House of Representatives

Explanatory Memorandum

Circulated By the Authority of the Minister for Climate Change and Energy Efficiency, the Honourable Greg Combet Am MP

Amendments to the Carbon Farming Initiative

Outline of chapter

5.1 This chapter provides explanatory material on amendments to be made to the Carbon Credits (Carbon Farming Initiative) Act 2011.

Context of amendments

5.2 The Carbon Farming Initiative (CFI) is a key component of the Government's plan for a clean energy future. The CFI legislation fulfils the Australian Government's commitment to develop legislation to give farmers, forest growers and landholders access to domestic voluntary and international carbon markets. This will begin to unlock the abatement opportunities in the land sector which currently makes up 23 per cent of Australia's emissions.

5.3 The legislation underpinning the CFI is the Carbon Credits (Carbon Farming Initiative) Act 2011 ( the CFI Act), the Australian National Registry of Emissions Units Act 2011 and the Carbon Credits (Consequential Amendments) Act 2011.

5.4 The Clean Energy Bill 2011 establishes a link between the carbon price mechanism and the CFI to increase incentives for land and waste sector abatement.

Summary of new law

5.5 The amendments ensure that the CFI complements the carbon price mechanism, assist existing activities to transition to the CFI and address some related technical implementation issues.

Detailed explanation of new law

Amendments commencing on Royal Assent, or the commencement of section 3 of the Carbon Credits (Carbon Farming Initiative) Act 2011, whichever is the later

References to foreign registries

5.6 Amendments remove references to 'foreign non-Kyoto registry' and substitute with references to 'foreign registry'. This matches similar amendments in the Australian National Registry of Emissions Units Act 2011. [Schedule 5, items 1-3]

References to Electronic Transactions Act 1999

5.7 The amendment removes the reference to sections 14(3) and (4) of the Electronic Transactions Act 1999 from section 7(6) of the CFI Act, and replaces it with a reference to section 14A of that Act. This reflects amendments made to that Act . [Schedule 5, item 4]

Prescribed non-CFI offsets schemes

5.8 Section 27(4)(n) of the CFI Act operates to prevent offsets projects from being covered by both the CFI and a prescribed non-CFI offsets scheme. If a project proponent seeks to be covered by the CFI, it must first exit the prescribed non-CFI offsets scheme and seek a determination under section 95 of the CFI Act (sections 23(1)(e) and 92). This determination will increase the relinquishment requirements in relation to sequestration projects by the number of credits issued to the project while covered by the prescribed non-CFI offsets scheme. This ensures that permanence obligations are carried over from the previous scheme.

5.9 Section 27(4)(n) is repealed and other consequential amendments are made. The effect of this is that a project can be covered by both the CFI and a prescribed non-CFI offsets scheme. Prescribed non-CFI offsets schemes, for these purposes, will include the Commonwealth Government's Greenhouse Friendly Initiative and the NSW and ACT Governments' Greenhouse Gas Reduction Scheme (GGAS). Other international and voluntary carbon offset schemes and government programs that fund greenhouse gas abatement could also be prescribed . [Schedule 5, items 9, 11-12, 16]

5.10 The amendments ensure that there is no double counting of abatement generated by a project while covered by both the CFI and a prescribed non-CFI offsets scheme. If a project was or is covered by a prescribed non-CFI offsets scheme, the unit entitlement in relation to the project will be reduced by the number ascertained in accordance with the regulations. The regulations will require the project proponent to report any abatement credited or otherwise accounted for under a prescribed non-CFI offsets scheme since the commencement of CFI coverage. The project proponent's unit entitlement will be reduced by reference to any amount so reported . [Schedule 5, items 5-8]

5.11 The amendments also deal with the carrying over of permanence obligations in relation to sequestration projects transitioning into the CFI from certain other offsets schemes. The Government has indicated that it will enforce permanence obligations in relation to the Greenhouse Friendly Initiative and GGAS, thus facilitating the winding up of those schemes . [Schedule 5, item 10] [Schedule 5, item 17]

5.12 Landfill legacy emissions avoidance projects that are or were covered by a specified prescribed non-CFI offsets scheme will be exempted from the regulatory additionality test in section 41(1)(b) of the CFI Act. This removes a potential obstacle to the transition of Greenhouse Friendly and GGAS landfill projects into the CFI. Regulatory additionality will instead be taken into account in landfill methodologies by assuming a specified percentage of emissions from landfills are reduced for regulatory purposes. This will achieve administrative simplicity and certainty for the industry . [Schedule 5, item 15]

Regulatory additionality

5.13 One requirement for eligibility to participate in the CFI is that the offsets project passes the additionality test (section 27(4)(d)). The additionality test is set out in section 41(1) of the CFI Act. There are two aspects to the test:

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The project must be of a kind specified in the regulations (the positive list) (section 41(1)(a)); and

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The project must not be required to be carried out by or under a law of the Commonwealth, a State or a Territory (regulatory additionality) (section 41(1)(b)).

5.14 The amendment enables regulations to carve out exceptions to the regulatory additionality test. The regulations will ensure that projects are not disqualified from participation in the CFI because of requirements arising out of arrangements voluntarily entered into by the project proponent, such as requirements arising out of a conservation covenant. It is not intended that projects will be disqualified merely because responsibilities voluntarily assumed by the project proponent are backed up by legislative requirements . [Schedule 5, item 13]

Transitional arrangements in relation to the Interim Domestic Offsets Integrity Committee

5.15 Section 254 of the CFI Act establishes the Domestic Offsets Integrity Committee (the statutory DOIC). The statutory DOIC has a number of functions under the CFI Act, the main one being the assessment and endorsement of proposals for methodology determinations. Prior to the commencement of the CFI Act, an interim DOIC was established administratively, and given the mandate to assess and endorse proposals in the pre-commencement period. Sections 131 and 132 of the CFI Act operate to ensure that:

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If an application was made to the Interim DOIC for the endorsement of a proposal, but the Interim DOIC neither endorses nor refuses to endorse the proposal, then, following commencement of the CFI Act, the application is taken to have been made to the statutory DOIC (section 131). The statutory DOIC must then consider the application afresh.

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If an application was made to the Interim DOIC for the endorsement of a proposal, and the Interim DOIC endorses it, then, following commencement of the CFI Act, the endorsement is taken to have been made by the statutory DOIC (section 132). The Minister can then proceed to make a determination giving effect to the proposal in accordance with section 106.

5.16 The amendment addresses the situation where an application for the endorsement of a proposal has been received by the Interim DOIC, and the Interim DOIC has commenced the assessment of the proposal- including by publishing the proposal on the Department's website and inviting public submissions- but has not yet endorsed the proposal prior to commencement of the CFI Act. The amendment operates to deem the actions taken by the Interim DOIC to have been taken by the statutory DOIC. The effect of this is that the statutory DOIC will not be required to duplicate the consultation already undertaken by the Interim DOIC, but can, in effect, pick up where the Interim DOIC leaves off. In particular, if the Interim DOIC has completed 30 days of public consultation in relation to a proposal, the statutory DOIC will not be required to undertake any further period of public consultation . [Schedule 5, items 18-19]

5.17 The amendment also addresses the pre-commencement actions of the Interim DOIC in relation to the positive list (i.e. the regulations made for section 41(1)(a) of the CFI Act). The Minister is required to request the statutory DOIC to advise the Minister about the projects that should be included in the positive list: section 41(2). The Minister has requested the Interim DOIC for such advice in relation to the initial set of activities to be included in the positive list on scheme commencement. The amendment ensures that this request fulfils the Minister's obligations. Activities will be added to the positive list over time, as new abatement activities are identified or methodologies are developed, and the statutory DOIC will be consulted in relation to the addition of those activities . [Schedule 5, item 14]

Ownership of Australian carbon credit units

5.18 The Clean Energy Bill 2011 expressly provides legal interests in carbon units to their registered holder. Amendments to the CFI Act are required to provide similar certainty about ownership of Australian carbon credit units.

5.19 If there is an entry for an Australian carbon credit unit in a person's Registry account, then that person is the legal owner of the unit, subject to the requirements of the Australian National Registry of Emissions Units Act 2011. [Schedule 5, items 20-22]

5.20 The transmission of Australian carbon credit units by force of law is of no force until the units are registered in the Registry . [Schedule 5, item 22A]

5.21 This would protect a bona fide purchaser of Australian carbon credit units if they purchased the units for value and without knowledge of any defects in the registered holder's title to the affected units. Defects in title might arise, for example, if an Australian carbon credit unit was transferred in error and sold on by an unintended recipient before the error is detected, or transferred fraudulently in cases such as where evidence of a transmission by operation of law is false, or there is unauthorised access to a Registry account.

5.22 Regulations may provide that legal interests in Australian carbon credit units are subject to any equitable interests that might be registered in relation to them in the Registry. Security interests in relation to Australian carbon credit units would be registered in the Personal Property Securities Register in accordance with the Personal Properties Securities Act 2009. [Schedule 5, item 23]

5.23 Similar amendments have been made for Kyoto units and prescribed international units, discussed in chapter 4.

Publication of concise description of the characteristics of Australian carbon credit units

5.24 Section 162 of the CFI Act provides for the publication of a concise description of the characteristics of Australian carbon credit units by 31 December 2011. The amendment provides for the concise description to be published within 6 months of scheme commencement, and ensures that the Administrator has sufficient time to publish the required information following scheme commencement . [Schedule 5, item 24]

Membership of the DOIC

5.25 The amendment increases the number of DOIC members who can be Commonwealth Scientific and Industrial Research Organisation officers from one to a maximum of two. This helps ensure that the DOIC can include sufficient members with the appropriate level and breadth of technical expertise . [Schedule 5, items 25-26]

Disclosure of protected information to certain persons and bodies

5.26 Section 276 of the CFI Act enables the Administrator to disclose protected information to certain persons and bodies. The Australian Carbon Trust Limited, referred to in section 276(1)(b), has changed its name to Low Carbon Australia. The amendment reflects this change . [Schedule 5, item 27]

5.27 The amendment also adds the Australian Transaction Reports and Analysis Centre (AUSTRAC) to the list of bodies to which protected information may be disclosed. This will enable the Administrator to disclose information to AUSTRAC to enable AUSTRAC to compile and analyse information in relation to markets for Australian carbon credit units, for instance . [Schedule 5, item 27]

Disclosure of publicly available information

5.28 Section 280 of the CFI Act provides that entrusted public officials may disclose protected information if it is already publicly available. The amendment limits this to the disclosure of information that has already been lawfully made available to the public. This is to ensure that the section does not authorise the further disclosure of information that has been unlawfully disclosed . [Schedule 5, item 28]

Amendments commencing at the same time as section 3 of the Clean Energy Act 2011 commences

5.29 The Clean Energy Regulator will take over the functions of the Administrator of the Carbon Farming Initiative on commencement of the Clean Energy Bill 2011. Bulk amendments are made to replace the term 'Administrator' with 'Regulator' to reflect this . [Schedule 1, Part 1, items 51-88, 88A, 89-97, 99] These do not include amendments of occurrences of "Administrator" or "Administrator's" in bold italic font.

Amendments commencing on 1 July 2012

Voluntary cancellation of carbon units and Australian carbon credit units

5.30 Part 14 of the Carbon Credits (Carbon Farming Initiative) Act 2011 provides for the voluntary cancellation of Australian carbon credit units until the carbon pricing mechanism commences, at which point the Part will be repealed . [Schedule 1, Part 2, item 257-258] These provisions are now included in the Australian National Registry of Emissions Units Act 2011, along with provisions for the voluntary cancellation of carbon units, and are discussed in chapter 4.

Publication of information about voluntarily cancelled carbon units and Australian carbon credit units

5.31 Division 3 of the Carbon Credits (Carbon Farming Initiative) Act 2011 provides for the publication of information about voluntarily cancelled Australian carbon credit units until the carbon pricing mechanism commence and the Division is repealed . [Schedule 1, Part 2, item 258] These provisions are now included, along with provisions for the publication of information about voluntarily cancelled carbon units, in the Australian National Registry of Emissions Units Act 2011 discussed in chapter 4.

Reviews of the Carbon Farming Initiative

5.32 The Climate Change Authority will also undertake reviews of the Carbon Credits (Carbon Farming Initiative) Act 2011. Consequently, amendments are made which reflect this change.

5.33 The Authority must make provision for public consultation and provide a copy of the report to the Minister . [Schedule 1, Part 2, item 258A]

5.34 The Authority must publish a copy of the report on its website at the time it is provided to the Minister . [Schedule 1, Part 2, item 258A]

5.35 The Authority may include recommendations to the Commonwealth Government in its review. If recommendations are made that the Government should take a particular action, the Authority must analyse the costs and benefits of that action . [Schedule 1, Part 2, item 258A]

5.36 The Authority is not prohibited from taking other matters into account when formulating a recommendation . [Schedule 1, Part 2, item 258A]

5.37 Any report containing recommendations must include the reasons for those recommendations . [Schedule 1, Part 2, item 258A]

5.38 If recommendations are made, the Minister must, on behalf of the Government, prepare a response to each of the recommendations as soon as practicable after receiving the report and then table copies of the response in each House of the Parliament within 6 months of receiving the report. The Government's response may have regard to the views of the Authority and any other person the Minister considers relevant. It is expected that the document will outline the Government's reasons for each response . [Schedule 1, Part 2, item 258A]