make and modify the positive list. The list is embodied in regulations
made under the CFI Act, which can be remade at any time by the Governor-General at
the direction of the climate minister. Other than the requirement that projects fall
within the broad statutory definitions of emissions avoidance or sequestration offset
projects, there is effectively no restriction on what can be included on, or excluded
from, the list.3 Regulations can even be made waiving the requirement that a project
not be required under a law of the Commonwealth or a state or territory. In some
respects, the flexibility inherent in the additionality test is strength as it allows the list
to be adapted to particular events and to evolve with land use and waste management
practices. However, it also leaves it open to manipulation.
Some of the risks associated with the project-type additionality test can be addressed
by the baseline and measurement requirements. Under the CFI Act, all methodologies
must provide for the setting of project baselines calculated on the assumption that the
project was not carried out.4 The methodologies are also required to meet specified
‘offsets integrity standards’, including that relevant emissions and removals be
measurable and verifiable, that all estimates, assumptions and projections be
conservative, and that the methods be ‘supported by relevant scientific results
published in peer-reviewed literature’ and consistent with those in Australia’s
National Inventory Report.5 Hence, even if a suspect project passes the additionality
test, its capacity to generate ACCUs should be limited.
1
CFI Act, s 41(3).
Carbon Credits (Carbon Farming Initiative) Regulations 2011 (CFI Regulations), reg 3.28.
3
Before regulations are made concerning the list, the minister must consider advice from the Domestic
Offsets Integrity Commission and have regard to whether the project type is common practice, or
would not be common practice but for the incentive provided by ACCUs (CFI Act, s 41). However,
these are procedural requirements and do not impose substantive restrictions on the content of the
regulations.
4
CFI Act, s 107.
5
CFI Act, s 133(1).
2
8
Leakage mechanism
Leakage refers to the risk that an offset project will trigger an increase in emissions
from sources, or reduction in removals by sinks, that occurs outside the project
boundary, thereby reducing the associated net abatement [6, 19-20, 28]. Unlike the
other integrity risks, there is the potential for leakage associated with Kyoto ACCUs
to have adverse environmental impacts. Where there is leakage from a Kyoto (or nonKyoto) offset project into a country whose emissions are not subject to a national cap,
there will be a relative increase in global emissions. However, this risk is not unique
to CFI projects. Mitigation in any trade exposed sector has the capacity to lead to
leakage of this nature [19].
To the extent there is domestic leakage from a Kyoto offset project, the impacts are
purely financial. Because of the existence of the national cap, and the fact that the
relevant emissions and removals fall within it, leakage from a Kyoto offset project
should not change Australia’s net emissions outcome; it merely changes the spatial
and/or temporal distribution of emissions by causing a relative increase in uncovered
sector emissions.
The main mechanism for dealing with leakage under the CFI is the methodologies.
The CFI Act’s offset integrity standards require all methodologies to provide for a
deduction to be made in calculating a project’s credit entitlement to account for
‘greenhouse gases that are emitted from any source or sources as a consequence of
carrying out the project’.6
Permanence
Permanence concerns the risk associated with sequestration projects that the carbon
stored within the project area in biomass or soils will be fully or partially released as a
result of future events (e.g. wildfires, drought and deliberate clearing of the
vegetation) [6, 19-22, 28]. Three mechanisms were built into the CFI to deal with this
issue. First, a risk of reversal buffer (usually set a 5% of a project’s credits) is required
to be deducted from all sequestration projects. Secondly, all sequestration projects are
required to maintain the relevant carbon stores for 100 years (known as the ‘100 year
rule’), or another period set by regulation. Thirdly, the offsets integrity standards
require that methodologies be conservative and include provisions to account for
‘significant cyclical variations’ in the amount of carbon sequestered in the relevant
carbon pool on the project area over the 100 year period (or the alternative period set
in the regulations).7
Perverse impacts
Perverse impact risks refer to secondary adverse impacts associated with offset
projects. With the CFI, much of the public debate surrounding perverse impacts has
concentrated on potential negatives associated with forestry projects, particularly
monoculture plantations and their capacity to have adverse hydrological, wildfire,
biodiversity and socio-economic affects [6]. After the introduction of tax incentives
for plantations in the 1990s (called ‘forestry managed investment schemes’), there
was a large increase in reforestation in parts of southern Australia and isolated areas
6
7
CFI Act, s 133(1)(e).
CFI Act, s 133(1)(f).
9
in the north. A significant proportion of the reforestation was in the form of
monoculture plantations. These plantations attracted controversy and were opposed by
many because of their impacts (perceived and real) on rural communities and the
environment. Farm lobby and environmental groups expressed concern during the
initial deliberations over the CFI that the scheme could lead to the permanent
retention of the existing plantations and spread of similar monocultures across the
landscape [6].
The CFI Act contains several mechanisms for dealing with these and other potential
perverse impacts, the most important of which is the power for regulations to be made
prescribing ‘excluded offset projects’ (known colloquially as the ‘negative list’). This
purpose of the list is to exclude projects that could have significant adverse impacts
on water availability, biodiversity conservation, employment, local communities, and
land access for agricultural production, or that could otherwise undermine the
efficient operation of the scheme. At the time of writing, the list consisted of seven
project types, including the planting of weed species, establishment of a forestry
managed investment scheme, avoiding harvest of a plantation and revegetation of
illegally cleared land.8
The negative list is complemented by three other perverse impact management
mechanisms:



projects must not involve the clearing a native forest or using material
obtained from clearing or harvesting a native forest;9
projects are required to have all necessary Commonwealth, State and Territory
regulatory approvals concerning land use and development, water and the
environment;10 and
the Register of Offset Projects must note whether a project is consistent with
any applicable regional natural resource management plan.11
Capturing co-benefits
As noted, some offset projects have the capacity to generate co-benefits related to the
environment and other dimensions of sustainable development. In order to promote
projects that are likely to generate these benefits, the CFI Act allows for these
attributes to be noted on the Register of Offset Projects. The Register must include
details of all eligible offset projects and, at the request of the proponent, it can also
include information on their environmental or community benefits, provided the
requested information meets requirements prescribed in the regulations.12 Although
still to be released, the Government has indicated it will develop a co-benefits index
that will be used to rate and record the co-benefits of projects on the Register [31].
These mechanisms are designed to facilitate the creation of a market for ‘premium’
ACCUs, much like the CDM’s Gold Standard [32].
8
CFI Regulations, regs 3.36 and 3.37.
CFI Act, s 27(4)(j).
10
CFI Act, s 28.
11
CFI Act, s 168(1)(i).
12
CFI Act, s168(1)(o).
9
10
Obstacles to the success of the CFI
The primary objective of the CFI is to lower the costs associated with meeting
Australia’s mitigation commitments by realising cheap abatement opportunities in the
sectors that are not subject to a carbon price. Other secondary aims are to increase
abatement in ways that are consistent with the protection of the environment and that
improve resilience to climate change, and to encourage offset projects in sectors that
are not counted towards Australia’s emissions total.
Although the CFI has many admirable design features, a number of issues could
threaten the uptake of CFI projects and stifle the capacity of the scheme to achieve its
aims. These can be grouped under four headings:



carbon price uncertainty;
transaction costs; and
integrity- and perverse impact-related restrictions.
Carbon price uncertainty
The success of the CFI is dependent, to a large extent, on the existence of a secure
source of demand. Under the existing policy framework, demand for Kyoto ACCUs is
provided by the carbon pricing scheme and, potentially, international compliance
markets. Demand for non-Kyoto ACCUs is intended to be provided by voluntary
carbon markets and the Australian Government’s Carbon Farming Initiative nonKyoto Carbon Fund, a six year AU$250 million fund that was established with the
sole purpose of purchasing credits from non-Kyoto projects.
As alluded to in the introduction, the Liberal-National Party is opposed to the carbon
pricing scheme has promised to repeal it if it wins the 2013 federal election. Under
their existing policy, the CFI would remain, with demand for both Kyoto and nonKyoto ACCUs being provided by a government fund and voluntary markets. At the
time of writing, the Opposition had provided few details of the fund or what projects
might be eligible to participate in its scheme. This has created uncertainty for project
proponents and concern about future eligibility requirements and project returns.
These political uncertainties are layered on top of those concerning international and
domestic carbon markets and prices. Under the CE Act, the price of Australian carbon
units is fixed for the first three years of the scheme (2012-13 to 2014-15). During this
period (the ‘fixed charge period’), liable entities are allowed to surrender Kyoto
ACCUs but there is a cap of 5% on their use, which is designed to protect government
revenues from the sale of carbon units. From 1 July 2015, the scheme becomes a
standard cap-and-trade emissions trading scheme (the ‘flexible charge stage’). In the
first three years of this stage, there will be a price ceiling, starting at AU$20 above the
‘expected international price’ (presumably the price of Certified Emission Reductions
(CERs)) and rising by 7.5% per annum in the following two years. There will also be
a 50% cap on the use of international units and 12.5% cap on the use of eligible Kyoto
units (CERs, ERUs and RMUs) but no limits on the use of Kyoto ACCUs. The initial
scheme included a floor price, however, it was abandoned in late 2012 and replaced
with an undertaking to link the Australian carbon pricing scheme with the EU ETS.
The design features of the carbon pricing scheme expose CFI proponents to the
uncertainties associated with the EU ETS and international climate negotiations. Until
11
there is greater certainty about future carbon markets and prices, it is likely that
proponents will be wary of undertaking CFI projects, particularly sequestration
projects.
Transaction costs
As the likes of Cacho et al. and van Oosterzee have highlighted, the transaction costs
associated with carbon offset projects can be significant and act as a major deterrent
to project activities [7, 21]. Under the CFI, standard projects will typically incur costs
associated with becoming a registered offset provider, obtaining project approval,
preparing offset reports, auditing offset reports, obtaining a certificate of entitlement
for ACCUs, and registering and transferring ACCUs. Depending on the project type,
project proponents can also be required to prepare, submit and refine methodologies.
For sequestration projects, the proponent must hold the applicable carbon
sequestration right (i.e. the exclusive registered legal right to obtain the benefit of
sequestration of carbon in the relevant carbon pools) and have the consent of all
people with an interest in the land (e.g. those with a freehold or leasehold interest,
native title holders, and any person or institution with a mortgage or charge over the
property). In addition, projects will often be subject to other regulatory requirements,
including in relation to financial services, planning, water and environmental issues,
and can incur stamp duty and other taxes.
By creating the project-type test inherent in the CFI’s positive list, the Australian
Government showed a degree of responsiveness to concerns about transaction costs.
However, further reform may be necessary in this area as the transaction costs
associated with many project types are still likely to be prohibitive. An obstacle to this
process is the nature of the Australian federation and distribution of powers within the
Commonwealth. Australia has three layers of government, federal, state/territory and
local. Broadly, the states and territories, and local government, are responsible for
most real property, land use planning, water and environmental issues, while the
federal government is responsible for most taxation, corporate and financial
regulation, and issues for which there is a sufficient nexus to international affairs.
Making modifications to the regulatory and taxation regimes that affect the CFI is
likely to be impeded by the need for cooperation amongst the different levels of
government and government agencies.
Integrity- and perverse impact-related restrictions
As described above, the CFI has mechanisms to deal with all of the major integrity
and perverse impact risks associated with offsets. While these risks are real and need
to be managed, a vulnerability that stems from the existing mechanisms is that they
could unnecessarily impede the uptake of projects. The most significant issues relate
to the 100 year permanence rule, abatement measurement and additionality
requirements.
The 100 year rule
The integrity mechanism that has attracted the most public attention is the 100 year
rule. Farm lobby groups and other landholders have expressed concern about ‘locking
up’ land for this period of time because of the associated financial and cultural
impacts (many farmers feel a sense of obligation to pass on their land to their children,
12
free of encumbrances) [6]. The Liberal-National Party Opposition has responded by
undertaking to reduce the permanence requirement to 25 years if they win office, a
proposal that has been attacked by the Labor Government and others [102, 103].
The 100 year rule appears to have its origins in the rule of thumb that the atmospheric
lifetime of CO2 (the time it takes for an increase in the atmospheric concentration of
CO2 caused by a pulse of emissions to be reduced to 37% of its initial amount) is
approximately 100 years [6, 21, 33]. Using this, the 100 year rule has seemingly been
applied on the grounds that, if most of the CO2 associated with an emissions pulse is
re-sequestered, on a net basis, after 100 years, any release from carbon stores after
this time is of little consequence.
As discussed, provided there is a cap on Australia’s national emissions, any reversal
of the removals or avoided emissions associated with a Kyoto CFI sequestration
project will not affect environmental outcomes. The risk that the Australian
Government actually manages through the 100 year rule for Kyoto offset projects is
the threat to its future revenues. The atmospheric lifetime of CO2 is irrelevant for
these purposes because the future emissions that are recorded in the national accounts
are not discounted to account for carbon cycle dynamics. By structuring the
permanence rule around an arbitrary 100 period, not only does it deter potential
project proponents, but it does not fully eliminate the risks to government. Moreover,
there are more effective ways of managing the residual financial risk associated with
sequestration projects without the need for reliance on a 100 year permanence period
[21, 22, 27, 34].
This can be illustrated using a hypothetical reforestation project involving permanent
environmental plantings on 10 ha in the Southern Tablelands in New South Wales
that commences in 2012-13. Under the existing methodology for permanent
environmental plantings, which uses the CFI Reforestation Modelling Tool [104], the
only carbon pools that are accounted for are live above- and below-ground biomass
and debris.13 The estimated increase in the carbon stock in these pools over 100 years
is 2,152 tCO2. After the deduction of the risk of reversal buffer (5%), and assuming
no further deductions are made for leakage or other emissions associated with the
project, the project proponent receives a total of 2,045 ACCUs, or an average of 20.4
yr-1. It is conservatively assumed for these purposes that the risk of reversal buffer
accurately reflects temporary carbon losses from the project area due to natural
disturbance events (e.g. fire and drought).
The financial risk faced by the Australian Government is that, at the end of the
permanence period, the entire project area may be deforested. Assume for current
purposes that this occurs in 2113 and that there is an instantaneous release of all
carbon stored in the carbon pools. Under this scenario, the financial exposure of the
Government is represented by the net present value (NPV) of future lost carbon
revenues. This was calculated using a 7% discount rate and three carbon price
scenarios:
13
Carbon Farming (Quantifying Carbon Sequestration by Permanent Environmental Plantings of
Native Species using the CFI Reforestation Modelling Tool) Methodology Determination 2012 (Cth).
The methodology also requires deductions to be made for emissions from fuel use and CH 4 and N2O
emissions from fire (biomass burning). These deductions are ignored for the purposes of the
hypothetical case study.
13



the Clean Energy Future (CEF) price scenario, where the carbon price follows
the statutory price until the end of the fixed price period (2014-15), tracks the
Australian Treasury’s CEF price path over the period 2015-16 to 2049-50, and
then increases at 4% yr-1 real to 2112-13;
a low price scenario, where the carbon price follows the statutory price until
the end of 2014-15, falls to $10 (nominal) in 2015-16 and then grows at 2.5%
real through to 2112-13; and
a high price scenario, where the carbon price follows the statutory price until
the end of 2014-15, tracks the Australian Treasury’s high price path through to
2049-50, and then increases at 4% yr-1 real to 2112-13 (Fig.1) [35].14
Figure 1 Clean Energy Future, low and high carbon price scenarios, real 2013
$A/t CO2-e
Data from Australian Treasury [35] and author estimates.
As the results in Table 3 demonstrate, the 100 year permanence rule does not
eliminate the financial risk to the Government. The NPV of the future foregone
revenues ranges between AU$253 and AU$8683 (2013 A$), depending on the carbon
price scenario.
14
The 4% real carbon price growth rate in the CEF and high price scenarios was based on the Hotelling
rule [36]. The 2.5% real growth rate in the low price scenario was based on the assumption that the
international community adopts less aggressive mitigation objectives than envisaged with the 2°C
target.
14
Table 3 Residual risk to Government with existing 100 year rule, real 2013 A$
Price scenario
Low
CEF
High
Foregone revenues in 2113
219,272
3,727,065
7,534,235
NPV of foregone revenues
253
4,295
8,683
To eliminate the financial risk associated with the potential reversal of the sequestered
carbon, an annual permanence deduction could be required on top of the 5% risk of
reversal buffer. With a permanence deduction of 3% per annum, the NPV of future
foregone revenues under the low price scenario is reduced to zero. Under the CEF and
high price scenarios, the same result can be achieved with a permanence deduction of
13%. If the permanence period was reduced, the annual permanence deduction would
have to be increased if there was a desire to eliminate the risk to the Government.
Table 4 shows the permanence deduction necessary under the three price scenarios to
ensure the NPV of future foregone revenues is zero with four permanence periods (25,
50, 75 and 100 years), and assuming a 7% discount rate.
Table 4 Required permanence deduction to eliminate residual risk with different
permanence periods
Permanence period
Annual permanence deduction (%)*
Price scenario
Low
CEF
High
25 years
53
86
87
50 years
22
47
47
75 years
8
24
25
100 years
* Assumes 7% discount rate.
3
13
13
The hypothetical analysis contained in Tables 3 and 4 is based on particular
assumptions about the carbon price, rate of removals, date of the reversal of the
carbon stores and discount rate. Alternative assumptions produce significantly
different results, as the scenarios used here illustrate. The central point is merely that a
fixed 100 year rule is not necessary to manage the financial risks associated with the
potential non-permanence of sequestration projects. Moving to a discount-based
approach, whereby proponents would able to select different permanence periods and
a permanence deduction would then calculated on the basis of the project
characteristics and length of the period, could achieve the desired policy objective of
protecting the Government’s revenues from carbon reversals without the need to ‘lock
up’ land for 100 years. In doing so, it could reduce the concerns of landholders about
the legacy effects of undertaking sequestration projects and thereby increase project
initiation. Other similar insurance mechanisms could also be used for these purposes
[21, 22, 27, 34].
Abatement measurement
As discussed, the CFI Act contains several layers of integrity mechanisms that are
designed to minimise permanence and leakage risks. These include the requirement of
15
conservatism in methodologies and that methodologies not be inconsistent with the
National Inventory Report, the risk of reversal buffer, and the need for methodologies
to provide for a deduction for greenhouse gases ‘emitted from any source’ as a
consequence of the project. Like the 100 year rule, for Kyoto offset projects, the
purpose of these requirements is to shield the Australian Government from potential
lost revenue stemming from measurement and leakage risks.
In implementing these requirements, a balance must be struck between the desire to
protect the financial interests of the Government and need to promote offset projects.
Excessive conservatism in methodologies reduces the financial returns from projects,
thereby undermining their capacity to compete with alternative land uses. While the
scheme is in its early stages and teething problems are to be expected, there is
evidence that conservatism and overly restrictive methodology requirements may be
impeding the uptake of projects. Examples include the following.




Underestimating sequestration in forest models. Preece et al. found that the
model used to estimate carbon stock changes in reforestation projects (i.e. the
National Carbon Accounting System (NCAS) and FullCAM, which sit behind
the CFI Reforestation Modelling Tool) potentially underestimates aboveground biomass in certain vegetation types [37]. This reduces the LULUCF
credits recorded in Australia’s greenhouse accounts and, in turn, the ACCUs
that proponents receive for reforestation projects.
Size and nature of the risk of reversal buffer. Arguably, the 5% risk of reversal
buffer is unnecessarily high and, if applied uniformly, will not reflect the risk
profile of individual projects. The effect is that low risk projects subsidise
those with higher risk. Greater guidance is required to demonstrate if and how
the risk of reversal buffer might be adjusted to account for the characteristics
of projects and proponents, the extent to which cyclical variations have been
accounted for in methodologies, and the conservatism in the applicable
methods. A more effective approach could involve merging the buffer with a
permanence period-permanence deduction mechanism, under which a single
deduction would be made on the basis of the characteristics of the project and
proponent.
Exclusion of carbon pools. Under the permanent environmental plantings
methodology, the soil organic carbon pool is excluded, even though it is
counted towards Australia’s mitigation commitments for the purposes of
reforestation and regrowth on deforested land units [38]. This is likely to
benefit proponents in the initial years of a project as reforestation/afforestation
typically results in soil carbon losses in the years immediately following
planting or seeding. In the longer term, the exclusion of the soil carbon pool
will usually lead to losses to the proponent, with corresponding gains to the
Australian Government, as soil carbon levels recover, then exceed, the levels
under the previous agricultural land use [38-44].
Leakage deduction. The intent of the requirement that a deduction be made for
greenhouse gases ‘emitted from any source’ is to ensure that the abatement
accredited for a project via the issuance of ACCUs is net of any increases in
emissions caused by the project. For instance, the permanent environmental
plantings methodology requires that, in determining a project’s net abatement
number, the carbon stock change in the live biomass and debris pools must be
calculated, after which a deduction is made for fuel use emissions (CO2, CH4
16
and N2O) from vehicles and machinery used in site preparation, planting,
management and other project-related activities (including transportation
between business locations and to the site), and for CH4 and N2O emissions
from prescribed burning and wildfires. Within a purely voluntary offset policy
structure, these deductions are appropriate and necessary to ensure the
integrity of credits. When applied within the compliance and carbon pricing
structure embodied in the Clean Energy Future package, they can result in
perverse outcomes. In some cases (e.g. emissions from non-transport use of
liquid fuels and scope 2 emissions from electricity use),15 the deduction will
result in a double application of the carbon price — once via the fuel tax
system or CE Act and then again via the lost ACCUs. This is inefficient and
inequitable. In others (e.g. off road use of transport fuels for agriculture and
forestry),16 the deduction imposes an effective carbon price on emissions that
would not otherwise be subject to one. Landholders who carry on with past
land use practices are exempt from a carbon price for emissions from these
sources but those who undertake an offset project are subject to a price for the
same emissions through lost credits. This would fit with the structure of the
Clean Energy Future package if the direct emissions deduction was calculated
using a baseline representing the emissions from these sources under businessas-usual (or reference case) conditions. However, none of the relevant
methodologies calculates the deduction on this basis;17 the emissions are
simply subtracted from the LULUCF, waste or agriculture-related avoided
emissions or enhanced removals. To satisfy the equimarginal principle and
ensure consistency with the structure of the Clean Energy Future package,
deductions should not be made for project-related emissions that are already
subject to a carbon price and, where deductions are made for emissions that
are exempt from a direct or equivalent carbon price, they should be calculated
against the counterfactual reference case.
The conservative approach that has been adopted toward the measurement of
abatement and issuance of credits is reducing the financial benefits associated with
CFI projects. If the CFI is to realise its full potential, these and other similar
requirements should be revised to shift the balance more in the favour of proponents.
Additionality requirements
Under the CFI Act, the Minister has broad powers to make regulations and
declarations changing the way many aspects of the scheme operate. These include
powers to include and remove activities from the positive and negative lists, and to
waive the second limb of the additionality test. The way these powers are exercised
will profoundly influence the trajectory of the CFI.
15
Carbon Farming (Destruction of Methane Generated from Manure in Piggeries) Methodology
Determination 2012 (Cth) and Carbon Farming (Capture and Combustion of Methane in Landfill Gas
from Legacy Waste) Methodology Determination 2012 (Cth).
16
Carbon Farming (Quantifying Carbon Sequestration by Permanent Environmental Plantings of
Native Species using the CFI Reforestation Modelling Tool) Methodology Determination 2012 (Cth).
17
Under the legacy waste methodology, a deduction is made for fuel and grid-delivered electricity used
to operate the landfill gas extract system using a baseline-and-credit approach. However, these
emission sources are subject to a carbon price.
17
A much commented on deficiency of the Kyoto Protocol’s first commitment period
rules was the treatment of forestry sources and sinks, particularly the CDM’s
restrictive treatment of reforestation/afforestation projects and exclusion of emissions
from deforestation and forest degradation, and the adoption of net-net accounting with
a cap for forest management in developed countries [20, 29, 45]. The same bias
against the conservation of carbon stocks in forests has emerged in the CFI. Despite
the CFI Act explicitly providing for ‘native forest protection projections’ — defined
as projects to remove CO2 from the atmosphere by sequestering carbon in trees in
native forests and avoiding emissions attributable to the clearing or clear-felling of
native forests18 — at the time of writing, the CFI positive list did not include avoided
or delayed native forest harvesting (i.e. improved forest management) or avoided
native forest conversion (i.e. deforestation of remnant forest) projects. The CFI Act
also excludes projects involving the clearing of native forest or use of material
obtained by clearing or harvesting a native forest. This prohibition excludes delayed
native forest harvesting projects and prevents any forest management project (should
they become eligible) from including part of a forest estate that remains available for
harvest. In doing so, it is likely to increase the methodological difficulties associated
with devising baselines for avoided native forest harvesting projects and magnify
leakage risks (i.e. proponents could increase harvest pressures in parts of a native
forest estate outside the CFI project boundaries). In addition, the legislation limits
native forest protection projections to a single crediting period with a default length of
20 years, which differs from other project types where crediting periods can be
renewed and have a default length of seven years. These rules appear to have been
based on the abatement characteristics of avoided deforestation projects, where the
avoided emissions are initially large but then follow an exponential decay function
that approaches zero after ~20 years. Although well suited to avoided deforestation
projects, it is inconsistent with the abatement profile of avoided and delayed native
forest harvesting projects. These project types could be significantly disadvantaged by
the single crediting period restriction, particularly if it is limited to 20 years.
No public explanation has been provided for the current bias against native forest
protection projects. The situation is made more inexplicable by the fact that avoided
forest conversion and improved native forest management potentially offer a large
and cost-effective source of abatement in Australia, and that the Australian
Government has historically been a strong supporter of programs to reduce
deforestation and forest degradation in developing countries [46-50, 105].
An additional obstruction for forest management abatement in Australia is the Kyoto
Protocol’s second commitment LULUCF rules. To address concerns about the
potential for ‘hot air’ (credits that do not represent additional abatement), forest
management credits, and credits associated with forest management project activities
undertaken through the joint implementation (JI) mechanism, are subject to a
combined cap of 3.5% of total base year emissions excluding LULUCF [50]. For
Australia, the 3.5% cap equates to a limit of 15.4 Mt CO2-e yr-1 over the commitment
period. As detailed in Macintosh [50], Australia’s forest management reference level
for multiple use public native forests and Tasmania’s private native forests was
calculated using the mean harvest rate from the period 2002-2009, and roundwood
removals from 2008. Since that time, the native forestry sector has undergone a major
contraction. The harvest area in native forests (broadleaved and cypress, excluding
18
CFI Act, s 5.
18
Queensland) in 2010-11 was 39% below the 2002-2009 mean [51-55]. Total native
broadleaved roundwood removals were 32% below the 2002-2009 mean and 29%
below the 2008 levels [56] (Fig. 2). The causes of the decline since 2008 are largely
unrelated to policy. The industry has been struck by a confluence of events, including
shifting market preferences (away from native forests), increasing competition from
plantations, a high Australian dollar and depressed international woodchip prices [50].
If these conditions persist, and harvest rates remain at 2011 levels, Australia will
receive approximately 10-12 MtCO2-e yr-1 of forest management credits, leaving 3.45.4 MtCO2-e yr-1 of space under the 3.5% cap.19 That is, Australia will almost fill its
3.5% cap from credits that are largely attributable to non-policy factors. The cap will
then strip away the incentive for further policy-induced abatement in the sector and, in
doing so, potentially increase the costs associated with achieving Australia’s
mitigation commitments. Within the CFI, the practical impact will be to prevent forest
management projects from generating Kyoto ACCUs. Any credits from these projects
will be non-Kyoto ACCUs that can only be sold into voluntary markets.
Figure 2 Harvest area in native forests (broadleaved and cypress, excluding
Queensland) (ha) and native broadleaved roundwood removals (m3), 2002-2011
Data from Australian Bureau of Agricultural and Resource Economics and Sciences [56] and state
forest agencies [51-55].
Australia’s situation vividly illustrates the downsides of using blunt caps to guard
against additionality concerns. To resolve this issue, either the cap could be removed
19
Calculated using Australia’s methods and datasets, except for changes in the harvested wood
products pool, where an alternative method based on the Australian Government’s wood flow model
and the IPCC first-order decay function with default half-lives of 2 years for paper, 25 years for wood
panels and 35 years for sawn wood. See Macintosh [57] for details.
19
or Australia could revise its forest management reference level to account for the nonpolicy induced reduction in native forest harvesting. The latter option would be in
keeping with Australia’s position in the international negotiations and demonstrate the
virtues of an accounting system that provides for a dynamic reference level that can
be adjusted to account for changes in events, data and methods [50].
Conclusion
The CFI is one of the most robust carbon offset schemes of its kind in the world. If it
is successful, it could lower the cost of achieving Australia’s mitigation commitments
and generate a number of important environmental co-benefits, including habitat
restoration and improved soil conservation. While it has significant potential, a
number of barriers threaten the scheme’s success. These include uncertainties in
carbon markets and the international climate negotiations, transaction costs stemming
from regulatory requirements, and overly restrictive integrity and perverse impact risk
management mechanisms.
At the time of writing, only eleven eligible offset projects had been registered,
involving six registered offset entities [106]. All but two of the registered projects
involved the capture and combustion of methane from legacy waste; the other two
involving the destruction piggery methane and early dry season savanna burning. The
scheme’s slow start is a reflection of the identified barriers. Until these are resolved,
the CFI will struggle to realise its full potential.
Future perspective
Climate policy in Australia has always been volatile and the introduction of the Clean
Energy Future package has not resolved this. Current polling has the Liberal-National
Party Opposition as the odds on favourite to win the 2013 federal election [107]. If
this happens, the carbon pricing scheme is likely to be abolished and replaced with a
collection of beneficiary pays programs, whereby the Australian Government will
directly purchase abatement from polluters and offset providers [58, 108]. The
uncertainty created by this prospect is eroding interest in the CFI and impeding the
efficient operation of the carbon pricing scheme.
Notwithstanding the domestic political situation, there are a number of opportunities
for technical improvements to be made to the CFI. Several suggestions have been
made here. These and other technical revisions are unlikely to set off a surge in CFI
projects. Uncertainties surrounding the domestic and international policy framework,
unavoidable transaction costs, path dependencies and cultural impediments will
remain as obstacles. However, adjustments in the design and implementation of the
CFI could help expand its reach and lay the foundations for future success.
20
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ANU Centre for Climate Law and Policy
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The Australian National University
Canberra ACT 0200
Ph: 61 2 6125 3832
http://law.anu.edu.au/CCLP/
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