News

Understanding the Emissions Reduction Fund

31 Jul

Enhar has recently been familiarising itself with the Federal Government’s Emissions Reduction Fund. The bill (Carbon Farming Initiative Amendment Bill 2014) to implement the ERF has been introduced to parliament and was passed by the lower house in July. It currently sits with the upper house and will be debated when Senate sits in again in late August.

The scheme is an outgrowth of the Carbon Farming Initiative, which was established by the previous government. The scheme is considered a highly successful scheme and has led to the funding of 130 projects, leading to the creation of 6,500,000 avoided carbon credits. These were purchased as the requirements on liable entities under the Carbon Pricing Mechanism. The government put a fixed price of $23/tonne on carbon units under the carbon price, but the CFI allowed companies to buy certificates at a lower price than this and surrender these certificates to meet their obligations. Practically the price for the CFI created emissions was just below $23/tonne (given the high demand to purchase them at any lower price). As such it can be suggested that 6.5 million carbon credits equates to around $150 million that was invested into rural Australia/farms.

The difference between the two schemes (noting that CFI will now be rolled into ERF) is:

1.Under CFI the entity (farmer, project applicant, etc) created a project which avoided emissions and then sold those credits on the market themselves.

2.Under ERF the entity now bids to the government for the Fund to purchase the emissions credits at a contracted amount.

Importantly the first step by the entity is to sign as a registered offset entity and the establishment of an ANREU (Australian National Registry of Emissions Units) account. The registration process and the account allow any project to create avoided emissions credits and to bank those credits, either for sale on a voluntary market, an established secondary market, or for direct sale to the ERF.

Note a project cannot be an ERF project if it would otherwise go ahead, receives/will receive other government assistance, is for compliance with legislation, is not covered by a methodology.

The process for the ERF is roughly:

1.A company or individual (entity) applies to join and opens a ANREU account

2.The entity applies for a project under the scheme

3.The project has to be covered by a “methodology” – which sets out how emissions abatement from the projects will be measured. It is anticipated that the methodology will either be activity specific or facility specific. If no methodology covers the project, then it can’t apply to the scheme.

4.If a project is approved the entity can proceed. The project can begin at this stage and begin to accumulate credits, yet it may pay to wait until the Fund selects the carbon credits to “purchase” before proceeding (given that it
would not be eligible if it could otherwise go ahead!).

5.A quarterly auction will take place at which project applicants will need to bid in on a $/tonne CO2e basis, and the ERF will choose to purchase projects on a lowest cost of abatement basis. Bids are assessed on price only at this stage. One bid per project, single round, “sealed bid”. But it is possible to bid at a future auction if unsuccessful.

6.Once the Fund has agreed to buy credits from a particular project a contract is signed for the amount of credits at the bid price. If the project fails to supply the full amount of credits, the Fund will seek to buy make up credits at a price below the contracted price. If it cannot the entity will be liable for the difference, or to directly purchase “make-good” certificates on the voluntary market or a secondary market.

7.If make good certificates are insufficient to address the lack of necessary credits and/or the project otherwise fails, the contract will allow for the Fund to recover liquidated assets, i.e. to seize assets for cost recovery.

There was lots of talk about a secondary market and if it was likely to be established. This would in effect create an emissions trading scheme, albeit without a cap on emissions. Nonetheless the market would set the price on emissions (we may have heard of a similar scheme before perhaps?). Practically the fact that the government is buying credits on a least cost basis and there will be a number of projects that will bid, which won’t require any significant capital cost (e.g. agreeing not to log a forest), the actual price will be low ~$10/tonne.

There are likely to be a significant number of methodologies created for the scheme. It is heartening to hear out that the energy efficiency methodology is being based on the NSW Energy Saver Scheme. The NSW ESS is considered a successful program that has assisted a number of businesses in NSW to invest in energy efficiency.

 A number of industry working groups are operating for the establishment of these methodologies and it is expected that they will be released as Draft Determinations in the next few weeks.

Some concerns of Enhar’s:

1.Obviously least cost abatement is problematic, because the whole point of government subsidies is to address market failures and target areas of strategic investment. The scheme worries us in that it doesn’t appear to be set up to address the problem of climate change, instead it is just a scheme for funding projects that avoid emissions or invest in energy efficiency.

2.There was a lot of reference to coal mine gas capture, waste to energy, landfill gas, cogeneration. Our concern is that the project will fund a number of methane gas generation projects, which does not significantly address the problem of climate change or greenhouse emissions.

3.Because renewables have a separate (albeit threatened) funding scheme, there will not be a methodology covering them at this stage (read never).

4.  There is a lot of red tape and “due diligence”, which could act as a filter for limiting more creative projects. 

At this stage it appears unlikely that the scheme will offer much to energy efficiency and clean energy projects in the first year or two. This is due to the fact that in the initial stages it is more likely farming based initiatives will be the first to jump into the scheme, simply because there already is an established scheme, which that industry understands and has more certainty in the emissions abatement prices that can be sold. Given energy efficiency projects will involve capital works, the actual emissions abatement $/tonne amount is going to be higher and may not be able to compete with other measures. There has been some talk of creating tranches of funding to dedicate to ensure even funding of methodologies, but this is now unlikely and the least cost abatement/lowest bid basis will be determine which projects are funded per auction. Time will tell how much space there is for energy efficiency based projects.

In the coming weeks and months Enhar will continue to increase its understanding and knowledge of the scheme, as well as advocating for a strong focus on genuine energy efficiency support and the full inclusion of renewable energy in the scheme.

If businesses are interested in hearing more about the ERF from Enhar and discussing with us how it can assist you, please get in contact. We are more than happy to provide assistance.

The Emissions Reduction Fund website is here – http://www.environment.gov.au/climate-change/emissions-reduction-fund

Some useful exists on this website about the CFI – http://mycfi.com.au