Seemingly from out of the blue, Treasury launched a consultation process on relaxing financial regulations around the ERF. Now, out of the blue, regulations have been passed ensuring that an ERF contract is not a financial product. Are you keeping up?
Have you ever bought a Fairtrade coffee with its comforting green and blue swirl?
As a non-coffee drinker I certainly haven’t, but its still an idea we want to explore for Aboriginal carbon projects in Australia.
So we put on a workshop in Melbourne on 30 January 2014.
There’s been a couple of papers on co-benefits already, canvassing options for co-benefits criteria and whether we need a standard tailored to Australian conditions. Co-benefits is just about the extra social and environmental benefits that a project can generate in addition to carbon.
Luckily, the sector seemed ripe for such a workshop and we received a good response from the paper authors, from corporate sustainability managers and key Indigenous groups.
At the workshop, we wanted to take the idea of co-benefits a bit further to the idea of Fair Carbon – it’s not just about the extra benefits but about a fair trading system: what’s are the terms of trade? In uncertain times can we have a minimum price? Can long term relationships smooth out an uncertain market? All wrapped up in a nice little standard.
We primed the day well, with a climate update from Tim Flannery, Climate Council, a history of Aboriginal Carbon Fund from co-founder and director Allan Cooney, building wealth for native title holders by Brian Wyatt, National Native Title Council, a corporate perspective on credit buying from Emma Herd, Westpac, thought provoking co-benefits thoughts from Cathy Robinson, CSIRO and the latest on the international scene from Neil Salisbury, Net Balance.
This of course didn’t resolve all the tricky bits so we broke into groups to get stuck into challenges, ideal outcomes, co-benefits criteria and the toughest nut of all: how to govern the system with integrity and reasonable cost.
The experiences of others show that if you don’t get the balance right, you will not get the take-up and buy-in you might imagine. How do you get a company to pay more than they have to for a product?
Fun day. Good people. We are working on a workshop report so more to come!
The Minister for the Environment, the Hon Greg Hunt MP, released the long awaited Green Paper on implementing the Emissions Reduction Fund (ERF) on 20 December 2013.
The paper centres around three design principles:
- lowest cost emissions reductions
- genuine emissions reductions
- streamlined administration.
To seek the lowest cost emissions reductions, the Government has signaled its intention to allow a ‘menu of emissions reduction projects’ expanding from the land sector and landfill into energy efficiency and industrial facilities. To achieve this expansion, the ‘positive list’ of allowed activities may go and additionality, or which projects go ahead only because of the credits they receive, may be handled in methodologies, or the rules for activity types.
For industry type activities, this means additionality is all about the baseline or the starting point from which improvement is measured. At this stage we don’t have colours on the mast but just options: absolute baselines considering overall emissions of a facility, and/or emissions intensity baselines which look at the efficiency of a facility. There are three devils and a dingo in calculating emissions intensity baselines.
Activities will be credited through auctions run by the Clean Energy Regulator (CER). Decisions will be based on price and prequalification by projects on eligibility etc. To choose projects, the CER will set a secret ‘benchmark price’ with only bids below that price to be considered. Am I the only one worried about the CER making value judgments on which projects to fund according to a secret price which will surely leak out? I am uneasy about the regulator choosing which projects it regulates according to secret parameters. I thought the whole point of markets was transparency – how can you have a market if no one knows the price?
Reputex thinks all this might make it a bit tough for the land sector and Bloomberg New Energy Finance thinks 5 year contracts will make the scheme unfinanceable. And it’s a real concern given only 6 per cent of CFI credits currently come from the land sector – the vast majority are from landfill – projects which are essentially bolted on to existing operations. Very few genuinely new projects have been incubated and this is the challenge to deliver abatement well into the future.
Still, like always, there might be some cracks of light for Aboriginal projects: simplifying methods by using the national accounts might make methodology development simpler for rangelands and new savanna methodologies. Risk based verification might reduce the costs of implementing projects. A ‘make good’ provision for industrial projects might create a secondary market for land credits where business projects fail and need to buy credits from steady land projects. A permanence condition of 25 years might ease the minds of traditional landholders (although query the environmental integrity).
But my favourite is aggregation. At present, the land requirements for CFI projects are relatively strict and landowners, rightly, are cautious about signing away their land or carbon rights. This makes aggregation of larger sequestration projects difficult. A simpler consent approach, similar to consent required for interest holders now, may make it a lot easier to bundle a whole of projects into a super project – this might be the way to make an irresistible case to the Government to get behind what would otherwise be a lot of smaller fragmented projects. Given there is a proposal for minimum size bids into the ERF, this might be essential.
The next steps will not be easy with legislation definitely required to implement this platform. However, if things get tricky, the Government could simply expand the scope of the CFI by regulation – leaving the complex stuff of baselines etc to methodologies.
The future is uncertain, but not certainly bright.
A lot of people are trying to work out how to test feasibility for carbon projects on their land: some are advertising for consultants, some are undertaking some training and some are just getting on with it.
But last week, we were invited to a workshop put together by the Alinytjara Wilurara NRM region and the SA Government with a difference: they invited a whole lot of experts with something to add to their carbon and land management puzzle in the Alinytjara Wilurara arid lands of western SA. A great way to gather ideas from an array of different experts and also a chance for those experts to cross-fertilise each other. Very impressive.
A few things struck me from the workshop. "Market fundamentals are strong" said one - meaning that while the politics continue to be uncertain, climate change is not going away and some kind of policies on carbon will stay. Do we need to worry as much about government policy of the day? "Integrated project approach" said another - is there carbon in our plan? Rather than the other way around. Carbon and other kinds of land management can complement each other. "Specialty market" invited another - perhaps Aboriginal carbon need not be a follower like in a commodity market but proactively market itself as a specialty product with its own price. These are pretty handy ideas for anyone thinking about their land and carbon.
And the innovative workshop approach is food for thought for others considering what to do.
At last week's meeting with the Carbon Market Institute, The Hon Greg Hunt MP released the Coalition's Plan to Tackle Climate Change.
At last some flesh on the terms of reference for the Emissions Reduction Fund!
The paper makes a case for removal of the carbon price and replacement with a more modest Direct Action policy: the carbon price is the "wrong market mechanism" for this problem because electricity is an "inelastic good". Electricity Bill take note! But it seems to me electricity use might be relatively inelastic, but how electricity is sourced need not be. Electricity emissions are falling.
A more expansive paper is welcome ahead of future green and white papers, but there are some worrying signals.
The paper accounts that the task of meeting a 5% reduction target by 2020 has reduced from 750 million tonnes to 440 million tonnes, but no reason is given why the ERF will be more effective than the carbon price at reducing emissions. Given past similar programs like the Greenhouse Gas Abatement Program were not that effective, it would be good to see some stronger reasons.
To ensure environmental integrity, the paper notes projects must be additional to "business-as-usual". It would be useful to clarify whether this is shorthand for the current additionality test - which ensures that projects which are "common practice" are excluded - or a softening of the test to be more inclusive of more kinds of projects. "Business-as-usual" might mean reductions below current emissions, when in fact "business-as-usual" emissions are falling anyway. Other comments about "keen to unlock abatement opportunities across the Australian economy" suggest it could be a softening which would undermine the integrity of the CFI.
The paper also talks about buying "lowest cost abatement" and "buying up the abatement cost curve". While this is good for the budget bottom line, it might not be the best approach for encouraging abatement across different sectors. We certainly know that energy efficiency projects could be cost negative and that Aboriginal land projects have a few capacity and remoteness humps to get over to deliver.
Keeping the CFI is a good thing. But there are few cracks of light in this paper for Aboriginal carbon farmers. If you want abatement on remote lands and Aboriginal people in jobs, we will need some enablers.
Our submission will be tackling some of these issues. Still thinking.
Industry body Carbon Market Institute has released a report on State of the Australian Carbon Market 2013.
What did they find?
Well, in the first year of the market there were 287 million carbon units at a market value of $6.58 billion. About half the units were given away in free industry allocations, but this will reduce over time. Interestingly, about 40 million units were sold to the Clean Energy Regulator under the buy-back scheme and a further 35 million were traded on the secondary market (that is, traded to other entities after issue rather than just surrendered to the Regulator).
That's quite the show! And gives a good impression of a functioning market?
What about the CFI?
21 CFI projects were issued nearly 1.8 million credits (or less than 1 per cent of the market). Credited projects were reforestation (12,000 credits), piggeries (8,000 credits) and savanna burning (26,000 credits), with the remainder being landfill. In fairness, as the CMI notes, many of the landfill projects transitioned from the former Greenhouse Friendly program and sequestration projects have a longer set up and return time. So the imbalance in crediting should square up in years to come.
In good news, 97 per cent of the CFI credits were sold to companies with a carbon bill to pay - the biggest buyers were Great Energy Alliance Corporation Pty Ltd, Stanwell Corporation Limited, CS Energy Limited and EnergyAustralia Yallourn Pty Ltd. Interestingly, while a 5 per cent cap on CFI credits applies while the fixed price period is in place, no one broke that mark this year. CFI credits typically traded just below the fixed price of $23.
So what does this mean?
Well, the CFI has made a slow but encouraging start, with many projects transitioning in to the CFI boosting the numbers of credits sold so far. And it's good news that CFI credits are finding the market and being sold - the bigger companies have an incentive to make savings by buying CFI credits just below the fixed price.
But it will be interesting to see if the base of projects broadens in the second year - hopefully we will also see a few more Aboriginal projects. It will also be interesting to see if any Aboriginal or other projects are able to market their credits at a premium because of the broader community and environmental benefits they are delivering. It's certainly a nicer story buying credits from a land project than paying the bill from the Regulator.
Better get to it.