Draft guidance on meeting the regulatory additionality requirement for the Emissions Reduction Fund

Purpose

This document outlines how the Clean Energy Regulator is proposing to assess and implement regulatory additionality.

Regulatory additionality

Most offset schemes including the Emissions Reduction Fund (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 or under a law.

Recent developments

In recent times, state and territory governments have imposed emissions reduction obligations on government and non-government entities, which do not specify or reference particular projects (activities) to reduce or offset 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 2030.

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

Some states and territories have expressed a desire for companies to meet their regulatory requirements to reduce emissions by undertaking ERF projects as the ERF framework provides a robust and established mechanism for carbon accounting and emissions reductions.

Our approach to date

To date, the Clean Energy Regulator has taken the view it is not possible to assess whether ERF projects go beyond state requirements if the state requirement does not specify particular activities to reduce or offset emissions, but instead requires a given amount of emissions reductions through emissions reduction and/or offsets targets.

Under the current approach to regulatory additionality, if businesses wish to generate Australian carbon credit units (ACCUs) to meet a state 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 that the alternative available mechanisms to source ACCUs can be inefficient, without necessarily providing a better outcome for the environment.

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Example

A land holder is subject to a state requirement that she must control feral animals on her property. To meet this obligation, she shoots feral goats on the farm a couple of times a year. The landholder then decides she would like to have an ERF vegetation regeneration project on her land. To go beyond the regulatory additionality requirement, the landholder undertakes to fence off the carbon abatement estimation area (as part of the ERF project abatement activity) so that the goats cannot get into the area where the trees are re-growing. All things being equal, the Clean Energy Regulator could assess the project as meeting the regulatory additionality requirement.

Proposed new approach

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

The Clean Energy Regulator will take the view that regulatory additionality has been met if:

1. the Clean Energy 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 method; or

3. the Australian Government, state or territory regulatory requirement refers to reducing or offsetting emissions but does not specify a particular activity to do so, and to fulfil the state requirement the obligated entity agrees to voluntarily and permanently place sufficient ACCUs generated from the project to meet the state obligation into a Commonwealth holding account in the Australian National Registry of Emissions Units (ANREU).

For a project to satisfy the third requirement, a sufficient number of ACCUs generated from the project that would be used to meet the regulatory requirement would need to be put aside permanently and not be made available to the carbon market (further details are provided in the Implementation section below). This would apply to projects whether they generated more or less ACCUs than their state based regulation required. Once the regulatory requirement has been met, by placing either the required number of ACCUs in the Commonwealth holding account, or in combination with other activities, any further ACCUs generated from the project may be sold in the secondary market or through an ERF contract to the Australian Government.

This approach ensures that the project would remain additional and goes above and beyond the regulatory requirement. No financial benefit could be gained from the ACCUs generated 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 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 Australian Government would have greater visibility of how the ACCUs generated from the relevant projects are used into the future, potentially mitigating the risk of double counting if they are on-sold outside the ANREU framework.

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Implementation

The Clean Energy Regulator will work collaboratively with relevant state and territory regulatory authorities to implement this approach.

At the time an entity with obligations under state or territory legislation applies for an ERF project, it will be required to supply the Clean Energy Regulator with the following information:

1. relevant details on the state or territory regulatory obligation, and when the project activities will be implemented

2. an ‘ACCU schedule’, which outlines the number of ACCUs that are being used towards meeting the regulatory requirement, and the timetable for placing ACCUs generated from the project permanently in the Commonwealth ANREU account, and

3. agreement from the relevant state or territory regulatory authority that the ACCU schedule complies with their regulatory requirement.

Obligated entities would be asked to consider whether their project will be able to meet the state obligation and to build in some flexibility with the ACCU schedule, in case the project does not generate the required number of ACCUs.

Relevant regulatory authorities who intend obligated entities to be able to use the ERF would need to put administrative processes in place to review and approve the ACCU schedules before a project can apply to participate in the ERF. It will be important to identify the relevant jurisdictional authority responsible for approving the ACCU schedules. The Clean Energy Regulator would require correspondence between the relevant state authority, the project proponent and itself has been put in place to facilitate this, including undertakings or representations made to the Clean Energy Regulator to give effect to the arrangement.

The Clean Energy Regulator will establish a new Commonwealth holding account in ANREU for ACCUs to be placed permanently to meet state obligations. The Clean Energy Regulator would require that the ACCUs subject to the state requirement schedule are placed permanently into this account. These ACCUs cannot be sold or traded to another entity for any purpose, or be used to meet delivery under an ERF contract with the Australian Government.

Arrangements similar to those operating under the safeguard mechanism would apply to avoid double counting.

Example

An LNG facility operator is undertaking an expansion and their EPA licence requires that they offset 10 per cent of the emissions from the expanded plant. The facility operator has applied to the Clean Energy Regulator to register a revegetation project to generate ACCUs that will offset some of the emissions from the LNG expansion project. The project could pass the regulatory additionality requirement if the relevant state authority can quantify the emissions that need to be offset as a result of the state legislation, and the participant agrees to place an equivalent amount of ACCUs generated by the project permanently in a Commonwealth Holding Account in ANREU.

Participating in an Emissions Reduction Fund auction

In some circumstances, obligated entities may be able to participate in an ERF auction process and contract with the Australian Government. However, the amount of abatement that can be contracted through an ERF auction will need to be clearly in excess of the ACCUs in the ACCU schedule. The Clean Energy Regulator will ensure that the ACCUs delivered to meet an ACCU schedule are prioritised over delivery to meet an

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Emissions Reduction Fund contract schedule. This ensures that projects can only earn a financial benefit for surplus abatement once their regulatory requirements are fulfilled.

Compliance

ERF participants should be aware that the Clean Energy Regulator will check compliance with regulatory additionality statements when projects are registered and credited. Participants who do not meet the agreed ACCU schedule may have their projects revoked through the powers available to the Clean Energy Regulator within the Carbon Credits (Carbon Farming Initiative) Act 2011. ACCUs issued for revoked projects would need to be relinquished. The Clean Energy Regulator’s priority remains to credit only 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 Carbon Credits (Carbon Farming Initiative) Rule 2015). The purpose of this requirement is to avoid double counting of abatement.

If biodiversity credits are generated for philanthropic purposes and then retired, it is likely that a project could meet ERF eligibility requirements.

Furthermore, an ERF 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:

(i) 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

(ii) 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.

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