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Chapter 2: Performance of the carbon farming initiative

This chapter assesses the performance of the CFI to date—that is, before its expansion into the ERF. Section 2.1 documents progress that was made in developing methods, attracting projects and generating credits. Sections 2.2 to 2.4 examine particular aspects of performance relating to the emissions reductions achieved and the costs of the scheme. Section 2.5 identifies the main factors that limited participation in the CFI.

2.1. Methods, projects and credits

CFI methods, projects and credits sat within a legislative framework governed by the CFI Act. The framework involved a number of elements, as follows.

  • Legislation and regulations—specified the coverage and governing principles for the scheme. These principles helped ensure environmental integrity by requiring that:
    • emissions reductions are measurable and verifiable
    • measurement methods are supported by peer-reviewed science and are not inconsistent with Australia’s international greenhouse gas emissions accounts
    • measurement methods account for leakage and variability, and use conservative assumptions
    • emissions reductions are additional to what would occur in the absence of the project
    • carbon sequestration is permanent (carbon stocks maintained on average for at least a 100-year period)
    • projects avoid negative social or environmental consequences, including impacts on water availability, biodiversity conservation, employment and other values.
  • Positive list—specified eligible activities under the CFI. This was a list of activities that were not common practice in an industry and were therefore considered to generate additional emissions reductions.
  • Methods (or ‘methodologies’)—rules for undertaking and monitoring a project and generating credits. A method was required for each kind of activity that could be credited under the scheme and was required to contain:
    • a list of emissions sources and sinks affected by the project
    • monitoring, verification and reporting requirements
    • instructions for determining a baseline that represents what would occur in the absence of the project
    • procedures for measuring or estimating emissions reductions or sequestration relative to the baseline.
  • Projects—activities that reduce emissions to gain credits. To be approved, a project was required to be covered by a method and implement an activity that was both included on the positive list, and was not on the ‘negative list’ (a list of activities that pose unacceptable risks to water, biodiversity, and so on). To undertake a CFI project, a person was required to become a ‘recognised offsets entity’.
  • Crediting—after emissions reductions or sequestration from approved projects were verified, ACCUs were issued by the CER. All ACCUs can be traded or sold in Australia. Prior to CFI Act amendments implementing the ERF, ACCUs could be converted into Kyoto units for export, on request. It appears this option was never used.

2.1.1. Available methods

A project was only able to participate in the CFI if it was covered by an approved method. The range of CFI methods therefore indicates the scope of activities that could participate.

Method proposals were developed by the Australian Government or industry participants. The Domestic Offsets Integrity Committee (DOIC) considered each proposal and either endorsed or did not endorse it on the basis of legislated criteria, including the ‘offsets integrity standards’. These standards were designed to ensure that credits issued under CFI methods represented real and additional emissions reductions.

The Minister considered endorsed methods and could approve them by making a methodology determination, which is a legislative instrument under the CFI Act. All CFI methods that were endorsed by the DOIC were approved by the Minster.

In all, 26 CFI methodology determinations were made and eight method proposals were considered by the DOIC but not endorsed (Table 1), while one CFI method was varied. The majority of methodology determinations were for activities in the forests and waste sectors. Savanna burning and some agriculture activities (such as livestock manure management) were also covered by methodology determinations.

Table 1: Methodology determinations made and proposals not endorsed, by activity

Activity

Methodology determinations made

Methodology proposals not endorsed

Methane in piggeries

3

1

Livestock feed additives

2

2

Dairy manure management

1

-

Soil carbon

1

-

Feral camel culling

-

1

Managed grazing systems

-

1

Alternative fertiliser products

-

1

Reforestation and other forestry activities

10

1

Avoided deforestation

1

1

Savanna burning

2

-

Landfill and waste treatment

6

-

Total

26

8

Note: Data current as at 3 December 2014.

Source: Climate Change Authority based on DOE (2014a, 2014b)

The CFI Act commenced in December 2011 and the first methodology determinations were made in June 2012. Since then, methods have become available for an expanding range of activities (Figure 6). Most CFI methods (20 of 26) were made by July 2013.

Figure 6: Methodology determinations, by sector

Note: Figure shows total CFI methods available at the end of the month specified. Data current as at 3 December 2014. ‘Forests’ refers to reforestation, avoided deforestation and other forest activities.
Source: Climate Change Authority, based on dates on which determinations were made

The DOIC refused to endorse method proposals that did not meet the offsets integrity standards or other legislated criteria. For example, a proposed avoided deforestation method was refused partly because some activities potentially within its scope were not covered by the additionality test regulations (the positive list) (DOIC 2013a, p. 2). A proposal for a method to establish agribelt forests was refused endorsement partly because it did not provide adequate instructions for establishing project baselines (DOIC 2013b, p. 1).

In general, the greater the number of methods, the greater the range of activities that could be accommodated within the CFI. However, this was not always the case, because:

  • Methods could have broad or narrow applicability within a sector. For example:
    • the ‘Savanna burning 1.1’ method applies broadly across savanna areas in northern Australia that receive more than 1000 millimetres long-term average annual rainfall
    • a method covering projects that divert construction and industrial waste from landfill and use it to manufacture fuel (‘Diverting waste from landfill for process engineered fuel manufacture’) is only applicable to previous Greenhouse Friendly projects and only has one registered project.
  • Some sectors had multiple methods for distinct activities (for example, within the forests sector there is one avoided deforestation method, two methods for human-induced regeneration of native vegetation and a number of methods for the planting of forests). Some activities had multiple methods using distinct approaches to measuring or estimating the emissions reductions achieved (for example, there are three reforestation and afforestation methods, each with slightly different rules for measuring the quantity of carbon sequestered).
  • A small number of methods were revisions of previous methods.

Gaps in the coverage of approved methods meant the CFI did not in practice encourage all ‘eligible’ emissions reduction activities. For example, commercial forestry and early finishing of beef cattle are activities with potential to reduce emissions but no approved methods. Section 2.5 examines gaps in methods.

2.1.2. Project uptake

One object of the CFI Act is to create incentives for offsets projects. The number of projects is an indicator of how successful the CFI has been in meeting this objective.

There were 178 CFI projects as at 3 December 2014. Just under half of these (46 per cent) were landfill and waste treatment projects, 19 per cent were avoided deforestation projects, and 19 per cent were other types of forest projects. Savanna burning projects (13 per cent) and agriculture projects (four per cent) made up the remainder.

Figures 7 and 8 show there has been a slow but steady ramp-up of projects since the first method was made in 2012. Landfill and waste treatment projects dominated initially, but over time participation in other sectors increased, particularly for forest activities.

Figure 7: Project entry, by sector

Note: ‘Current projects’ percentages do not add to 100 due to rounding. Data current as at 3 December 2014.
Source: Climate Change Authority based on CER (2014a)

Project types covered by an approved method were allowed to transition into the CFI from pre-existing state and Commonwealth offsets schemes; for example the New South Wales Government’s GGAS. About a third of all projects that have entered the CFI have transitioned from pre-existing schemes (Figure 8). These ‘transition projects’ dominated the early CFI period, but their entry has slowed considerably since mid-2013, likely because most projects that were eligible to transition had already done so.

Figure 8: Project entry—new and transition projects

Note: Data current as at 3 December 2014.
Source: Climate Change Authority, based on Clean Energy Regulator data

2.1.3. Credits issued

The number of credits issued is a key indicator of the CFI’s environmental effectiveness (as discussed later, the environmental integrity of credits also needs to be taken into account).

As at 3 December 2014, 10.6 million ACCUs had been issued. Credit issuance has increased sharply in recent months. This is likely to be because CFI project proponents wish to sell credits to entities liable under the carbon pricing mechanism before the final surrender deadline on 2 February 2015. As at 3 December 2014, 61 per cent of credits have been for landfill and waste treatment projects, and 29 per cent have been for avoided deforestation projects. Reforestation and other forestry projects account for five per cent of credits; however, these are likely to generate increasing amounts of credits over time because forest growth generally accelerates five to 10 years after planting. Savanna burning projects (four per cent) and agriculture projects (one per cent) make up the remainder (Figure 9).

Figure 9: Cumulative crediting, by sector

Note: Data current as at 3 December 2014.
Source: Climate Change Authority, based on Clean Energy Regulator data

The proportion of credits issued to new projects has increased over time; however, more than half of all CFI credits have been issued to transition projects (Figure 10).

Figure 10: Cumulative crediting—new and transition projects

Note: Data current as at 3 December 2014.
Source: Climate Change Authority, based on Clean Energy Regulator data

As noted in section 2.1.1, government and industry could develop a method for DOIC approval. At 3 December 2014, 69 per cent of all projects and 64 per cent of total issued credits were under government-led methods (Figure 11). This result is heavily influenced by the fact that the government-led method for capture and combustion of landfill gas accounted for 38 per cent of total projects and 56 per cent of total credits. The most significant industry-led method is for avoided deforestation, which accounted for 19 per cent of total projects and 29 per cent of total credits.

Figure 11: Project and crediting proportions to date, by lead developer

Note: Data current as at 3 December 2014.
Source: Climate Change Authority based on DOE (2014a) and CER (2014a)

2.2. Environmental integrity

The CFI’s environmental effectiveness is determined by the quantity of additional and accurately measured emissions reductions that are permanent and not diminished by leakage.

2.2.1. Additionality

For a CFI project to qualify as additional it must initially fulfil two requirements:

  • The law must not require the activity (‘regulatory additionality’).
  • The activity must be on the positive list, which identifies a broad set of abatement activities that are not ‘common practice’ in an industry or region (‘common practice test’).

Methods could not be approved unless the projects covered by the method passed these tests. These tests were also applied at the individual project level before project approval.

The CFI established robust arrangements to prevent activities that were required under government regulation from being accepted into the CFI. The Authority has not found any evidence that the regulatory additionality test was not applied appropriately (although, as discussed later, some transition projects were exempted from this test).

Similarly, the DOIC clearly considered common practice when advising the Minister that activities should be included on the positive list. For example, its advice to include farm forestry plantations provided evidence that this activity has low adoption rates (DOIC 2012d). Where the DOIC has advised against inclusion, it was generally because an activity was already common practice (for example, the diversion of mixed organic waste by the electricity generation industry: DOIC 2014) or because there was insufficient evidence that the activity could reduce emissions or of the conditions under which it could reduce emissions (for example, applying organic fertilisers to soil: DOIC 2013c).

The DOIC also applied the common practice test in considering methods, even when the project activity was already on the positive list. For example, while livestock feeding supplements appear on the positive list, the DOIC refused to endorse two methods for livestock feed additives, partly because some of the supplements were already commonly used (DOIC 2012a and 2012c).

While the CFI has applied these requirements rigorously, a broader question arises—do these tests provide a good assurance of additionality? Some baseline and credit schemes, such as the Clean Development Mechanism, apply a detailed ‘financial additionality’ test at the project level. This assesses ‘the investment environment, business operations and motivations of the project provider or investor to determine their likely actions in the absence of the scheme incentive’ (CCA 2014a, p. 31), which can provide a greater assurance that emissions reductions are really additional.

The CFI did not apply a project-level financial additionality test. This was a deliberate design choice to avoid the high transaction costs associated with project-level assessments (Macintosh 2012). The common practice test could be seen as a rough proxy for financial additionality (applied at the activity-wide rather than project-specific level). In practice, it appears to have delivered reasonable results.

It is clear that a significant proportion of CFI projects are financially additional. These projects have no apparent financial driver that would have made them attractive without the scheme. These include flaring of landfill gas, savanna burning, environmental tree planting and livestock manure management.

Other projects may not be financially additional. For example, in some cases land clearing involves costs that exceed the returns from grazing or cropping on the cleared land. Accordingly, leaving the forest intact may be the best option from a commercial perspective. The CFI sought to exclude such non-additional avoided deforestation projects by limiting participation to landowners who had obtained a permit to clear before July 2010. While this would undoubtedly have excluded many non-additional projects, it is unlikely to have excluded them all. Some landowners could have obtained clearing permits for an area greater than what they actually intended to clear in order to retain some flexibility; others may have intended to exercise the permit but then found the returns from clearing did not justify the expense. Both categories of landowners would be in a position to put forward non-additional projects that could pass the CFI additionality test.

The Authority does not have any specific evidence that this has occurred. Nevertheless, the example highlights the possibility that some CFI credits may not represent additional emissions reductions.

Additionality arrangements for transition projects were designed to ensure that a project was additional at the time it commenced, not the time it entered the CFI. This is appropriate; when policy settings change it is generally desirable not to penalise firms that made investments based on a reasonable expectation of the policy continuing.

It is likely, however, that transition arrangements have resulted in some non-additional emissions reductions. This is because some landfill transition projects were exempt from the regulatory additionality test and applied a baseline representing a default methane capture rate, which was zero per cent for previous Greenhouse Friendly projects and 24 per cent for GGAS projects (DIICCSRTE 2013). Landfills are now usually subject to at least some methane capture requirements, and many non-transition landfills are likely to have a regulatory baseline of at least 30 per cent (CER 2013). Greenhouse Friendly began in 2001; thus, the additionality of some project types, including baseline requirements, may not been have re-assessed for over a decade.

2.2.2. Measurement

CFI methods use different approaches to calculate emissions reductions achieved. Some methods involve direct measurement of emissions reductions (for example, the reforestation and afforestation methods require project proponents to sample and measure the trees they have planted). Others estimate reductions using a model (for example, the ‘Savanna Burning 1.1’ method uses a tool called SavBAT to estimate emissions reductions from changes in burning practices).

Several sources of evidence suggest that the CFI’s measurement practices resulted in conservative levels of crediting.

First, stakeholders consulted for this review generally reported that measurement practices were rigorous and/or conservative. Indeed, some stakeholders criticised measurement requirements for being overly rigorous or conservative, noting this could deter participation. These claims were made by both project proponents and others who had no commercial interest in CFI projects.

Second, academic analysis has concluded that the CFI used conservative measurement approaches. Macintosh (2012, p. 16) discusses analysis finding that FullCAM, the model used to estimate sequestration from some reforestation projects, could underestimate the sequestration that some projects actually achieve. Although its estimations are conservative, FullCAM is also used in the calculation of Australia’s national greenhouse gas inventory. Therefore its use ensures consistency between CFI methods and the inventory, a requirement of the offsets integrity standards.

Third, there are examples of the DOIC refusing to endorse method proposals for reasons related to scientific measurement of emissions and sequestration. For example, it refused to endorse a method proposal for managing feral camel populations partly because there was not enough evidence that the estimates, projections or assumptions used to calculate emissions reductions were conservative (DOIC 2012b).

Therefore, it seems likely that emissions measurements underpinning credit issue have been somewhat conservative.

2.2.3. Permanence

The CFI legislation contains permanence arrangements so that if sequestered carbon is released within 100 years (for example, through fire), project proponents are obliged to either restore carbon stocks or hand back credits. A five per cent risk of reversal buffer adjusts for the carbon that is temporarily lost before carbon stocks are restored and for carbon losses due to wrongdoing by the project proponent that are unable to be restored.

The Authority has not identified any specific problems with the permanence arrangements. Given that these arrangements manage the effects of events that might only occur infrequently, such as drought or fire, it is too early in the scheme to judge whether they will continue to work smoothly or whether the five per cent risk of reversal buffer is set at the right level. The risk of reversal buffer should be monitored carefully in future reviews.

2.2.4. Leakage

The CFI Act provides that methods can include a leakage deduction (paragraph 133(1)(e)). This would adjust crediting to account for increases in emissions that were caused by a CFI project but occur outside the project’s greenhouse gas assessment boundary.

No CFI methods included a leakage deduction. Leakage can be influenced by commodity markets, and can occur at different spatial scales and over time, so it is hard to estimate. This review has not had time to examine the effects of projects on emissions outside their accounting boundaries. This is an issue that could be explored in future reviews.

2.3. Scale of emissions reductions

The total emissions reductions achieved by the CFI is the ultimate measure of the scheme’s environmental effectiveness.

CFI credits have been issued for 10.6 Mt CO2-e of emissions reductions (as at 3 December 2014). Although the CFI commenced in late 2011, some of these reductions occurred as early as 1 July 2010, because some projects were allowed to receive backdated credits.

The number of credits does not necessarily equate to the scheme’s actual emissions reductions. Where non-additional projects are credited, actual emissions reductions would be less than the number of credits. On the other hand, credits are only issued after emissions reductions are reported and verified, so the scheme will have achieved some emissions reductions that are not reflected in current credit numbers.

Considering these factors, and given that the CFI appears to have operated with a reasonably high degree of environmental integrity, the CFI has likely achieved about 10 Mt CO2-e of emissions reductions in total or, on average, about 2.5 Mt CO2-e per year (with more emissions reductions in later years than in earlier years).

The CFI specifically aimed to contribute to meeting Australia’s international commitments under the Kyoto Protocol and UNFCCC. All CFI emissions reductions have counted towards Australia’s Kyoto Protocol commitments, because even though the scheme covered ‘non-Kyoto’ activities, no methods were approved for these activities.

Conclusion

C 1. The CFI has achieved about 10 Mt CO2-e of real emissions reductions over the last four years. Its additionality rates seem reasonably high and it takes a conservative approach to the measurement of emissions. To date, no specific concerns about permanence or leakage have been identified.

The remainder of this section compares the emissions reductions achieved by the CFI with emissions in the sectors covered by the scheme and with emissions reductions achieved by other policies.

2.3.1. Reductions as a share of sectoral emissions

The land management and waste sectors were estimated to have emissions of about 110 Mt CO2-e in 2012 (or about 20 per cent of Australia’s total emissions in that year) (Table 2).

Table 2: Estimated emissions in sectors covered by the CFI—2011 and 2012

Emissions sector

2011 emissions (Mt CO2-e)

2012 emissions (Mt CO2-e)

Change (Mt CO2-e)

Agriculture

84.6

87.4

2.8

Waste

12.9

11.7

-1.2

LULUCF—deforestation

38.5

32.8

-5.7

LULUCF—afforestation and reforestation

-26.4

-21.9

4.5

CFI sectors—total

109.6

110

0.4

National Inventory Report total (excluding Kyoto Protocol Article 3.4 activities)

553.6

554.6

1.0

CFI sectors—% of National Inventory Report total

19.8

19.8

 

Notes: Negative numbers for afforestation and reforestation represent sequestration. The National Inventory Report total does not include emissions and removals from activities accounted for under Article 3.4 of the Kyoto Protocol (forest management, cropland management, grazing land management and revegetation). Savanna burning emissions are part of the agriculture category in the National Inventory Report.
Source: Climate Change Authority based on Commonwealth of Australia (2014a)

The CFI’s average annual emissions reductions of 2.5 Mt CO2-e represents about a two per cent reduction in emissions from the land management and waste sectors. This is not a precise comparison of like with like, because not all reductions in waste emissions can be credited under the CFI; further, some activities that the CFI covers are not included in the National Inventory Report 2012 (in particular, activities accounted for under Article 3.4 of the Kyoto Protocol).

The average reductions caused by the CFI have been smaller than recent emissions increases in the land sector. In the latest quarterly update to the National Inventory, emissions from the land management sectors are estimated to have increased by about 8 Mt CO2-e (or seven per cent) in the year from March 2013 to March 2014 (Commonwealth of Australia 2014b), about three times the size of the CFI’s average annual emissions reductions. Nevertheless, the CFI helped reduce emissions from what they would otherwise have been.

2.3.2. Reductions relative to other policies

The RET is estimated to have reduced electricity sector emissions by 20 Mt CO2-e between 2001 and 2012 (CCA 2012, p. 12) or about 1.7 Mt CO2-e on average per year. This is somewhat lower on average than the CFI. That said, the RET achieved average annual emissions reductions of more than 3 Mt CO2-e between 2009 and 2012 (Figure 16 in SKM 2012, p. 27), and is projected to deliver substantially more in the years to 2020 (Warburton review 2014, p. 60).

State restrictions on land clearing have contributed to a significant decline in emissions from deforestation. Stronger land clearing regulations were introduced in New South Wales, Queensland and Western Australia from the early 1990s which, along with economic conditions, reduced the rate of first-time clearing of undisturbed forest and contributed to an emissions decline between 1990 and 2011 (Figure 12). Deforestation emissions fell from 140 Mt CO2-e in 1990 to 38 Mt CO2-e in 2011 (CCA 2014b, pp. 308–311). In Australia’s 2010 emissions projections, the Department of Climate Change and Energy Efficiency estimated that changes to vegetation management laws in Queensland and New South Wales would reduce deforestation emissions by 18 Mt CO2-e per year over the period 2008–2012 (DCCEE 2010). This illustrates that land clearing laws have been one of the biggest contributors to Australia’s emissions reductions since 1990, delivering far greater emissions reductions than either the CFI or the RET.

Deforestation emissions increased to 47 Mt CO2-e in 2012 (CCA 2014b, p. 309) but recently decreased to below 40 Mt CO2-e, according to 2014 quarterly estimates. Despite this decrease, the recent relaxation of land clearing restrictions in New South Wales, Queensland and Western Australia (CCA 2014b, p. 311) could, in future, contribute to reversing the large emissions reductions achieved.

Figure 12: Australia’s deforestation emissions, 1990–2012

Source: Climate Change Authority calculations using results from Treasury and DIICCSRTE (2013)

2.4. Costs

The administration of the CFI created a number of transaction costs for project proponents and the government. The level of transaction costs was important as it affected participation in the scheme and the cost to the community of achieving emissions reductions. Direct project costs were also important.

2.4.1. Transaction costs for project proponents

In addition to the direct costs of undertaking a project, project proponents incurred various transaction costs associated with:

  • CFI method development (if an appropriate method was not already available)
  • project applications
  • reporting and verification requirements.

There is very limited public quantitative data on the transaction costs incurred by CFI project proponents. This makes it difficult to determine how important transaction costs have been in determining participation in the scheme. Nonetheless, available information provides some insights:

  • Private method developers reported that methods could cost hundreds of thousands of dollars to develop. These private costs are consistent with the Methodology Development Grants program, which are discussed below.
  • Where project proponents had to develop a new method to participate in the scheme, the cost would likely have presented a significant financial disincentive. Development aside, the method approval process also imposed transaction costs on developers, who commonly observed that the approval process was very time-consuming (for example, Australian Industry Greenhouse Network sub. 13, p. 2) and took ‘longer … than would normally be expected’ (Fares Rural sub. 3, p. 3). Some method developers expressed frustration at long approval timeframes ranging from 12 to 24 months.
  • Project applications for sequestration projects were reported to have significant legal costs. Proponents were required to obtain regulatory approvals, demonstrate they held applicable carbon sequestration rights and obtain the consent of eligible interest holders. Some of these processes involved long waiting times.
  • The costs of complying with reporting and verification requirements varied significantly across activities and methods, and are likely to have reduced participation by some types of projects.

Some project proponents using methods with direct measurement and sampling approaches reported that monitoring and reporting costs constituted a large share of transaction costs. In contrast, some proponents using methods with models and tools to calculate emissions reductions reported these were a much lower proportion of overall costs.

Auditing costs usually ranged from $15,000 to $30,000 per audit. The Aboriginal Carbon Fund (2014) noted that, for savanna projects, audit costs could be prohibitive and could influence a decision about whether to proceed with a project. On the other hand, Clear Environment, a consulting firm that provides audit services, commented that auditing costs were often relatively low in the firm’s experience—usually under two per cent of the returns obtained from credits (sub. 6, p. 1).

The time taken for the CER to approve project reports was initially slow in some cases. However, there is evidence that the CER is reducing its processing times.

2.4.2. Transaction costs for government

The government incurred various transaction costs, including those relating to:

  • developing methods (by the Department of the Environment)
  • administering the scheme (by the CER). The CER’s costs included costs incurred in assessing project applications and reports; providing input to method development processes, education and engagement; and monitoring compliance.

Method development is likely to be the largest transaction cost incurred by the Department of the Environment; however, the direct costs incurred by the Department are not publicly available. Government grants for method development give some indication of government expenditure, however other significant costs (for example, staffing) would have been incurred. The Methodology Development Grants program provided grants ranging from $110,000 to $214,000 for four method development projects, and the Indigenous Carbon Farming Fund allocated $2.7 million in five grants to develop methods and supporting tools—these grants ranged from $60,000 to $1.2 million.

Direct scheme administration costs incurred by the CER in the 2013–14 financial year amounted to approximately $6.1 million. This corresponds to over $40,000 for each project that was in the scheme by the end of 2013–14; or around $1.40 for every credit issued that year. The bulk of scheme administration costs (almost $3 million) were incurred in developing and conducting assessment processes (for example, assessing projects for approval). Education and engagement accounted for over $1.5 million.

While transaction costs are necessary to ensure the environmental integrity of schemes such as the CFI, it is likely that costs have been unnecessarily high in some areas. In particular, the approach to developing methods under CFI—whereby anyone could propose a method—resulted in a number of methods that were very narrowly defined. For example, there are three reforestation and afforestation methods that relate to very similar activities, differing in their specific measurement requirements. The need to develop a new method where there was a very similar method available is likely to have increased transaction costs for some proponents, and discouraged other potential proponents from participating.

The lack of a formal prioritisation process is likely to have directed resources to less worthwhile methods. For example, government and industry resources have been used to develop 10 methods for activities that have had no uptake (Table 3). This partly reflects that some projects moved on to newer methods (for example, savanna burning projects) and that some methods have only become available recently (for example, ‘Measurement based methods for new farm forestry plantations’ became available in August 2014). However, some methods appear to have been developed for activities that are not likely to be commercially viable. For example, there are two methods for dairy activities but no projects, and the Australian Dairy Industry Council (sub. 1) has stated that these activities are not viable at a carbon price of $23 per tonne of CO2-e.

Some stakeholders suggested some rules under the CFI (for example, some measurement, auditing and verification requirements) were too prescriptive, and neither proportional nor well-targeted to the environmental integrity risks that they sought to manage.

To some extent, it is to be expected that transaction costs would be high in the early years of the CFI, as perfect foresight regarding which methods to develop is not possible and experience needs to be gained in how to best ensure scheme integrity. Accordingly, it would be expected that costs would decline over time, and indeed there is some evidence that this has occurred already to some extent.

Table 3: Projects and crediting, by method

Sector

Method

Government or industry licant

Projects

Credits

Agriculture

Destruction of methane generated from dairy manure in covered anaerobic ponds

Government

0

0

 

Destruction of methane from piggeries using engineered biodigesters

Government

0

0

 

Destruction of methane generated from manure in piggeries

Government

0

0

 

Destruction of methane generated from manure in piggeries 1.1

Government

7

56,827

 

Reducing greenhouse gas emissions in beef cattle through feeding nitrate containing supplements

Industry

0

0

 

Reducing greenhouse gas emissions in milking cows through feeding dietary additives

Industry and government

0

0

 

Sequestering carbon in soils in grazing systems

Government

0

0

Forests

Environmental plantings

Government

14

430

 

Mallee plantings

Government

2

22,573

 

Human-induced regeneration of a permanent even-aged native forest

Government

0

0

 

Human-induced regeneration of a permanent even-aged native forest 1.1

Government

3

92,068

 

Measurement based methods for new farm forestry plantations

Industry

0

0

 

Native forest from managed regrowth

Industry

1

0

 

Native forest protection (avoided deforestation)

Industry

33

3,087,341

 

Reforestation and afforestation

Industry

5

188,124

 

Reforestation and afforestation 1.1

Industry

0

0

 

Reforestation and afforestation 1.2

Industry

6

168,299

 

Reforestation by environmental or mallee plantings—FullCAM

Government

2

63,553

Savanna burning

Savanna burning

Government

0

0

 

Savanna burning 1.1

Government

23

467,542

Landfill and waste treatment

Avoided emissions from diverting waste from landfill for process engineered fuel manufacture

Industry

1

64,103

 

Avoided emissions from diverting waste from landfill through a composting AWT technology Industry

Industry

4

111,366

 

Capture and combustion of landfill gas

Government

68

5,875,622

 

Capture and combustion of methane in landfill gas from legacy waste—upgraded projects

Government

4

170,616

 

Diverting waste to an alternative waste treatment facility

Industry

3

161,838

 

Enclosed mechanical processing and composting alternative waste treatment

Industry

2

21,291

Subtotals—methods from industry applicants

 

55

3,802,362

 

Subtotals—methods from government applicants

 

123

6,749,231

 

Totals

 

178

10,551,593

 

Note: Method titles are taken from DOE 2014 and are shortened versions of the legislative instrument titles. Grey shading indicates methods with no projects or credits. ‘Government’ denotes methods developed by the Australian Government. ‘Industry’ denotes methods developed by other participants, including other levels of government. Data current as at 3 December 2014.
Source: Climate Change Authority based on CER (2014a) and DOE (2014a)

2.4.3. Very high-cost emissions reductions have been avoided

The CFI is a voluntary incentive-based scheme, so CFI project proponents would only have participated if they expected the price they would receive for credits would exceed their total costs per credit (comprising direct project costs and transaction costs). Liable entities under the carbon pricing mechanism were the major buyers and, given that an ACCU represented an alternative compliance unit, the carbon price set an effective cap on the ACCU price (the carbon price was fixed at $24.15 in 2013–14). As a result, the CFI almost certainly excluded the types of high-cost emissions reductions that have occurred under some other policies (see, for example, schemes discussed in PC 2011, pp. 123-124).

2.5. Factors affecting participation

Voluntary programs such as the CFI only deliver results if they attract participants. Participation levels in large part determine the amount of emissions reductions achieved. CFI project numbers steadily increased from the beginning of the scheme; however, there is evidence that participation was not as high as it could have been. Three main factors lowered participation in the CFI, and in turn reduced its environmental effectiveness.

2.5.1. Policy uncertainty

The first and most significant factor that deterred participation in the CFI was uncertainty about the future of carbon pricing (on which the price of CFI credits depended) and of climate change policy in Australia more broadly. Policy uncertainty plays havoc with price expectations, in this case about future prices for credits, because a change in policy settings can change demand. Heightened uncertainty over future prices increases the risks around expected revenue streams from a project, deterring some potential participants from taking up a project.

Policy settings that determine demand for credits have largely been external to the CFI legislative framework. Under the carbon pricing mechanism, liable entities could buy credits (formally termed ACCUs) and use them to meet some of their liabilities. This means the price of an ACCU could be expected to reflect the price of a carbon unit, which was fixed at $23.00 in 2012–13 and $24.15 in 2013–14.

CFI participants faced uncertainty about the carbon pricing mechanism since its inception, with the Liberal–National Coalition promising to repeal that mechanism (and doing so in 2014). Even if the carbon pricing mechanism had remained in place, CFI participants faced substantial price uncertainty. The planned link between the carbon pricing mechanism and international carbon markets (such as the European Union’s Emissions Trading System) meant that the Australian carbon price was projected to fall to much lower levels in 2015 (CCA 2014b, p. 130). The Labor Government announced in 2013 that it would bring the link forward from 2015 to 2014 (Commonwealth of Australia 2013).

In consultations for this review, stakeholders overwhelmingly expressed the view that investment in CFI projects had slowed or ceased because of policy uncertainty. Fares Rural (sub. 3) argued that this uncertainty has particularly discouraged projects involving long-term investment; and Country Carbon (sub. 7) submitted that, from the beginning of the scheme, policy uncertainty beyond the 2013 election meant that projects would only be considered if they were low-risk and had short payback periods. Industry analysts (for example, RepuTex 2014, p. 11) similarly emphasised that long-term price certainty is crucial to encouraging project investment, particularly for sequestration projects.

2.5.2. Eligibility and coverage gaps

While policy uncertainty was the most important factor, eligibility gaps and gaps in methods also reduced participation in the CFI. The CFI Act provided the basis for broad participation across the land sector and for legacy waste activities. Credits could potentially be earned for activities that:

  • increased carbon stored in vegetation or soil (sequestration activities; for example, reforestation or improved management of forests)
  • reduced agricultural emissions (for example, emissions from livestock production or fertiliser use)
  • reduced emissions from waste deposited at a landfill before 1 July 2012.

Projects were ineligible, however, if the project activity was not on the positive list, was on the negative list, or was excluded through other specific restrictions in the Act. Even if a project was eligible under these criteria, it still could not participate if there was no applicable method.

Eligibility constraints to prevent perverse impacts

Some eligibility constraints have been the result of efforts to reduce perverse impacts. For example, the negative list excluded projects that involved planting weed species and reforestation activities judged to have unacceptable risks of negative impacts on water availability.

Some constraints that aimed to prevent perverse impacts may have been overly restrictive. For example, projects that involved any harvesting of native forest, or using material obtained from a native forest by clearing or harvesting, were excluded. This avoided providing a perverse incentive to clear native forest; excluding, for example, projects to clear low-density native forest and plant higher-density forest which sequestered more carbon. This also meant, however, that the CFI excluded projects to increase carbon sequestration through changing the timing and management of native forest harvesting. Some analysts have argued that activities that delay harvest could potentially have provided a large amount of emissions reductions at low cost (Macintosh 2012, p. 18).

The Australian Forest Products Association (sub. 9, p. 2) also argued that:

the negative list remains a major impediment that prevents a large number of forestry and afforestation projects from playing a role in the CFI. It imposes unnecessary constraints that effectively exclude forestry projects from the CFI, such as the restrictions on tree planting in regions with average annual rainfall above 600 mm.

While the concerns about water use that led to these constraints would ideally be dealt with through broader water policy settings, rather than through the CFI, it not clear to the Authority whether current water policy provides adequate protection.

Positive list gaps

Eligibility constraints have also arisen where activities are not included on the positive list. For example, the positive list did not include projects to avoid harvesting on public land (such projects are eligible on private land: CFI Regulations, Reg. 3.28(1)(o)). Analysis by Perkins and Macintosh (2013) and Macintosh (2013) suggested that such projects could offer substantial emissions reductions, potentially at a low cost.

Harvesting rates may decline for commercial reasons, such as reduced demand from wood processing facilities, or from other policy motives, such as ceasing harvesting to conserve biodiversity. Accordingly, the decision to exclude harvesting of native forests on public land as an eligible activity may reflect valid concerns about additionality.

Gaps in method availability

When available methods are compared with identified emissions reduction opportunities in the land sector, gaps become apparent. Where a method was not available, the CFI could not access the emissions reduction opportunities. This is not to suggest that the ideal is to have no gaps. Methods are time-consuming and costly to develop and, therefore, should only proceed where the benefits are expected to outweigh these costs.

Establishing commercial-scale forestry plantations was not covered by a CFI method and was one example of such a gap. Even though establishing a new long-rotation hardwood plantation was on the positive list (CFI Regulations, Reg. 3.28(1)(q)), there was no method for this activity. There were no other positive listings for establishing forest for commercial harvest (for example, establishing softwood plantations). Smaller-scale plantations could participate through the ‘Farm forestry’ method; however, this does not apply to plantations at a commercial scale (in areas generally considered to have sufficient rainfall for commercial forestry, this method allows plantations to be no more than 100 hectares and to occupy no more than 30 per cent of a farm: CFI Regulations, Reg. 3.27).

This appears to be a significant gap, given that ClimateWorks (2013, p. 40) identified establishing forestry plantations (‘reforestation of marginal land with timber plantation’) as a significant source of potential emissions reductions (4.3 Mt CO2-e of potential to 2020). Further, ClimateWorks identified establishing plantations to be a relatively low-cost source of emissions reductions (Figure 13).

As commercial plantations can have strong commercial drivers, the absence of methods could possibly be justified by additionality concerns. However, such blanket exclusions can rule out genuinely additional projects that offer significant, low-cost emissions reductions. The Australian Forest Products Association (2014, p. 8) argued that a:

key impediment has been the blunt interpretation of additionality, particularly for commercial plantation forest projects. The reliance on a common practice test - defined simply as an activity that represents 5 per cent of existing land use in a region - fails to acknowledge the spatial and historical (temporal) factors that have generated plantation investment.

This suggests that it may have been possible to identify particular types of plantations (possibly in particular regions) that would be unlikely to be established in the absence of revenue from the CFI.

Gaps also arose where CFI methods were narrow, limiting coverage of emissions reduction activity. This partly arose due to private method development—in some cases, proponents wrote prescriptive methods to suit a particular project (and perhaps also to prevent others being able to free-ride on their investment). For example, the reforestation and afforestation series of methods each applied a slightly different measurement method for the same project type: establishing forest on clear land (CER 2014b).

2.5.3. Transaction costs

As discussed in section 2.4, there is some evidence that transaction costs deterred participation. High method development costs and long approval timeframes are likely to have discouraged method development, which then reduced project entry. Current and potential participants reported that high transaction costs deterred participation in some cases. In particular, costs associated with measurement and reporting were often high due to rigorous method requirements, and audit costs were prohibitive in some cases. Measurement and verification was often very expensive for projects where emissions reductions are directly measured (for example, for soil carbon or reforestation projects).

Figure 13: Sectoral investor abatement cost curve

Source: ClimateWorks 2013, p.13

Transaction costs are necessary in schemes like the CFI to protect environmental integrity. Therefore, the deterrent effect of transaction costs is only a concern to the extent that costs were higher than necessary. As discussed in section 2.4, transaction costs have been unnecessarily high; although there is evidence that some are declining.

Conclusion

C 2. Participation in, and emissions reductions from, the CFI have been constrained, principally because policy uncertainty led to low price expectations and a lack of confidence in longer-term returns. Participation has also been affected by gaps in method coverage and broad exclusions, and relatively high transaction costs.