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Emissions Reduction Fund

The Emissions Reduction Fund makes a significant contribution to Australia’s international emissions reduction commitments.

Incentives for projects that reduce emissions or store carbon

The Emissions Reduction Fund provides an incentive for industry, businesses, land owners, state, territory and local governments and other organisations to reduce emissions or store carbon (referred to as carbon abatement).

There are three elements:

  • Crediting—We asses and register eligible carbon abatement projects using approved methods. We issue one Australian carbon credit unit (ACCU) for each tonne of carbon abatement achieved. Scheme participants can sell these ACCUs to generate income, either back to the government through a carbon abatement contract, or on the secondary market.
  • Purchasing—We enter into contracts with participants on behalf of the Commonwealth to purchase ACCUs earned through eligible carbon abatement activities. To date this has been through reverse auctions, where we purchase lowest cost abatement.
  • Safeguard Mechanism—This is designed to ensure emissions reductions from the Emissions Reduction Fund are not offset by significant emissions increases above business-as-usual levels in other sectors of the economy. The National Greenhouse and Energy Reporting scheme provides an emissions reporting framework for facilities covered by the Safeguard Mechanism. For more information see National Greenhouse and Energy Reporting Scheme.

The Emissions Reduction Fund is now in its fifth year of operation. By the end of 2018–19, the Emissions Reduction Fund had contracted a total of 192 million tonnes of abatement through 452 contracts, registered 784 carbon abatement projects, and issued more than 60 million ACCUs. The Emissions Reduction Fund has so far delivered 43 million tonnes of the contracted abatement.

We have held two auctions a year with the aim of maintaining and improving the portfolio of contracted abatement. In recent times, scheme participants have bid for us to purchase only part of the abatement from projects. Much of the remaining abatement has been available for the growing secondary market, which serves state and territory offset schemes, demand from the Safeguard Mechanism, and businesses pursuing carbon neutrality. To help inform this growing secondary market, we have invested time in providing information about current and new opportunities to generate ACCUs and about initiatives to inform and build capability in the ACCU market.

We are joint stewards of the Emissions Reduction Fund with the Department of the Environment and Energy and the Emissions Reduction Assurance Committee (ERAC). The Department’s role is to set policy direction and develop methods for project activities, as well as manage other legislative matters. The ERAC is an independent expert committee, which assesses whether methods used for carbon abatement meet the requirements of the Emissions Reduction Fund, and provides advice to the Minister. Our role is to administer the scheme, including registering projects, purchasing carbon abatement through auctions, issuing ACCUs, processing reports and audits, managing contracts and ensuring compliance.

Highlights in 2018–19

  • 13.7 million tonnes of carbon stored or emissions reduced
  • 34 new contracts for another 3.27 million tonnes of carbon abatement awarded at auction
  • 67 new projects registered to reduce emissions
  • 784 Emissions Reduction Fund projects in total

An extra $2 billion for the Climate Solutions Fund

On 25 February 2019, the Australian Government announced the Climate Solutions Fund, providing additional funds to extend government purchasing of ACCUs under current Emissions Reduction Fund mechanisms. For more information see Looking forward.

Another 67 Emissions Reduction Fund projects registered

We approved 67 applications to register new projects in 2018–19 compared with 135 in the previous year. This decrease reflects some industry uncertainty as new rules were developed for key vegetation regeneration methods.

Most new projects use land sector methods, involving vegetation regeneration for native forests (see Table 1).

As at 30 June 2019, there were 784 Emissions Reduction Fund projects.

Table 1: Projects registered under the Emissions Reduction Fund, 2018–19

Method

New projects registered
in 2018–19

Cumulative projects registered
to 30 June 2019

Percentage of total projects registered

Agriculture*

8

69

7.5%

Energy efficiency

6

65

7.0%

Industrial fugitives

1

17

1.8%

Savanna burning

1

88

9.5%

Transport

1

9

1.0%

Vegetation

45

532

57.5%

Waste

4

143

15.5%

Facilities

1

2

0.2%

Total

67

925**

100%

*Includes livestock and soil carbon.

** Includes 141 revoked projects.

Projects create 13.7 million tonnes of carbon abatement

Projects report on the amount of carbon abatement they achieve through their activities to store carbon or reduce emissions. Based on these reports, they can apply for one ACCU to be issued for each tonne of carbon abatement achieved. These are known as crediting applications.

We received 610 crediting applications and issued a total of 13,663,409 ACCUs in 2018–19. This is an 11.9 per cent increase on the 12,207,903 ACCUs issued in 2017–18 and, as shown in Figure 6, is the highest ever amount of ACCUs issued in a financial year. This increase in ACCUs issued in 2018–19 continues the trend of abatement increasing year-on-year.

There were 67 crediting applications on hand at the end of 2018–19. Of these applications, 38 were completed in July 2019 and the remainder will be processed and ACCUs issued during 2019–20. As new projects begin to achieve carbon abatement, they will also add to the number of ACCUs issued in 2019–20.

In total, more than 65.2 million tonnes of carbon dioxide equivalent (CO2-e) has been achieved under the previous Carbon Farming Initiative and the current Emissions Reduction Fund.

Figure 6: Total ACCUs issued annually, compared with cumulative total, as at 30 June 2019Bar chart graph showing ACCUs issued by year as well as cumulatively from 2012 to 2019. Each year since 2012, there has been a gradual increase in ACCUs issued.

Table 2: Number of project applications and crediting applications, 2018–19

Type

On hand at 30 June 2018

Received

Approved

Withdrawn, incomplete or refused

Processed within 90 days*

On hand at 30 June 2019

Project applications

7

98

67

18

99%

20

Crediting applications (also called abatement statements)

64

610

581

26

97%

67

*Under the Carbon Credits (Carbon Farming Initiative) Act 2011 we have 90 days to process project registrations, variations and crediting applications.

Table 3: Number of ACCUs issued, 2012–13 to 2018–19

2012–13*

2013–14

2014–15

2015–16

2016–17

2017–­18

2018–­19

Total

ACCUs issued

1,750,179

4,380,473

9,318,106

10,719,735

13,151,991

12,207,903

13,663,409

65,191,796

*The Carbon Farming initiative began in late 2011 but it was 2012–13 before projects began maturing to the point of delivering carbon abatement. The Emissions Reduction Fund began in late 2014.

Vegetation projects account for most carbon abatement

In 2018–19 more than 53 per cent of all ACCUs were issued to projects using vegetation methods. This was followed by alternative treatment of waste and savanna burning.

We continue to investigate and strengthen our posture and guidance to protect the integrity of ACCUs issued. As the largest contributor, vegetation projects have been an area of focus including issues related to permanence requirements and particular methods.

On 8 May 2019, we released guidelines on activities allowed under the human-induced regeneration method and native forest from managed regrowth method. We developed these guidelines in consultation with industry and technical experts to support participation and clarify requirements for projects under these methods.

Table 4: Number of ACCUs issued by method category, 2018–19

Method category

Projects issued

with ACCUs

Number of ACCUs issued

Percentage of ACCUs issued in 2018–19

Vegetation

230

7,290,275

53.4%

Waste

95

4,074,789

29.8%

Savanna burning

30

1,102,682

8.1%

Industrial fugitives

4

756,310

5.5%

Energy efficiency

10

275,664

2.0%

Agriculture

9

147,738

1.1%

Transport

1

12,468

0.1%

Facilities

0

0

0%

Total

379

13,659,926

100%

Auctions secure another 3.27 million tonnes of carbon abatement

We use reverse auctions to offer participants the opportunity to enter into a contract to sell carbon abatement to the government. We began running auctions in 2015, each in a single-round, pay-as-bid, sealed-bid format.

We purchase abatement based on bid price, consistent with our statutory requirement to purchase lowest cost abatement. We advise participants their bids should reflect their most competitive price.

We held our eighth auction on 10–11 December 2018, and committed to purchase a total of 3.27 million tonnes of carbon abatement across 34 contracts for $45 million. We purchased the majority of carbon abatement offered at below the benchmark price, indicating that participants continue to offer competitive prices for abatement at auction.

Across all eight auctions, total contracted abatement is 192 million tonnes.1

Overall, we have awarded 479 contracts for 529 projects, with most contracts having a duration of seven to 10 years. Contracted abatement amounts range from 5000 tonnes to 15 million tonnes. The average price per tonne of abatement was $13.97 at the eighth auction, bringing the average across all auctions to $12.00.

We publish summary statistics for each auction on our website and details in a contract register.

Expected volume of contracted abatement

Each carbon abatement contract includes a delivery schedule for when the seller will deliver ACCUs to us. We provide payment on delivery for the price agreed in the contract. In some circumstances, delivery schedules can be varied by negotiation if required as project implementation evolves.

In 2018–19 projects delivered 10.2 million tonnes of contracted ACCUs. Since the start of the scheme in late 2014, projects have delivered 43 million tonnes of the 192 million tonnes of carbon abatement currently contracted.

The flexibility built into carbon abatement contracts allows some participants to deliver early or request to vary delivery milestones. As at 30 June 2019, contracted deliveries were 94.4 per cent of scheduled deliveries over the life of the fund.2

The flexibility within contracts also allows participants to meet their delivery obligations by delivering the agreed quantity of ACCUs either from the contracted project or from other projects in their portfolio, or by purchasing ACCUs on the secondary market.

We will continue to monitor compliance with the volume of abatement originally agreed when contracts are established, as well as carefully consider requests for revisions to delivery schedules.

A total of 21 of the 479 Emissions Reduction Fund contracts have now completed all delivery obligations.

Funds from lapsed and terminated contracts reallocated to other projects

The Emissions Reduction Fund was designed to encourage participation through the use of conditions precedent in contracts. Conditions precedent allows a project to be awarded a government contract in advance of all land holder consents or finance being obtained.

Delivery obligations begin once a contract has satisfied all conditions precedent (if applicable). If a contract fails to meet or waive any conditions precedent, the contract lapses and the delivery and payment obligations of the contract cease. Funds allocated for the contract are then available for future purchasing. Contracts can also be terminated as a result of certain events, or by mutual agreement between both parties.

In 2018–19 there were 11 terminated and lapsed contracts. The amount of contracted abatement involved was 3.3 million tonnes, or approximately 1.6 per cent of total contracted abatement. Since the start of the scheme, a total of 27 contracts (14.8 million tonnes, or just over 7 per cent of the total volume awarded at contract) have lapsed or been terminated—returning approximately $165 million to the Emissions Reduction Fund for future purchasing.

Informing the market

We published our first statement of opportunities on the ACCU market in March 2019, in response to a recommendation in the Climate Change Authority’s 2017 review of the Emissions Reduction Fund.

The statement outlines the opportunities presented by new and emerging sources of demand for ACCUs by private and state/territory participants. It also highlights current and new opportunities to generate ACCUs, as well as initiatives to inform and build capability in the ACCU market.

This statement builds on our December 2018 market update, which was the first in a series of regular updates on trends in the ACCU market.

The market updates will provide our view on supply and demand of ACCUs under current policies and explore key factors that may influence the market in the near future. This is intended to increase market transparency and drive genuine low cost carbon abatement opportunities.

During the year we also hosted a workshop and webinar on sourcing ACCUs to increase capability within the carbon market and assist safeguard entities to source and surrender ACCUs.

Feature – Soil carbon project a first for Australia

The first Australian soil carbon credits were issued during the year, in a landmark event for the Emissions Reduction Fund and a first for Australia.

The Emissions Reduction Fund soil carbon methods provide the incentive for land owners and managers to change land management practices and improve soil health.

In March 2019, we credited Corporate Carbon with 406 ACCUs for its Grounds Keeping Carbon project near Drouin in Victoria. This the first time in Australia a project has generated ACCUs by increasing levels of soil carbon.

‘We are proud to receive the first soil carbon credits. Not only will these credits be the first to count towards Australia's national targets under The Paris Agreement but they are the first soil credits worldwide to be eligible under Paris,’ said Corporate Carbon Managing Director, Matthew Warnken.

The project uses the innovative Soilkee Pasture Renovator that combines cultivation, mulching, aeration and mixed species seeding to improve grazing systems and build soil carbon effectively. This leads to improved water holding capacity storage, improved nutrient uptake of plants, and improved farm operations. The higher the soil carbon levels, the more productive and healthy the farm.

Soilkee developer, Gippsland farmer Niels Olsen said, ‘The opportunity for expanding regenerative farming and building soil carbon at scale is phenomenal and we are now ramping up our production to deliver on this potential’.

Corporate Carbon has now also established an agricultural start up designed to focus solely on scaling soil carbon farming. ‘If we mainstream this as an approach to agriculture, we are talking millions, even hundreds of millions, of tonnes of greenhouse gas reductions in Australia alone. It’s tremendously exciting both from the agriculture and emissions reduction perspective,’ said Mr Warnken.

Soil carbon sequestration is an innovative emissions reduction measure. There is a triple win to address climate resilience, while improving soil health and food productivity, and the bottom line for farmers. This example of innovation in the agriculture sector demonstrates the co‑benefits that can be achieved under the Emissions Reduction Fund.

Looking forward

The Government’s Climate Solutions Fund (CSF) sends a strong signal to the market that there is ongoing demand for abatement. It aims to deliver a step change to the carbon market in Australia.

In addition to carbon abatement, the projects will help provide new, diverse revenue streams for landowners, boost agricultural productivity, support jobs for Indigenous communities and improve biodiversity and water quality.

We will work closely with scheme participants and industry to develop new and innovative ways to reduce emissions and secure abatement for the CSF.

Our focus will be on increasing the supply of abatement. We will use a range of strategies and new initiatives covering extension and outreach to participants, market development, and market innovation.

We will also develop new approaches to streamline reporting, compliance and audit, including using new ICT tools.

We will continue our focus on providing more information to the carbon market via market updates and simple guides to explain carbon abatement methods. In addition, we will explore ways to encourage a broader range of participants including new financing and other business models. We will develop new initiatives to recognise co-benefits and make it easier for smaller players to participate in carbon abatement projects.

Footnotes

  1. On our website, we initially published a total amount of 193 million tonnes, however, this decreased to 192 million tonnes due to a contract termination
  2. Once the July 2019 deliveries are included, the contracted deliveries rate rises to more than 100%.