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The Emissions Reduction Fund for Dummies

We’ve looked at Direct Action and the Emission Reductions Fund on many occasions over the last few years, especially to determine whether councils would be able to get involved in the “reverse auctions” through energy efficiency projects on council assets (see here, here and here)

The first reverse auction is only a few months away however the Municipal Association of Victoria, ICLEI Oceania and Ironbark have released the results of a council survey indicating that councils will have few projects that would be eligible or would generate sufficient greenhouse reductions in order for participation in the ERF to be financially viable. So we thought it was a good time to revisit the federal government’s flagship greenhouse emissions reduction program. We also attended a great information session at Norton Rose headed by Elisa de Wit, partner and head of climate change, in mid-February that gave us some new insights.

So here’s an update, a run-down and some thoughts on ERF opportunities, particularly from a local government point of view.

First things first

Alexi Lynch

Alexi Lynch

Since first announced before the 2010 federal election, we’ve found Direct Action and the ERF process quite confusing and have decided that by simplifying the language we are starting to get a better hold on things internally. By using the term “dummies” we don’t mean to suggest that readers or council staff are in fact “dummies”, we are just trying to make this as simple as possible and add some brevity.

Also apologies to our friends at John Wiley & Sons. We have nothing against their extraordinarily successful “dummies” books. Everyone has read them, even those who say they haven’t.

The basics

In a nutshell, the ERF involves the government purchasing lowest cost carbon abatement from a wide range of sources to reduce greenhouse emissions. The Government has provided $2.55 billion to establish the ERF. The ERF falls under the Carbon Farming Initiative, which has been around since December 2011, mainly dealing with land sector emissions reduction.

The Clean Energy Regulator will administer the ERF scheme once the final legislative rules are made, expected to be in the next few weeks. They will administer three key components of the scheme:

1. Crediting emissions reductions

Crediting involves determining an amount of emissions reductions delivered by a project. The CER will issue one Australian Carbon Credit Unit for each tonne of emissions reductions and credits can then be sold to the government through a reverse auction.

2. Purchasing emissions reductions

The CER will run competitive reverse auctions to purchase emissions reductions at the lowest available cost. The CER will then enter into contracts with successful bidders with contracts guaranteeing payment in return for delivery of emissions reductions.

3. Safeguarding emissions reductions

The safeguard mechanism will ensure that emissions reductions paid for through the ERF are not offset by significant increases in emissions elsewhere in the economy. The safeguard mechanism will commence on 1 July 2016 – just in time for the next federal election.

So you want to partake in the Emissions Reduction Fund (ERF)?

First let’s find you a project.

Projects must satisfy one of the many methodologies available plus a range of other criteria. For example, the project must lead to “additional” carbon abatement; you have to be of “good character” etc.

Onto “methodologies”, which could also mean “types of projects”. While there are a dozen or so methodologies slated for inclusion in the ERF, at the moment there are only three that have been finalised. They are for landfill gas, alternative waste and commercial buildings. Public consultation is now closed for other methodologies including:

  • aggregated small energy users
  • avoided clearing of native regrowth
  • avoided land clearing
  • beef cattle herd management
  • coal mining
  • designated Verified Carbon Standard projects
  • facilities
  • fertiliser use efficiency in irrigated cotton
  • industrial fuel and energy efficiency
  • reforestation
  • savanna fire management
  • sequestration of carbon in soil using modelled abatement estimates
  • transport
  • wastewater treatment

With the first auction now due for April it is highly likely that the first projects will all be legacy CFI projects that are ready to go under the landfill gas or alternative waste methodologies. You can find a list of these types of projects here to get an idea of what you can expect to see in the first auction.

If you can get a buildings project up then all power to you because the methodology was only released a few weeks ago and we think councils will generally be excluded from this methodology as outlined at the end of this The Fifth Estate article a few weeks ago.

A little on the “additionality” test

This is nothing new; all carbon abatement or offset schemes require projects to satisfy additionality criteria, but it’s worth noting there are three key tests at the moment.

First there’s the Newness Test, which essentially means a project has not begun or project implementation has not yet begun, but there is some wriggle room here. For example, “implementation” includes making investment decisions, commencing construction or acquiring assets. So if a project is in a council’s strategic plan or capital works plan then it may be considered additional because a final “investment decision” has not yet been made… Maybe!

Second there’s the Regulatory Additionality Test, which is pretty straight forward. This means that the project can’t be something that the organisations or councils are legally obliged to do.

Finally there’s the Government Program Test, which means the project can’t be part of another government program. There are certain programs included here. If the project is gaining funding through the Renewable Energy Target, NSW Energy Savings Scheme or Victorian Energy Efficiency Target then you cannot also be part of the Emissions Reduction Fund. This is different to programs such as the Community Energy Efficiency Program, with which you could also claim energy efficiency certificates through state-based schemes.

Creating or selling or crediting

Let’s imagine for a second that we found you a project.

Let’s imagine that your council does in fact have a massive commercial building that satisfies the requirements of the buildings methodology.

You have a commercial building (or hotel or shopping centre… however not many councils run these) that has a NABERS rating and the potential to improve by one star, and can deliver over 2000 tonnes of abatement. Tick.

You can demonstrate that you are a “fit and proper person”. Tick.

You can demonstrate the credibility of your emissions reduction estimates. Tick.

Your project is “additional”. Tick.

You now need to register your project with the CER and if they believe that your project ticks all the boxes you can create Australian Carbon Credit Units, or ACCUs. Now you’re ready to get involved and sell your ACCUs, which can be done through one of the upcoming reverse-auctions (note: there are other ways you can sell your ACCUs including “tenders” or “other processes” but we’re not sure how this works. We think this means that if you have over 250,000 tonnes then you can go straight to the front of the queue and have a quiet discussion with the Department or CER.)

This is how the auctions will work:

  • You put in a “sealed bid” or silent bid with a price per unit of your ACCUs (you will not be able to see what other proponents are bidding)
  • You have only one bid per project per auction
  • You must have a minimum 2000 tonnes or 2000 ACCUs
  • The lowest­-cost projects will be selected out of the auction

If you win

Well, firstly, well done you. You’re an #ERF #directaction #winner.

You will be paid the price that you bid and will enter into a contract with the government, which will guarantee the price and payment for the future delivery of emissions reductions – however there’s no payment until the ACCUs are created and delivered. The primary contract requirement is that you deliver the agreed volume of ACCUs through your project in accordance with your delivery schedule.

So now it’s time to deliver.

As you implement your project, you create abatement and create your ACCUs, you “sell” them back to the government via the CER for your agreed upon price at the auction. Or the aforementioned tender process. Or the aforementioned “other processes”.

Note that once you’ve signed a contract with the CER the ACCUs can actually come from anywhere. There is an expectation that a secondary markets for ACCUs will develop and you could purchase from there (presumably at a higher cost that what you originally bid… but who knows). If you fail to deliver your ACCUs from your project then you could head down to the secondary market and purchase ACCUs from there. If you still can’t deliver on what you said you would then you will probably have to pay damages, which will amount to the new cost of ACCUs (at the time of non-delivery) minus what your ACCU bid was, which presumably be lower.

You will also have to undertake at least three audits per project, with the timing of these to be determined by the CER, as well as other administrative stuff.

Confused yet?

Good.

Not confused?

Perhaps it’s time to start identifying potential projects? As mentioned in the “additionality” and “newness” tests above, these may be from existing identified budgeted opportunities. Even if it’s a large capital works project it appears that’s okay as long as you have not made an investment decision, started implementation on-the-ground or purchased anything. In fact, the more documentation you have may demonstrate maturity of a project when you register it with the CER. We imagine there’ll be a fine balance between what is or is not considered “new”.

Potential council projects

However, we don’t think there’s much potential at the moment.

  • Landfill gas – sure, if you’re yet to do anything on these sites, which is unlikely
  • Alternative waste – sure, if you’re yet to do anything on these sites
  • Large buildings – nope, unless you have a NABERS-rated office building
  • Small Buildings – your leisure centres, MCHC centres, kindergartens, libraries etc. are currently not eligible
  • Street lighting – nope

What about aggregating projects?

Last year we said the order of the day for councils would be “aggregation, aggregation, aggregation”. Man were we wrong. Despite the rhetoric beforehand – and even statements directly from the Department that councils could be involved in aggregation – we’re not sure how this can actually be done.

It’s also worth noting that councils themselves don’t appear to be showing much interest in the ERF. The survey we worked with MAV and ICLEI Oceania late last year attempted to determine whether there was scope for the MAV and/or ICLEI Oceania to play a role as an “aggregator” of abatement for Victorian councils.

You can view the report in full here but the gist of it is that few, if any, councils have projects that would be eligible and would generate sufficient greenhouse reductions in order for participation in the ERF to be financially viable. Councils would struggle to compete with other businesses and sectors, and at this stage there doesn’t seem to be any scope or need for the bodies like MAV and/or ICLEI Oceania to play a role as an “aggregator” of abatement for councils.

This also reflects our understanding and what we hear “on the ground”. Councils aren’t that interested, don’t really understand it and are unlikely to get involved. At the Government and Sustainability Conference in Sydney late last year, we facilitated a panel session with councils from Pittwater (NSW), Tweed (NSW), Port Phillip (Vic) and Whittlesea (Vic), discussing the question: “Given the reform agendas we’re seeing at a federal level, how do councils maintain the pursuit of sustainable outcomes in the tighter financial climate?”

Our first question was whether anyone had investigated Direct Action (“no”) and whether they would look into it (“probably not”) and then whether they could explain the basics (“no”). So we threw to the audience and got the same response.

From here

If the federal government does indeed want to engage with local government on the ERF then there needs to be more than what we’ve seen so far because at the moment the structure is a stumbling block for the sector. Councils have been leading the rest of the country in energy efficiency and emissions reduction for over a decade but need more support and the ability to fairly aggregate if there is to be any involvement.

During 2014 several meetings were held with environment minister Greg Hunt and his advisors to determine the part to be played by the local government sector in reducing carbon emissions and participate in the ERF. The minister was supportive of an “Action on Carbon Emissions” program put forward by ICLEI Oceania and Ironbark recognising the important role of local governments in scaling up local community carbon action.

However, as the survey has revealed, if the federal government wishes to have local councils participate in the ERF they will need to do more than just express support for their participation. ICLEI Oceania’s regional director Martin Brennan has called on the minister to provide seed funding to enable the local government sector to “act and aggregate” their local carbon emission reductions as there is no doubt that significant reductions can achieved when federal and local governments work together.

Alexi Lynch is business leader – sustainability strategy at consultancy Ironbark Sustainability.

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Comments

7 Responses to “The Emissions Reduction Fund for Dummies”

  • Louis Bettini says:

    Is there a particular reason why you think there is little opportunity for street lights to be a potential project?

    • Alexi Lynch says:

      Mowgli – If the efficiency initiatives have already been implemented then it would not satisfy the “additionality” test. I can’t see how there’d be any wriggle room here, it’s pretty straight forward.

      Louis – at this moment there is no opportunity for street lights. As future methodologies are rolled out, let’s hope street lighting is included, as slated over the last few years – perhaps through the “aggregated small energy users” or “industrial fuel and energy efficiency” methodologies. Perhaps you know something we don’t?!

      Given the potential for low-cost abatement (depending on the capital costs… which will depend on the distribution business; current stock; new technology etc.) then it would be one area where councils may be able to be involved. The first auction will provide an indication of whether street lighting can compete from a cost of abatement perspective.

      I’m sure the Minister – and the department – would like to see councils and communities involved in the ERF, we just want to see more opportunities and it’s important to keep reminding them of this critical area.

  • Mowgli says:

    So based on the above, a recently built-turned-operational gas-fired power station wouldn’t have a claim under the ERF for efficiency initiatives implemented two years ago?

  • Alexi Lynch says:

    Couldn’t agree more Greg. Councils and LG associations continue to promote and implement energy efficiency and GHG reduction however there’s a pretty big opportunity for the Feds to re-engage LG in order to build support and participation in the ERF (or indeed the other Direct Action pillars.)

    Local government could play their part in ensuring that their operations and communities are part of the ERF solution. But not through the initial three methodologies and not through the ones released earlier today – coal, transport, and land and energy sectors. There’s a risk that the ERF is ending up exactly as critics said it would – using taxpayers money to pay big business to pollute with no way for other sectors to get involved.

    Let’s hope future methodologies can break this mould so councils can aggregate, report and engage their communities. An ERF program or component designed for councils and communities would be a great start and could lead to greater understanding and renewed commitment to carbon abatement

  • Greg Hunt says:

    Yes indeed, thanks for this analysis. Greg Hunt MP suggested to us that he saw a role for alliances as as aggregators within the ERF. Like you, we do not see how this can happen. If the ERF is to continue it has to include some component that promotes community participation for in the long-term, we need to orient people’s thinking to the conecept of universality – that everyone has a role to play in emission reductions.

    Cheers

    Greg Hunt
    SECCCA

  • Alexi Lynch says:

    Great point Fran… agreed, critical for councils to be on top of the ERF and to respond to opportunities around the safeguard mechanism.

    Theoretically there could still be opportunities for councils to work with their community on aggregating abatement depending on the structure of the to-be-determined methodologies. But my guess is that this pretty unlikely – it’s not exactly council core business. Think of things like the Energy Savings Scheme (ESS) in NSW and Victorian Energy Efficiency Target (VEET) – councils don’t knock on the doors of residents to create energy efficiency certificates, third parties/other businesses do.

    Finally with a bit of luck we’ll see some opportunities in the final methodologies. Minister Hunt was repeatedly clear on the prospects of councils or local government bodies to act as “aggregators”, so hopefully this will still come to the fore.

  • Thanks for the update – very useful. Although there may not be a direct role for councils to participate in the ERF (through their own projects or aggregating others’ projects), it will still be important for councils to know what the ERF means for local businesses and the economy in general. Local government should check the Government’s draft of the safeguard mechanism when it’s released and respond to any consultation opportunities because this may be the only real check on emissions pursuant to Direct Action. The safeguard needs to be strong.

    Fran Macdonald, Coordinator, Western Alliance for Greenhouse Action

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