In the seemingly endless and often bitter political argument over climate change, it is often forgotten that Australia has one of the longest standing carbon markets in the world – and which is paid for by a multi-billion dollar government scheme called the Emissions Reduction Fund, or ERF.

Last month, the government announced a shake-up to the way the billion-dollar industry works after a review led by Grant King the former head of the Business Council of Australia. King is also a former energy industry executive with a 16-year stint as the managing director of Origin Energy.

There are three components to Australia’s ERF, according to Ilona Millar head of Baker McKenzie’s Climate Change Practise. These are :

  • A regulatory component that enables projects to be developed to achieve emission reductions through different types of activities.
  • A government procurement fund of about two 2.5 billion dollars which enables the government to buy those offsets developed by projects under the regulatory framework.
  • A safeguard mechanism which puts a baseline on some of the largest emitting facilities in Australia. The operators of those facilities  are required to keep their emissions below their baseline

Millar says that the projects under the scheme have successfully reduced emissions.

Almost 800 projects have been registered as project activities within the emission reduction fund, says Millar, and it is recognised that projects under the scheme have successfully reduced emissions.

“Those projects are going to be generating close to 200 billion tonnes of carbon dioxide equivalent emission reductions.”

However, while the projects themselves are successful and are capturing some of the least cost abatement, a number of sectors are underrepresented in the ERF, says Millar.

“Particularly some of those industrial sectors where abatement is often a lot more expensive and hard to achieve.”

Scalability

Millar also suggests there is a potential to really scale the projects assuming there is increased demand for emission reductions across the economy.

There are impediments, however.

Millar says high upfront costs required to develop projects is a barrier to ERF participation by the underrepresented sectors 

To address this the King Review suggested consideration of a method known as compressed crediting, she said.

This approach brings forward some of the payments for the emission reductions achieved through that project. “So instead of waiting until after a project had verified its emission reductions for a particular period, some of that funding would come forward and essentially be available for project developers enabling them to kick start those projects.”

King also identified a lack of methods available for some of these hard-to-abate sectors. His review recommended piloting of several methods to fast track their development, as well as third part participation to enable industry groups to come forward and work with the government to develop methods.

It is also important to ensure market participants can’t game the system, Millar said.

“One of the really groundbreaking recommendations that’s come through from the King review is that the government should introduce a ‘duty of utmost good faith’, and that duty would effectively apply to participants in the emission reduction fund process and markets, project developers and other market participants.

“The duty would effectively require them to attest to the fact that in undertaking their engagement with the market, they are operating to the highest standards of integrity.”

One of the more controversial issues raised by the review concerns the baseline credits.

At the moment, when a facility exceeds its baseline, they are able to surrender Australian carbon credit units (ACCUs) to offset that.

Millar said one of the recommendations from the King Review was to pilot an approach whereby those facilities that significantly reduce their emissions below their baseline through transformational projects could be credited for the emission reductions.

“At the moment, ACCUs can be used for that purpose. And so there’s concern that if this unit is viewed as a fully fungible unit with an ACCU then essentially there would be no need for an ACCUs to be used to address those safeguard mechanism exceedances.”

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