The ERF White Paper: what more have we learned?

The Emissions Reduction Fund (ERF) White Paper expands on the Green Paper, without changing the direction of the key design elements to any significant degree.

Points that have been developed to the point that a clear consensus appears to have been reached are:

  • The total funding pool available has increased to $2.55 billion over the four year forward estimate period. This brings funding into line with the figure proposed in the original Direct Action Plan published in 2007.

  • The ERF can be considered to be made up of two components:

1. the creation and purchase of abatement credits, and
2. the safeguard mechanism.

  • It is proposed that the ability to register, create and auction “emission reductions” will commence from 1 July 2014 or as soon as the relevant legislation is passed (whichever comes first).

  • There is an emphasis on “streamlining” the requirements for ERF proponents. Generally, this covers either a risk-based audit approach (meaning fewer audits for smaller or low risk projects) or reduced record keeping and reporting expectations. However Energetics believes that neither of these should come at the expense of the integrity of the abatement. The ultimate aim is to meet Australia’s international obligation to reduce national GHG emissions target to 5% below 2000 levels by 2020.  

  • The paper says the Government will, at its discretion, use special arrangements to enter into ERF contracts for projects that deliver large-scale abatement above 250,000 tonnes of CO2 a year, on average.

  • The exposure draft for the legislation establishing the safeguard mechanism will be developed over the course of the next 12 months for implementation on 1 July 2015.

  • The ERF will be subject to review at the end of 2015, six months after the safeguard mechanism is proposed to commence operation. The white paper says that this will be a review of “operational elements” so it is expected that any resulting changes will be relatively minor, rather than significant modifications to the ERF design.

Major policy elements related to the safeguard mechanism are still to be developed and the Government will work with business to develop compliance mechanisms.

Major elements in the White Paper:

Methodologies

In order to be eligible to participate in the ERF (i.e. receive funding), projects must comply with a methodology for estimating emissions reductions.

  • Methodologies development and approval will be the responsibility of government (technical working groups are already working on the development of draft methodologies)

  • Existing CFI methodologies should be transitioned into the ERF (but may be “streamlined”)

  • Development of new methodologies will be prioritised by the government based on feasibility, potential for emissions reduction and other criteria

  • It is uncertain how simple (or otherwise) the transition of methodologies from other schemes such as the Clean Development Mechanism (CDM) will be.

Linkage with state based energy efficiency schemes

A new point raised in the ERF White Paper surrounds the potential for complementary linkages between the ERF and existing state based energy efficiency schemes such as the Victorian Energy Efficiency Target (VEET) and the NSW Energy Savings Scheme (ESS). Energy efficiency methodologies are already established by both schemes and there is potential to use these as the basis for methodologies for the ERF.

Similar to the state schemes, the White Paper allows for “aggregated projects” – where multiple smaller projects are rolled together into one approval and bid together.

Operation of the reverse auction and pricing abatement

The Clean Energy Regulator will be responsible for the administration of the auction process. The CER will determine a “benchmark price” (the maximum price to be paid per tCO2-e) prior to the auction. The CER will have the discretion to release this price prior to the first auction round. Contracts will then be raised with projects associated with the lowest priced 80% of emissions below the benchmark.

Figure 1:

ERF-reverse-auction-explanation.png

As described in Figure 1 above, the successful bid will be at the bid price of the project’s proponent. The weighted average $/tCO2-e will be published following each auction, and the published figure which can be used by interested parties as guidance for bidding into the auction. We anticipate an initial price of approximately $12 per tonne of emission reduction.

Pre-qualification of projects

The Clean Energy Regulator (CER) will approve projects against methodologies. To become eligible to participate in the reverse auction process, a project proponent must meet pre-qualification criteria which include:

  • Ability to generate the forecast emissions within the indicated timeframe

  • Meets definition of “additionality” – needs to be a project that is additional to “normal business practice”

  • Is “genuine” – project would not have occurred without ERF funding, is verifiable and counts towards Australia’s emissions reduction target.

Contract and abatement

Once a party is successful in the reverse auction, contracts will be negotiated.  The period over which a project can create Australian Carbon Credit Units (the crediting period) will range from three to ten years depending on the project type. However, the maximum contract period (number of years that the ERF will contract to purchase ACCUs from a specific project) is five years. “Where a project’s crediting period exceeds the contract period, excess credits can be sold into the voluntary or “make good” markets.  Where a proponent is unable to provide the ERF with the contracted amount of emission reductions, they will need to “make good” the difference by procuring alternative reductions. 

One key difference between the proposed ERF and state schemes is that the White Paper rules out any suggestion of up-front payments for deemed reduction in emissions. Payment will only provided as, or once, the reductions have been achieved.

Next steps

There is still opportunity for interested parties to comment on the progress of the ERF. Figure 2 below outlines the future timeline for comment. Entities that are concerned that the White Paper does not adequately address feedback provided on the Green Paper will have further opportunity for consultation. 

Energetics can help assess the issues and opportunities for your business. 

Figure 2:

ERF-timeline.png

 

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Jody Asquith

Principal Consultant

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