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The CFI laid bare

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MAY 24, 2011

The CFI laid bare

During the 2010 election, the Government announced that, if re-elected, it would introduce a new program, the Carbon Farming Initiative (CFI), to pay landholders for helping to reduce atmospheric greenhouse gas concentrations. On 24 March 2011, legislation for the CFI and two related bills was introduced into the House of Representatives. The debate is expected to take place this week. On the whole, the legislation has been well accepted by stakeholders, but there remain a number of contentious and complex issues with the design of the scheme. As the Parliamentary Library is in the final stages of developing a Bills Digest, this post provides a basic outline of the scheme and its main issues. After a lengthy consultation process (attracting nearly 280 submissions), the Government introduced three bills into Parliament as part of this initiative:

• The Carbon Credits (Carbon Farming Initiative) Bill 2011 • The Australian National Registry of Emissions Units Act 2011 • The Carbon Credits (Consequential Amendments) Act 2011

The bills were referred to both the Senate and House of Representatives for committee consideration. The House Standing Committee on Climate Change, Environment and the Arts reported on 23 May 2011. The Senate Standing Committee on Environment and Communications was expected to report by 20 May 2011 but will now present the final report on 27 May 2011.

Outline of the CFI An outline of the scheme is provided on the Department of Climate Change and Energy Efficiency website. Basically, the CFI creates a new form of personal property, known as an Australian carbon credit unit (ACCU). Farmers and foresters can generate and hold ownership of ACCUs by undertaking certain projects such as reforestation, manure management or the removal of feral animals. Projects are only acceptable if they are listed

on a ‘positive list’, have specific methodologies defined in regulations and are beyond ‘common practice’ in that industry or environment. Two types of ACCUs exist. Those that can be used by Australia to meet its Kyoto Protocol obligation are known as Kyoto-ACCUs, all others are non-Kyoto ACCUs. The positive list is matched by a ‘negative list’. Projects on the negative list have adverse environmental or social impacts and are not eligible projects.

For ACCUs to represent real climate change mitigation, the Bill also requires that carbon abatement endures for a 100-year period. This is referred to as ‘permanence’. All forestry projects have a small percentage of ACCUs deducted from their total to insure against temporary carbon losses after certain natural or human-induced events. This percentage is referred to as the ‘risk of reversal buffer’ and has been set at 5 per cent, nominally. ACCUs are held in an electronic database that is defined in the Australian National Registry of Emissions Units Act 2011. This database also stores Australia’s various Kyoto-compliance units.

Kyoto-ACCUs can be exchanged for units that can be sold to other developed countries that are signatory to the Kyoto Protocol. Non-Kyoto ACCUs could currently only be traded on the voluntary market internationally or domestically. However, if an Australian compliance market were to be established through an emissions trading scheme (ETS), or a carbon price were rolled out through a tax, ACCUs might also be purchased to offset the requirements or liabilities under such schemes.

Various positions on the CFI The Coalition has not adopted an official position towards the policy. It does stand to reason that the concept of the CFI would be acceptable to the Coalition as it leverages emission reduction projects in the land-use sector, in the vein of The Coalition’s Direct Action Plan on climate change. However, The Direct Action Plan relies on government money, whereas the CFI is based on a market mechanism. Also, the Nationals have voiced concern that the CFI could pose a threat to food production.

Although the Greens support a Federal policy to increase carbon absorption through altered land management practices, they are generally not in favour of any policy instruments that may emulate the outcomes of previous managed investment schemes. Senator Milne believes that the current design of the CFI could potentially create a surplus of offsets that might flood the market. She is also concerned that the creation of ACCUs may generate dangerous competition for land between food, fibre, energy and carbon farmers.

Mr Oakeshott supports the CFI legislation. To date, Mr Windsor has not given his final verdict on the Bill. Mr Katter made a statement in the beginning of the CFI consultation process that the scheme was plagued with opportunities for extortion. No other Independents have commented to date.

As could have been predicted, emissions-intensive industry groups do not see the need for the CFI, but of course there is overarching support from both the farming and forestry sectors (although there are some issues of concern to each). There are mixed views amongst environmental and conservation groups regarding the CFI. Many are unsure about the potential outcomes, believing these could either reinforce or actually weaken existing biodiversity. Finally, traditional land owners, as major stakeholders, support the intent of the

CFI and are keen to engage with it, but have some legal concerns.

Main issues with the CFI The biggest challenge to the CFI is ensuring that ACCUs have credibility in both domestic and international markets. The integrity of ACCUs is founded on three factors:

• Additionality: For a project to be deliver genuine carbon abatement, it must result in a reduction in atmospheric greenhouse gas that is additional to what would have occurred in the absence of the project (and in the absence of the CFI scheme as a policy instrument). This is known as ‘additionality’. For a project to pass the CFI additionality test it must be included in the ‘positive list’ and it must not be accepted as ‘common practice’ in the relevant industry or environment. The definition of ‘common practice’ is a grey area and difficult to formally apply. It also varies by State and bioregion. Additionality has been an issue of contention amongst prospective CFI participants as it introduces uncertainty into the scheme and makes it difficult to assess the legislation before regulations have been developed. However, for ACCUs to be recognised in international voluntary and compliance markets, additionality is a necessary clause.

• Permanence: As well as being additional, greenhouse gas abatement from CFI projects must be permanent. In the Bill, permanence is considered a 100-year period. This poses a challenge to CFI participants and could be a deterrent for some. There has been some debate over the nominal 5 per cent choice for the risk of reversal buffer. Finally, the Bill requires that if project participants choose to end or reverse a project they must return as many ACCUs as have been credited. Because ACCU prices are predicted to increase, someone in this situation is likely to come out at a loss. This has been an issue of contention.

• Leakage: If efforts to reduce atmospheric greenhouse gases in one place, by one activity, lead to increases of such gases somewhere else or in some other form, it is referred to as leakage. Because the CFI is founded on a project-by-project basis, some kinds of leakage are difficult to monitor and control. Yet, problems of leakage can undermine the environmental integrity of the scheme and lead to unsubstantiated claims of carbon abatement.

Because of such rigid requirements for scheme credibility, the design of the CFI and administrative procedures are complex and costly. This has been seen as a major barrier to participation. Another barrier to participation, specifically for Native Title holders, has been the failure to adequately recognise non-exclusive rights to land. The Bill does not provide any special treatment for non-exclusive native title, such as native title access or usage rights, as they are thought less likely to include carbon sequestration rights. The Government has stated that consultation on this issue is ongoing.

With such barriers to participation, the likely uptake of CFI projects is uncertain. According to the Government’s own calculations, even the most optimistic scenario results in less than 23 megatonnes of carbon dioxide equivalent sequestered or avoided in 2020 through the CFI. The uptake of the CFI will be highly dependent on the demand for ACCUs, which will be determined by any forthcoming Australian carbon price and international commitments. Certainly, the demand, and therefore price, for ACCUs would be stronger and more certain if such credits were accepted to offset liabilities under a domestic compliance market, such as an ETS or carbon tax.

In his sixth update paper, Professor Garnaut argued for linkage between the CFI and an

Australian compliance market. However, he also built a case for limiting the amount of offset credits accepted, at least in the early stages under a fixed price scheme. This is to ensure budget neutrality of a carbon price scheme, but also to guarantee that mitigation efforts in high-polluting sectors are not weakened. The concept of capping the number of credit units available to a domestic carbon pricing scheme has gained some support from such groups as The Climate Institute, the Wentworth Group of Concerned Scientists, and Greenpeace. However, by some others it is seen as a distortion to the market and a barrier to CFI uptake.

Another deciding factor will be Australia’s future decisions under the Kyoto Protocol. Two thirds of the CFI’s abatement potential is expected to come from Kyoto-compliant activities. Yet, the first commitment period of the Kyoto Protocol ends in December 2012 and large shadows of doubt hover over the continuance and likely future form of the treaty. While the international compliance market is the biggest market available to CFI participants it provides investor certainty only until December 2012.

Nevertheless, because of the scheme’s interaction with the Kyoto Protocol, and also because of the uncertainty in the science of agricultural carbon management, the CFI is likely to favour forestry projects over agricultural projects. As the Government’s early estimate suggests, more than 80 per cent of abatement under the CFI is likely to come from forestry activities. This bias towards tree plantations could result is a number of perverse outcomes. First, there is a fear that abundant and misplaced forestry projects could impact on water availability. Second, if the resulting plantations end up being mainly carbon-rich monocultures, then biodiversity could be affected. Third, there is the danger that valuable cropland will be transformed into large sections of forests.

These potential perverse outcomes were the reasons behind the Government’s proposed positive and negative lists for projects. A project on the negative list is ineligible as a CFI project. However, not all those projects listed on the positive list are eligible; they must also gain approval under any relevant natural resource management (NRM) plan, if one exists for that project area. While these measures go some way in resolving the risks of perverse environmental outcomes, there are questions as to whether they are adequate and scientifically rigorous. There have been suggestions that the Environment Protection and Biodiversity Conservation Act 1999 may provide a more credible framework for assessing the environmental impact of land-use change and forestry projects. Another suggestion, and alternative to the positive and negative lists, has been a heavier reliance on, and linkage to, regional NRM and land use plans. However, NRM plans are currently not designed for such purposes. Regional NRM bodies will need significantly more resources if they are to take on this new role. Also, some oversight would be needed to ensure that certain standards exist and are upheld across all NRM plans nationally.

Another potential perverse outcome of the CFI relates to its interaction with existing and future policy instruments at the Commonwealth, State and local levels. Because of the additionality rulings, early movers—those who have made voluntary efforts towards biodiversity and carbon retention by placing a conservation covenant on their land—will not be able to benefit from their actions through the CFI. Similarly, any projects participating in the Government’s Environmental Stewardship program under the Caring for Country initiative would also be excluded from CFI eligibility—and vice versa. As a partial solution, Senator Milne proposes that a fund be created from a proportion of any carbon pricing

revenue and that it be used to maintain and enhance existing carbon stocks. In general, though, perhaps there needs to be further investigation into the potential of integrating or streamlining some schemes.

One of the Bill’s stated objectives is the protection of Australia’s natural environment. CFI participants will be able to list information about environmental and/or community benefits associated with an offset project and the ACCUs deriving from it. In the Explanatory Memorandum, the Government proposes a standardised co-benefits index. However, for co-benefits to add real value there needs to be some sort of third-party assessment and an ongoing review of each attributed co-benefit.

Conclusions Although the CFI is seen by most as a positive development, there are concerns with the integrity of the scheme's basic design as well as the details of the administrative requirements. Whether the scheme will have any real impact on atmospheric greenhouse gas concentrations will depend heavily on any future carbon price. In line with this, the weaknesses and failures of the scheme will become visible only if and when the demand for ACCUs becomes significant. A 2014 review is expected to resolve any such issues.

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Posted by Anita Talberg at 12:41 PM

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Labels: climate change, emissions trading