Masquerading behind the facade of an innocent sounding-

        Carbon Farming Initiative- bill. is this poison.

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Chapter 1

Introduction

Conduct of the inquiry

1.1        On 25 March 2011, the Senate referred the provisions of the Carbon Credits (Carbon Farming Initiative) Bill 2011, the Carbon Credits (Consequential Amendments) Bill 2011 and the Australian National Registry of Emissions Units Bill 2011 (the bills) to the Environment and Communications Legislation Committee for inquiry and report by 20 May 2011.

1.2        The three bills were also referred to the House of Representatives Standing Committee on Climate Change, Environment and the Arts on 24 March 2011 for inquiry and report.[1] On 23 May 2011, the Standing Committee on Climate Change, Environment and the Arts tabled its final report.[2]

1.3        In accordance with usual practice, the committee advertised the inquiry on its website and in The Australian. The committee also wrote to relevant organisations and associations inviting submissions. The committee received 72 submissions (listed at Appendix 1) and held one public hearing in Canberra on 20 April 2011 (see Appendix 2).

1.4        The committee notes the short period of time between referral of the bills to the committee and lodgement of submissions. The committee appreciates the effort required to meet this timeframe, and thanks those organisations and individuals that made contributions to the committee's inquiry.

Background

Kyoto Protocol

1.5        The Kyoto Protocol is an international agreement linked to the United Nations Framework Convention on Climate Change (UNFCCC). The protocol sets binding targets for 37 developed countries and the European Union for the limitation and reduction of greenhouse gas emissions.[3]

1.6        Australia became a signatory to the Kyoto Protocol on 29 April 1998 and ratified the protocol on 12 December 2007.[4] The ratification came into effect on 11 March 2008.[5]

1.7        Australia's commitment under the Kyoto Protocol is to ensure that its greenhouse gas emissions, over the period from 2008 to 2012, are no more than 8 per cent above 1990 levels.[6] It is currently expected that Australia's emissions will reach an average of 583 million tonnes of carbon dioxide equivalent (Mt CO₂-e) per annum over 2008–12, which is 107 per cent of 1990 levels.[7]

1.8        The allowable level of emissions for parties to the Kyoto Protocol that have an emission reduction or limitation target is referred to as that country's "assigned amount".[8]

1.9        Under the Kyoto Protocol, countries are allocated Kyoto units called "assigned amount units" (AAUs) on the basis of their initial assigned amount, where each AAU signifies an allowance to emit one tonne of carbon dioxide equivalent (CO₂-e).[9]

1.10      The protocol also allows countries to create and acquire Kyoto units via three market-based mechanisms. These are:

• international emissions trading which allows countries to trade in Kyoto units (this is known as the "international carbon market");
• the Clean Development Mechanism which allows developed countries to generate Kyoto units by undertaking projects to reduce emissions in developing countries; and
• "Joint Implementation" which allows developed countries to generate Kyoto units by undertaking projects to reduce emissions in other developed countries.[10]

1.11      Under the Kyoto Protocol, Australia is also required to monitor and report on its commitments to ensure that it is on track to meet its emissions reduction target.[11] These requirements include keeping precise records of trades in Kyoto units.[12]

1.12      Projects carried out under the Carbon Farming Initiative (CFI) which produce abatement that will be reflected in Australia's Kyoto accounts (Kyoto compliant activities), for example reforestation, reducing enteric fermentation by livestock, manure management and savannah fire management, will help Australia to meet its obligations under the Kyoto Protocol. Kyoto compliant projects will also receive Kyoto Australian Carbon Credit Units (ACCUs) which can be traded in domestic or international voluntary carbon markets, or exchanged for Kyoto units that can be traded in the international carbon market.[13]

1.13      CFI projects which produce abatement that will not be reflected in Australia's Kyoto accounts, for example forest management and revegetation, reforestation on non-Kyoto land, and carbon sequestration on cropping land, will receive non-Kyoto ACCUs.[14] Non-Kyoto ACCUs can be traded in domestic or international voluntary carbon markets, for example to offset fuel combustion for air travel or road transport.

Overview of the bills

Carbon Credits (Carbon Farming Initiative) Bill 2011

1.14      On 24 March 2011, the Carbon Credits (Carbon Farming Initiative) Bill 2011 (the bill) was introduced to the Parliament.[15]

Summary of the bill

1.15      The bill fulfils a commitment made by the Commonwealth Government to 'develop legislation to give farmers, forest growers and landholders access to domestic voluntary and international carbon markets'.[16] The bill implements a voluntary carbon offsets scheme focussed on providing 'new economic opportunities for farmers, forest growers and landholders'[17] by generating 'saleable carbon credits'.[18]

1.16      The objects of the bill are threefold:

• To implement certain Australian obligations under the UNFCCC and Kyoto Protocol;
• To create incentives for people to carry out certain offsets projects, specifically in the land sector; and
• To increase carbon abatement in a manner both consistent with the protection of Australia's natural environment and that improves resilience to the effects of climate change.[19]

1.17      The bill covers three possible emissions reductions strategies: sequestration; native forest protection; and emissions avoidance projects.[20] The bill recognises both Kyoto and non-Kyoto offsets projects. A Kyoto offsets project is an agricultural or landfill legacy emissions avoidance project, or an offsets project of a kind specified in the regulations.[21] A non-Kyoto offsets project is a project other than a Kyoto offsets project.[22]

1.18      The bill contains provisions for a "negative list" of excluded projects. The negative list will comprise certain types of sequestration or emissions avoidance projects that are excluded from the scheme on the basis of the impact on the availability of water; biodiversity conservation; employment; or the local community.[23]

1.19      The CFI is a stand-alone scheme but has been designed to 'be complementary to a carbon pricing mechanism'.[24]

1.20      The bill is estimated to have a total cost to the Commonwealth of no more than $45.6 million over four years to 2013–14.[25]

Australian Carbon Credit Units

1.21      The bill provides for the issue of ACCUs in respect of both Kyoto and non‑Kyoto offsets projects. Ca[26]rbon credit units can only be issued if a certificate of entitlement is in force in respect of an eligible offsets project.[27]

1.22      The requirements for making an application for a certificate of entitlement are outlined in clause 13. Clause 15 enables the carbon farming scheme administrator to issue a certificate of entitlement where the administrator is satisfied the applicant meets specified requirements, including:

• The applicant is a recognised offsets entity;
• The applicant is the project proponent; and
• The applicant meets the eligibility requirements, if any, outlined in regulations.[28]

1.23      The number of carbon credit units issued for a project will be calculated by reference to:

(a)        the relevant abatement amount calculated under the applicable methodology (if the project is a sequestration offset project other than native forest protection project); or

(b)        if the project is a native forest protection project, the relevant sequestration amount calculated under the applicable methodology.[29]

1.24      The bill specifies the formulae for calculating the unit entitlement for sequestration offsets projects, prescribed native forest protection projects and other native forest protection projects.[30]

1.25      The "risk of reversal buffer number" for these types of projects is five per cent, or another percentage as specified in the regulations, with respect to a particular kind of project (see Chapter 2).[31]

1.26      Clause 18 provides for unit entitlements for emissions avoidance offsets projects such as reductions in savannah burning and fertiliser use.[32]

1.27      Crediting periods for eligible offsets projects are detailed in clauses 68 and 69. The first crediting period for native forest protection projects is 20 years; for eligible projects that are not native forest protection projects, the first crediting period is seven years.[33] The determination of subsequent crediting periods is outlined in clauses 70 through 74.

1.28      The bill allows the CFI scheme administrator to issue ACCUs.[34] The transfer and transmission of ACCUs is enabled by clauses 151 through 156. Clause 157 allows Kyoto ACCUs to be exchanged for Kyoto units.

1.29      The circumstances and processes by which ACCUs may be relinquished are covered by clauses 175 to 178 of the bill, inclusive.

Eligible offsets projects

1.30      The types of projects allowed under the bill are outlined in clauses 53 through 55, inclusive. Eligible offsets projects are emissions avoidance projects and sequestration offsets projects which may be classified as either Kyoto or non-Kyoto offsets projects.[35]

1.31      Clauses 22 through 38 outline the application, approval, variation and revocation processes for eligible offsets projects. An application for the declaration of an eligible offsets project must be made in writing, and provide information as specified in the regulations.[36] In addition, if an indigenous land use agreement is relevant to the application, this must be provided.[37] If the project is in an area covered by a natural resource management (NRM) plan, a statement demonstrating the project is consistent with the NRM plan must be submitted with the application.[38]

1.32      After considering an application for a declaration of an eligible offsets project, the administrator may declare in writing that an offsets project is:

• an eligible offsets project and an eligible Kyoto project; or
• an eligible offsets project and an eligible non-Kyoto project.[39]

1.33      Subclause 27(3) requires that a declaration must identify, amongst other requirements: the name of the project; the project area(s); and the project proponent.

1.34      The scheme administrator may only declare a project as an eligible offsets project if the project:

• is conducted in Australia;
• is covered by an approved methodology;
• passes the additionality test;
• the applicant is the project proponent and a recognised offsets entity;
• if the project is a sequestration project and holds the applicable carbon sequestration right;the project area is on Crown land, the relevant minister of the state or territory has certified that the applicant holds the applicable carbon sequestration right;
• if a sequestration project is on Commonwealth property, the relevant Commonwealth minister has certified that the applicant
• the project does not involve clearing native forest or using material obtained as a result of clearing or harvesting native forest; and
• the project is not an excluded offsets project.[40]

1.35      Clause 56 allows excluded projects to be listed in the regulations to the bill. This is known as the "negative list".[41]

1.36      The types of projects that may be on the negative list include but are not limited to:

• establishment of a forest where the:
• relevant jurisdiction does not have an accredited regime for meeting their National Water Initiative commitments to adequately manage water interception by plantations;
• proponent does not hold the appropriate high security water access entitlement to offset the plantation's water use over the entire life of the plantation;
• project area is in a zone that receives more than 600 millimetres of annual rainfall or more than 800 millimetres if the area also overlays a shallow saline groundwater table;
• total forested area for the project is greater than two hectares; and
• forest is not a permanent environmental planting;
• establishment of a forest where the forest was established as a Managed Investment Scheme (MIS);
• establishment of a forest or non-forest vegetation where:
• land was cleared of vegetation after 30 June 2008 or within three years of project commencement (whichever is more recent); or
• a swamp was drained after 30 June 2008 or within three years of project commencement (whichever is more recent); or
• where the species being established is a declared weed species in that jurisdiction; and
• cessation or avoidance of logging, clearing, clear-felling and selective harvest in monoculture plantations where the:
• project involves foregone harvesting of a monoculture plantation forest; or
• area of land was under an in-perpetuity covenant prior to 24 March 2011 (the date the CFI legislation was introduced to Parliament).[42]

Transition from non-CFI offsets schemes

1.37      The transition of offsets projects from pre-existing prescribed non-CFI offsets schemes, for example the Greenhouse Gas Reduction Scheme and Greenhouse Friendly, is enabled under clauses 92 to 95, inclusive.

Integrity standards

1.38      The integrity standards required of projects are detailed in clause 133 of the bill and are as follows:

• additionality – ACCUs will only be issued for abatement that would not normally have occurred;
• measurable and verifiable – estimates of abatement achieved by a project must be measurable and verifiable;
• leakage – the abatement achieved by a project is not offset by increases in emissions as a result of the project;
• internationally consistent – where appropriate abatement estimation methodologies must meet internationally recognised accounting standards so that abatement may be counted towards Australia's Kyoto target;
• supported by peer-reviewed science – to ensure scientific credibility, estimation methods must be supported by relevant science that has been published in peer-reviewed literature and generally accepted by the scientific community; and
• account for cyclical variability – estimation methods for sequestration projects are required to provide estimates which accurately reflect cyclical changes in carbon stocks.[43]

1.39      The "additionality test" is designed to ensure that ACCUs are only issued for abatement that would not normally have occurred and therefore provides 'a genuine environmental benefit'.[44] In order to pass the additionality test, a project must not be "common practice" in the relevant industry (or relevant part of the relevant industry) or the kind of environment in which such a project will be carried out.[45]

1.40      The bill utilises a "positive list" mechanism to streamline the process for determining the additionality of a project. Abatement activities or types of projects that are determined by the minister (on the advice of the Domestic Offsets Integrity Committee) not to be common practice within an industry or region will be included on the positive list and recognised as additional.[46] The positive list will be contained in the regulations to the bill.[47]

1.41      The types of activities which might be on the positive list include but are not limited to:

• establishment of a permanent environmental planting since 1 July 2007 (with a planted area greater than one hectare);
• establishment of trees for biomass energy;
• application of biochar to soil;
• capture and combustion of methane from legacy waste;
• early burning of savannahs to reduce the intensity and frequency of fires (burnt area greater than one square kilometre);
• culling feral camels;
• reducing enteric fermentation by livestock by:
• using tannins as a feed supplement for cattle;
• incorporating Eremophila[48] in livestock feed;
• manipulating the gut flora in livestock; and
• selective breeding of livestock to reduce residual feed intake;
• capture and combustion of methane from manure;
• application of urea inhibitors to manure to reduce nitrification;
• application of nitrification inhibitors to fertiliser; and
• projects that have been assessed as additional under the Greenhouse Friendly program.[49]

Permanence

1.42      The bill contains permanence provisions which require carbon stores for eligible projects to be maintained over a period of 100 years.[50] If carbon stores are not maintained over this period, ACCUs may be required to be relinquished in circumstances where units were issued:

• as a result of false or misleading information; or
• in relation to a sequestration project and the project was varied or revoked; or
• in relation to a sequestration project and there was complete or partial reversal of sequestration.[51]

1.43      Project proponents will not be required to hand back credits that have been issued if carbon stores are lost as a result of:

• bushfire, drought or pest attack;
• reasonable actions to reduce bushfire risks, such as establishing fire breaks; or
• vandalism or other actions that are beyond the control of the project proponent.[52]

1.44      A carbon maintenance obligation may be imposed on a project if a relinquishment requirement (for the three reasons listed above) is not complied with.[53] A carbon maintenance obligation prevents a person from engaging in conduct that results, or is likely to result, in a reduction in carbon stores below a benchmark sequestration level.[54] The benchmark sequestration level is the amount of carbon sequestered in the relevant carbon pool at the time that the carbon maintenance obligation is declared.[55]

Methodologies

1.45      Offsets project methodologies establish the procedures for estimating abatement, as well as project specific rules for monitoring, record keeping and reporting on abatement.[56] The provisions for assessment of methodologies are outlined in clause 106. On 25 May 2011, the Minister for Agriculture, Fisheries and Forestry and the Parliamentary Secretary for Climate Change and Energy Efficiency announced savannah burning as the first methodology to be released for public comment and possible inclusion on the positive list.[57]  

1.46      The minister must not make a methodology determination unless, amongst other criteria, the Domestic Offsets Integrity Committee (DOIC) has endorsed the methodology and the methodology complies with the integrity standards in the bill.[58]

1.47      Subclause 112(5) requires the DOIC to publish methodology proposals on the DCCEE website and invite the public to make submissions on each methodology proposal before endorsing the methodology.

1.48      Project methodologies may be varied under clause 114. Clause 123 enables the minister to revoke a project methodology; however, before doing so the minister must seek advice from the DOIC as to whether the methodology should be revoked.[59]

Land title and title registers

1.49      The project proponent for a sequestration project must have an applicable carbon sequestration right, which means they have the exclusive right to benefit from carbon stored in the land. The applicable carbon sequestration right held by a person over an area of land is outlined in clause 43. The clause describes the applicable carbon sequestration right applied to Torrens system land, crown land that is not Torrens system land and native title land.[60]

1.50      The bill recognises that the registered native title body corporate for determined exclusive possession native title land has the carbon sequestration right and can be the project proponent.[61]

1.51      The bill is silent on whether holders of undetermined and / or non-exclusive native title have an eligible interest and would therefore be required to consent to sequestration projects before the project could be declared eligible. However, the government has indicated it will undertake further consultation in relation to forms of native title other than exclusive possession.[62]

1.52      Clause 40 of the bill allows a land registration official to make entries or notations in title registers so as to draw attention to a carbon maintenance obligation applicable to a particular piece of land.[63] 

Reporting and notification

1.53      The bill requires project proponents to provide reports on eligible projects to the scheme administrator.[64] The reporting period must not be shorter than 12 months and not longer than five years. An "offsets report" must include an audit report prepared by a registered greenhouse and energy auditor.[65]

1.54      Clause 81 requires sequestration offsets project proponents to notify the CFI scheme administrator in writing of a natural disturbance that causes or is likely to cause a reversal of carbon sequestration. 

1.55      Project proponents must also notify the scheme administrator if a project becomes inconsistent with a NRM plan.[66]

Record-keeping and monitoring

1.56      The bill requires certain standards of record-keeping and project monitoring. These requirements are in clauses 191 through 193 (record-keeping) and 194 (project monitoring).

Civil penalties

1.57      Part 21 provides for civil penalty provisions for contravention of the bill.[67]

Australian National Registry of Emissions Units Bill 2011

1.58      On 24 March 2011, the Australian National Registry of Emissions Units Bill 2011 (the ANREU bill) was introduced to the Parliament.

Summary of the bill

1.59      The ANREU bill will modify the Australian National Registry of Emissions Units (the registry) so that it can be used to keep account of the location and ownership of units issued under the CFI.[68]

1.60      The registry was established under the Commonwealth's executive power to meet an Australian commitment under the Kyoto Protocol.[69] The registry does not currently have a legislative basis.[70]

1.61      The registry was opened in September 2009 to enable organisations and individuals to open accounts and participate in both the domestic and international trade of Kyoto units.[71]

1.62      The financial impact of the ANREU bill is included in the estimated total cost of the CFI (no more than $45.6 million over four years to 2013–14).[72]

Main provisions of the bill

1.63      The continued existence of the Australian National Registry of Emissions Units is enabled in clause 9 of the ANREU bill.[73] The registry will be maintained electronically, and it will serve as a registry for ACCUs and Kyoto units.[74]

1.64      The ANREU bill allows the administrator to open accounts in the registry.[75] An account must be opened in the name of a particular person, and this is a "registry account".[76] Each account must also be identified by a unique number known as the "account number".[77]

1.65      Information that must accompany a request for a registry account, and the fee (if any) for making a request, may be required by the regulations.[78]

1.66      Entries in registry accounts for ACCUs may be made in accordance with the Carbon Credits (CFI) Bill 2011.[79] Entry of Kyoto units and non‑Kyoto international emissions units may also be made in a registry account in accordance with the ANREU bill.[80]

1.67      Part 3 of the ANREU bill provides rules for dealing with Kyoto units. Kyoto units are "assigned amount units", "removal units", "emission reduction units" and "certified emission reductions".[81] A specified number of assigned amount units may be issued to the Commonwealth, in accordance with the Kyoto rules.[82] For abatement that results from approved Joint Implementation projects, assigned amount units and removal units can be converted to emission reduction units.[83]

1.68      Kyoto units may be transferred from one registry account to another under clause 33 of the ANREU bill. Kyoto units may also be transferred from one person to another person who holds a registry account.[84]

1.69      The process for outgoing international transfer of Kyoto units is outlined in clause 35. Incoming international transfers for Kyoto units are allowed under clause 36 of the ANREU bill. 

1.70      The treatment of non-Kyoto international emissions units is detailed in Part 4. Non-Kyoto international emissions units may be transferred between registry accounts and to a foreign account (outgoing international transfer).[85] Incoming international transfers of non-Kyoto international emissions units are enabled by clause 53. 

1.71      The administrator is required to publish on the internet, and keep up-to-date, a concise description of the characteristics of each of the following eligible international emissions units (Kyoto units):

• certified emissions reductions;
• emissions reduction units; and
• removal units.[86]

1.72      The administrator must also publish on the internet a definition of a non‑Kyoto international emissions unit and keep this definition up-to-date.[87]

1.73      A registered account holder of one or more Kyoto units may request the voluntary cancellation of emissions units.[88]

Carbon Credits (Consequential Amendments) Bill 2011

1.74      On 24 March 2011, the Carbon Credits (Consequential Amendments) Bill 2011 was introduced to the Parliament.

Summary of the bill

1.75      The Carbon Credits (Consequential Amendments) Bill 2011 amends the following Acts:

• the Anti-Money Laundering and Counter-Terrorism Financing Act 2006;
• the Australian Securities and Investments Commission Act 2001;
• the Competition and Consumer Act 2010;
• the Corporations Act 2001; and
• the National Greenhouse and Energy Reporting Act 2007.

Main provisions of the bill

1.76      Amendments to the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 will address the potential risk of money-laundering through the trade in ACCUs and other emissions units.[89]

1.77      The Consequential Amendments bill amends the Corporations Act 2001 and the Australian Securities and Investments Commission Act 2001 in order to regulate financial services associated with ACCUs and eligible international emissions units.[90]

1.78      Amendments to the Competition and Consumer Act 2010, as well as the Australian Securities and Investments Commission Act 2001 will ensure the appropriate disclosure and exchange of information between administrators.[91]

1.79      The amendments outlined in items 12 through 16 of the Consequential Amendments bill establish the audit framework for the CFI, which will be the existing audit framework under the National Greenhouse and Energy Reporting Act 2007.

1.80      Transitional arrangements for accounts already registered with the Australian National Registry of Emissions Units are provided in items 17 to 19 of the Consequential Amendments bill, inclusive.

Projected abatement of the Carbon Farming Initiative

1.81      It is currently estimated the agriculture, forestry and fishing sector (for brevity, the agricultural sector) is responsible for 109.8 Mt CO₂-e emissions, or 19.5 per cent of total emissions in Australia.[92] Emissions from the agricultural sector have declined by 50.5 per cent (112.0 Mt CO₂-e) since 1990, attributable to declining emissions from the clearing of forest cover and increased carbon sequestration from afforestation and reforestation.[93]^{, [94]}

1.82      The Garnaut Climate Change Review Update 2011: Transforming rural land use, released 1 March 2011, outlined estimates for potential abatement associated with rural land use. The 2011 Garnaut update makes a comparison between national abatement potential estimates made in The Garnaut Climate Change Review: Final report (2008)[95] and the 2009 Commonwealth Scientific and Industrial Research Organisation (CSIRO) report: An analysis of greenhouse gas mitigation and carbon biosequestration opportunities from rural land use.[96] Importantly, the Garnaut update noted:

The quantitative estimates from the CSIRO 2009 report indicate the potential scale of mitigation, rather than forecasts of outcomes. Significant uncertainty remains around how much of the identified technical potential can be realised. For example, the practical limitations, such as the willingness of farmers to change land use practice over large areas, or the economic constraints of establishing timber plantations a long distance from processing facilities, are not taken into account in estimates of technical potential. It is not realistic to expect that all or even most of the technical potential will be realised. [97] [emphasis added]

1.83      The estimates for national abatement potential outlined in the CSIRO report were 164 Mt CO₂-e per year for agriculture and 853 Mt CO₂-e per year for forestry.[98] Potential abatement from bioenergy was unable to be estimated.[99] There were rehabilitating overgrazed significant differences between the Garnaut and CSIRO estimates for the following abatement activities:soils, restoring soil and vegetation carbon balance: 286 Mt CO₂-e / year (Garnaut) versus 100 Mt CO₂-e / year (CSIRO);

• rehabilitating mulga lands, restoring soil and vegetation carbon balance (subset of rangelands): 250 Mt CO₂-e / year (Garnaut) versus 20 Mt CO₂-e / year (CSIRO);
• changing land use to carbon forestry (primary goal is carbon sequestration): 143 Mt CO₂-e / year (Garnaut) versus 750 Mt CO₂-e / year (CSIRO); and
• carbon storage in post-1990 forestry plantations (primary goal is commercial biomass harvest): 50 Mt CO₂-e / year (Garnaut) versus 400 Mt CO₂-e / year (CSIRO).[100]

1.84      The complete table of estimated national abatement from the 2011 Garnaut update, including the 2009 CSIRO estimates, is at Appendix 3.

1.85      On 24 January 2009, the then Leader of the Opposition the Hon Mr Malcolm Turnbull MP announced the Coalition's plan for a 'Green Carbon Initiative', a scheme similar to the CFI, comprising:

...commitments to restore soil carbon through better land management; to invest heavily in the revegetation and reforestation of the Australian landscape; and to pursue sequestration of large quantities of carbon via biochar.[101]

1.86      Mr Turnbull estimated the Green Carbon Initiative would achieve 'additional annual reductions of at least 150 million tonnes (Mt) of carbon dioxide equivalent' by 2020.[102]

1.87      In its discussion paper Carbon Farming Initiative: Preliminary estimates of abatement, the DCCEE projected the abatement that will be achieved by the CFI. The discussion paper provides upper and lower projections of carbon abatement likely to be achieved by the scheme, and noted:

Many of the key factors that influence the level of abatement from the CFI are uncertain at this point. However, the Department has constructed indicative ranges to illustrate the likely magnitude of the abatement that could be achieved...The amount of abatement that will be generated by the CFI will depend on various factors including:

• final eligibility rules of the CFI;
• international accounting rules that apply to Australia;
• technical potential of the relevant sources;
• cost of generating the abatement credits;
• levels of participation by the relevant sectors;
• other relevant policies; and
• the price at which the CFI credits can be sold.[103]

1.88      For Kyoto compliant activities, the discussion paper provides indicative projections of abatement in 2020 ranging from less than 5 Mt CO₂-e to around 15 Mt CO₂-e.[104] The key contributors to this abatement are expected to be avoided deforestation and managed regrowth on deforested land, and legacy waste management.[105] The complete table of DCCEE's indicative projections of abatement for Kyoto-compliant activities are at Appendix 4.

1.89      For non-Kyoto compliant activities, the discussion paper outlines the following indicative projections of abatement in 2020:[106]

1.90      Dr Phil Polglase of CSIRO explained to the committee that CSIRO's estimates of potential abatement represented the upper limit of what was technically possible rather than abatement that was likely to be achieved:

...all of these numbers you have seen—the previous Treasury analyses and the CSIRO analyses—are economic modelling. I do not consider them to be predictions or projections of land use change. I do consider them to be estimates of areas of opportunity for land use change given certain model constructs and certain model assumptions, particularly input assumptions. The models are particularly sensitive to such things as establishment costs for forestry, financial discount rates and carbon price. They are not social models in the sense that they do not actually take into account all those factors that are pertinent—the various investors and their willingness to change land use, and whether those land investors be the landholder, the farmer, or the third-party investors...[T]here are a whole bunch of factors that are not really taken into account. We use this information to test the sensitivity of those models with different assumptions and see how that produces different results in terms of what I would call areas of opportunity, rather than areas of likely land use change.[108]

1.91      Ms Shayleen Thompson, First Assistant Secretary, Land Division, DCCEE explained that the department's projections were 'underpinned by an assumption of a mitigation action on around one million hectares of land'; based on a carbon price of $5 per tonne (in voluntary non-Kyoto markets) in 2020; and represented a point estimate of expected abatement in 2020.[109]

1.92      Ms Thompson went on to emphasise the difference between the department's projections and the figures in the Garnaut update:

The abatement estimates included in Professor Garnaut’s update paper on the land sector, and that were also included in the CSIRO 2009 report that focused on Queensland, were estimates of technical potential. What that actually refers to is the biophysical capacity of the land to carry carbon; it does not relate to any particular assumptions about the incentives that you might need to drive that level of abatement. What Professor Garnaut indicated in the update paper is an estimate of potential; it is not a forecast of what could be delivered on the ground. This is one of the areas of this particular debate that does cause some confusion because people look at these very big numbers in the CSIRO report or the Garnaut update and think that is what you could get on the ground. In fact, the next step is to try to work out what abatement you can drive through an incentive like the Carbon Farming Initiative. There is obviously going to be quite a significant difference between the two.[110]

1.93      Ms Thompson also brought to the committee's attention the significant level of abatement projected to be achieved by the CFI:

...if you take the [DCCEE] high scenario [15 Mt CO₂-e] they are second only to the emissions reductions we are currently getting from the renewable energy target. So even though it is a very small number compared with [the Garnaut and CSIRO estimates], it actually is making a fairly significant contribution to Australia’s greenhouse gas mitigation effort.[111]

Committee comment

1.94      The committee notes the key differences between the abatement projections under the CFI provided by the DCCEE, and the estimates of agricultural sector abatement potential from CSIRO and Garnaut. The committee welcomes the explanations provided by the department and CSIRO in this regard.

1.95      The committee emphasises the importance of recognising the different models from which these estimates are derived; the assumptions upon which these models are based; and the uncertainty associated with the estimates. In particular, the committee draws attention to the difference between the DCCEE's projections on one hand and the CSIRO and Garnaut estimates of potential abatement on the other. The DCCEE projections provide a range of the abatement likely to be achieved in 2020 as a result of the CFI, taking into account 'economic and other uptake constraints, including the incentive posed by a particular carbon price'.[112] By contrast, the estimates of abatement provided by CSIRO and Garnaut are estimates of abatement which are technically feasible and do not take into account social factors such as uptake rates by farmers and willingness to change land use.[113] For this reason, the potential abatement projections provided by DCCEE are understandably lower than the estimates of potential abatement provided by CSIRO and Garnaut. 

Access to international and domestic carbon markets

1.96      The CFI will allow participants to earn Kyoto or non-Kyoto carbon credits, depending on the type of project conducted and whether the project is a Kyoto‑compliant activity. As a result, the CFI will give participants the opportunity to participate in the international carbon market where Kyoto ACCUs are issued and in domestic or international voluntary carbon markets where non-Kyoto ACCUs are issued. The price of ACCUs in these different markets is likely to vary. Furthermore, carbon markets 'often differentiate carbon abatement from different sources and place a premium on credits from projects that have co-benefits such as protecting biodiversity'.[114]

1.97      There was a widespread expectation amongst submitters that Kyoto ACCUs will attract a higher price than non-Kyoto ACCUs largely due to the higher level of demand for Kyoto-compliant carbon credits.

1.98      Ms Thompson of DCCEE gave a succinct summary of the scheme's interaction with carbon markets:

The Carbon Farming Initiative is a voluntary scheme. There is no requirement on anyone to participate, but those who do will be eligible to receive carbon credits for every tonne of greenhouse gas emission saved or stored. These credits will be able to be exported or sold here in Australia to companies or individuals wishing to offset their emissions or sell carbon neutral products. The scheme has been designed to encourage broad participation without compromising the environmental integrity and market value of the credits generated.[115]

1.99      Various submitters questioned the ability of the CFI, in the absence of a mandated carbon price, to facilitate effective participation by project proponents in carbon markets, in particular a voluntary domestic market.[116] The Australian Plantation Products and Paper Industry Council's (A3P) opinion was representative of these concerns:

The CFI is primarily designed to interact with the voluntary market, where demand is shallow and weak, and the carbon price will be insufficient to realise much of the potential carbon savings and sequestration in Australia. A3P supports Professor Garnaut’s finding in his paper on rural land use that the Government should seriously consider linking the CFI to any emerging mandatory carbon market.[117]

1.100         Conversely, Mr Paul Morris, Deputy Executive Director, Australian Bureau of Agricultural and Resource Economics and Sciences (ABARES) explained the difficulty proponents would have participating in international carbon markets in the absence of the CFI:

I think it is fair to say...that we need some sort of recognised system of carbon credits in Australia in order to effectively participate in those international markets. Unless there is a recognised system of carbon credits here, then it will be very difficult to actually participate in those markets.[118]

1.101         With respect to the relationship between the CFI and a carbon price, the committee notes the CFI has been designed to be 'complementary to a carbon pricing mechanism'.[119] The committee also acknowledges the Multi-Party Climate Change Committee's comment:

The Committee considers that a carbon pricing mechanism is the most cost-effective and economically responsible way of reducing Australia's carbon pollution, and that its introduction would enable Australia to play its part in global efforts to reduce the risks posed by climate change. A carbon price will also provide opportunities for innovation and investment in lower carbon technologies, and opportunities and rewards for improved land use management.[120]

1.102         The link between the CFI and a future carbon pricing mechanism is discussed in Chapter 4. 

Issues regarding the bills

1.103         Throughout the inquiry the committee heard broad support for the CFI.  Various submitters did, however, raise a number of issues regarding the bill. 

1.104         In addition to the questions raised during the inquiry regarding the abatement potential of the CFI and the effectiveness of the CFI to facilitate participation by proponents in voluntary carbon markets, the committee heard concerns regarding the integrity principles in the bill; potential adverse impacts of the bill; the treatment of non-exclusive indigenous land under the bill; and the link between the CFI and a future carbon price mechanism.

1.105         The integrity principles, in particular the additionality and permanence requirements, are discussed in Chapter 2.

1.106         Chapter 3 examines issues around the co-benefits index, the "negative list" and avoiding potential negative impacts on prime agricultural land, water availability and biodiversity.

1.107         The treatment of indigenous land rights holders and the link between the CFI and a future carbon pricing mechanism are discussed in Chapter 4. 

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