EXPLANATORY STATEMENT

Issued by the Authority of the Minister for the Environment

Carbon Credits (Carbon Farming Initiative) Act 2011

Carbon Credits (Carbon Farming Initiative—Interim Measures) Rule 2014

Purpose

The Carbon Credits (Carbon Farming Initiative) Act 2011 (CFI Act) enables the crediting of greenhouse gas abatement from emissions reduction activities across Australia. Greenhouse gas abatement is achieved either by reducing or avoiding emissions, or by removing carbon from the atmosphere and storing it.

The Carbon Credits (Carbon Farming Initiative—Interim Measures) Rule 2014 (Interim Rule)  provides for important aspects of administration under the CFI Act, including audit requirements, the fit and proper person test for participants and proof of identity requirements. The content of the Interim Rule is largely based on the Regulations under the CFI Act, which will be repealed when the CFI Act is amended by the Carbon Farming Initiative Amendment Act 2014. The rule ensures no enforcement gaps are created by the commencement of these amendments.

These provisions will assist proponents to register their Emissions Reduction Fund projects for the first auction, prior to the making of the Carbon Credits (Carbon Farming Initiative) Rule 2015, which will further streamline and improve upon the existing regulatory framework.

Background to the Emissions Reduction Fund

In 2014, the Australian Government amended the CFI Act with the Carbon Farming Initiative Amendment Act 2014 (CFI Amendment Act). The CFI Amendment Act established the Emissions Reduction Fund by expanding the crediting of emissions reductions under the Carbon Farming Initiative (CFI) to the non‑land based sectors of the Australian economy.

The Emissions Reduction Fund is the centrepiece of the Australian Government’s efforts to reduce emissions. Its primary objective is to assist Australia to meet its emissions reduction target of five per cent below 2000 levels by 2020, consistent with its international obligations under the United Nations Framework Convention on Climate Change and the Kyoto Protocol.

The Emissions Reduction Fund will do this by purchasing approved and verified emissions reductions from registered projects. The Clean Energy Regulator is empowered under the CFI Amendment Act to conduct processes to purchase emissions reductions, and enter into contracts for this purpose.

The CFI Amendment Act also further streamlined the operation of the CFI to simplify making methodology determinations and encourage participation in the Emissions Reduction Fund. 

Legislative rules and regulations supporting the CFI Act

The CFI Act is supported by subordinate legislation, including the Carbon Credits (Carbon Farming Initiative) Regulations 2011 (Regulations). The Regulations provide detailed explanations of the way in which the CFI Act will be administered by the Clean Energy Regulator.

The CFI Amendment Act provides for the Minister to make legislative rules (section 308), consistent with the intention that new subordinate legislation under the CFI Act will be in this form. Over time, the existing regulations will be transferred to sections of this instrument to create a full new rule set – the Carbon Credits (Carbon Farming Initiative) Rule 2015 (the 2015 rules)–which will help alleviate the workload of the Federal Executive Council.

As part of this process, regulations that no longer reflect the CFI Act (as amended by the CFI Amendment Act) will be repealed and remade by the Minister as sections in the Rules. The date of effect of repealed regulations will coincide with the making of the replacement sections in the Rules to ensure there is no overlap between the Regulations and the Rules.

The Interim Rule operates in the period from the commencement of the CFI Act until the making of the 2015 rules.

The Interim Rule contains provisions that will assist proponents register their Emissions Reduction Fund projects for auction in early 2015. All of the provisions are designed to continue to give effect to existing regulations or provisions of the CFI which are impacted by the CFI Amendment Act. These rules reflect the policy of the existing provisions.

All of the substantive provisions other than sections 18 and 19 are also identical to those which are intended to be made in early 2015, following public consultation. Sections 18 and 19 are audit provisions which maintain the effect of the current audit requirements in the Regulations. They will be replaced by a more streamlined and risk-based framework in early 2015.

The Interim Rule continues existing audit arrangements until the 2015 rules commence to ensure the continuity of verification arrangements under the CFI and avoid the need for stakeholders to apply a new audit framework for reports they are submitting in December 2014 and January 2015.

Detailed description of the Rule

Attachment A outlines and describes the sections in the Interim Rule. A comparison table of the Rules and existing regulations is included at Attachment B.

Public Consultation

Consultation with businesses will be undertaken in December 2014 on the current set of regulations to be repealed and the 2015 rules to be made.  An exposure draft of the 2015 rules has been released. The explanatory material for that exposure draft noted the requirements which would be included in this interim rule and no particular concerns have been raised with the Department.

As these rules are a machinery change to move existing requirements from regulations to legislative rules, they have not been consulted upon separately or released as an exposure draft. Because they need to be in place for the commencement of the amendments to the CFI Act, there was not time to release them for consultation between the Royal Assent of the CFI Amendment Act and the commencement of the amendments.

Separately, the Government undertook extensive public consultation on the Emission Reduction Fund policy framework which underpins the policy in these rules (see Attachment D).

Regulatory Impact

The Department of the Environment certified the Emissions Reduction Fund White Paper as a Regulation Impact Statement for initial decisions on the Emissions Reduction Fund, including the Emissions Reduction Fund crediting and purchasing arrangements, Carbon Farming Initiative arrangements incorporated into the Emissions Reduction Fund, and coverage of the Emissions Reduction Fund safeguard mechanism in accordance with the Australian Government Guide to Regulation. The Regulatory Impact Statement will be finalised after consultation with business on the remaining aspects of the safeguard policy.

Statement of compatibility with human rights

A statement of compatibility with human rights for the purposes of Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 is set out at Attachment C.

ATTACHMENT A

Details of the proposed sections in the
Carbon Credits (Carbon Farming Initiative—Interim Measures) Rule 2014

All references to sections of the CFI Act refer to the CFI Act as amended by the CFI Amendment Act.

Part 1 - PRELIMINARY

1, 2, 3 – Preliminary

These are the preliminary sections of the Rules. Section 2 provides for commencement at the same time as Schedule 1 to the CFI Amendment Act commences.

4 – Definitions

This section defines key concepts in the Interim Rule. These concepts will be explained further in the relevant sections below.

Part 2 – ISSUE OF AUSTRALIAN CARBON CREDIT UNITS IN RESPECT OF OFFSETS PROJECT

5 – Form of application for certificate of entitlement—audit requirements

Paragraph 13(1)(e) of the CFI Act states that, if an application for a certificate of entitlement is subject to audit, it must be accompanied by an audit report that is prescribed by the legislative rules.

This section of the Interim Rule requires that, if the offsets report for a reporting period is subject to audit, the audit report must accompany the application for a certificate of entitlement. This is equivalent to current regulation 1.11.

As with the current regulation, this section clarifies that, while the offsets report and certificate of entitlement are both subject to audit under the amended CFI Act, only an audit of the offset report is required and must accompany the application for the certificate of entitlement.

6 – Issue of certificate of entitlement—eligibility requirements

Paragraph 15(2)(h) of the CFI Act states that an application for a certificate of entitlement must meet eligibility requirements as specified in legislative rules. This section requires than an audit report accompanying an application for a certificate of entitlement must set out either a reasonable assurance conclusion or a qualified reasonable assurance conclusion for each of the matters audited. This replicates the existing requirement in regulation 1.11 for one of these conclusions to be contained in the audit report. The reference to paragraph 15(2)(h) of the CFI Act in the rule rather than paragraph 13(1)(e) reflects changes to the audit framework made by the CFI Amendment Act.

Part 3 – ELIGIBLE OFFSETS PROJECTS

7 – Operation of this Part

Paragraphs 23(1)(c) and 23(1)(h) of the CFI Act allow for legislative rules to specify information and documents that must accompany an application for the declaration of an offsets project as an eligible offsets project.

The CFI Amendment Act removes the concept of a ‘recognised offset entity’ from the CFI Act and replaces that with a ‘fit and proper test’ for applications. However, for the fit and proper person test to be applied, the proof of identity requirements previously part of the recognised offset entity process need to be maintained.

This Division replaces several existing regulations in Part 4 of the Regulations, and makes very minor revisions to the content of those regulations to remove and update revoked or outdated terminology.

8 – Information required to establish applicant’s identity

This section sets out the information required to accompany an application for the declaration of an eligible offsets project. It replaces existing regulations in Division 4.1, but makes no changes to the content of those regulations. The information will assist the Clean Energy Regulator to verify that the proponent is the person who they claim to be and is a fit and proper person.

9 – Documents required to establish applicant’s identity

This section sets out the documents required to accompany an application for the declaration of an eligible offsets project. It replaces existing regulations in Division 4.1 relating to documents that establish an applicant’s identity, but makes no changes to the content of that regulation.

In particular, subsections (2), (3) and (4) avoid information being provided twice in the same way as current regulation 4.3.

10 – Form etc. of documents

This section sets out the form of documents required to accompany an application for the declaration of an eligible offsets project. It replaces existing regulations in Division 4.1, but makes no changes to the content of that regulation.

This section will apply from the date of commencement of the amended CFI Act.

11 – Aboriginal persons or Torres Strait Islanders

This section sets out the requirements that apply where an Aboriginal or a Torres Strait Islander person does not have specified documents for an application for the declaration of an eligible offsets project. It replaces existing regulations in Division 4.1 such as regulation 4.7, but makes no changes to the content of that regulation.

This section will apply from the date of commencement of the amended CFI Act.

Part 4 – FIT AND PROPER PERSON TEST

12 – Operation of this Part

Subparagraphs 60(1)(a)(i), (2)(a)(i) and (2)(a)(ii) of the CFI Act state that the key details of the fit and proper person test are detailed in the legislative rules. This part sets out the key tests, including whether an applicant has been convicted of specified offences, has breached a climate change law, is insolvent, or is under administration. These must be considered in whether a person satisfies the fit and proper person test.

The CFI required applicants to satisfy identity and probity checks in order to become a ‘recognised offsets entity’, which was a precondition to participating. Under the Emissions Reduction Fund, the concept of a recognised offsets entity will be removed to streamline processes, but the identity and probity checks will be retained and will inform the fit and proper person test.

Proponents must satisfy this test as part of the project declaration process under paragraph 27(4)(f) of the Act and in issuing a certificate of entitlement under paragraph 15(2)(a) of the Act.

This Part replaces regulation 4.11 and the substance of Part 4 of the CFI Act but retains the content of those requirements.

The fit and proper person test will apply from the date of commencement of the amended CFI Act.

13 – Events for individuals, bodies corporate and executive officers of bodies corporate

This section lists the events applying to individuals, bodies corporate and executive officers of bodies corporate which the Clean Energy Regulator must have regard to in considering the fit and proper person test.

14 – Events for individuals

This section lists additional events applying to individuals which the Clean Energy Regulator must have regard to in considering the fit and proper person test.

15 – Events for bodies corporate

This section lists additional events applying to bodies corporate which the Clean Energy Regulator must have regard to in considering the fit and proper person test.

16 – Events for executive officers of bodies corporate

This section lists additional events applying to executive officers of bodies corporate which the Clean Energy Regulator must have regard to in considering the fit and proper person test.

Part 6 – REPORTING AND NOTIFICATION REQUIREMENTS

17  – Operation of this Part

Paragraphs 76(4)(c), (ca) and (cb) of the CFI Act state that, if legislative rules require an offsets report to be subject to an audit, the offset report must be accompanied by an audit report in accordance with the legislative rules. 

The sections in this Part require that all reports provided before the 2015 rules commence must be accompanied by an audit report which complies with the existing requirements of regulation 1.12 (as in force immediately before commencement). This will not apply to an offsets report in relation to an eligible offsets project that is exempt from audit report requirements as specified by regulation 1.13 (as in force immediately before commencement).

Maintaining the existing audit arrangements avoids confusion for existing projects due to report in December and January who intend to sell their credits to companies meeting their final liability under the former Clean Energy Act 2011.

18 – Audit reports to accompany offsets reports

This subsection (1) is equivalent to regulation 1.12(1) of the current regulations and the remaining subsections are equivalent to regulation 1.13.

Subsection (1) states that audits must be accompanied by an audit report that covers whether, for the report period, the project is in accordance with its section 27 declaration, methodology determination and the requirements of the CFI Act. The report must also address whether the project proponent meets the requirements specified in the applicable methodology determination under subsection 106(3) of the CFI Act.

Subsections (2), (3) and (4) replicate the exemption for auditing contained in existing regulation 1.13.

There is no change to the audit report requirements from the Regulations.

19 – Conduct of audits

This section is equivalent to regulation 1.12(2) of the Regulations.

It states that audits must be conducted in accordance with the National Greenhouse and Energy Reporting (Audit) Determination 2009. All audits need to provide a reasonable assurance or qualified reasonable assurance opinion to be eligible for a certificate of entitlement under subsection 8(2).

However, unlike the CFI requirements, other audit conclusions may be submitted with an offsets report even though credits would not then be issued. This is consistent with changes to section 13 and 76 of the CFI Act.

There is no change to who can conduct an audit.

Part 28 – REPEAL

20 – Repeal of instrument

The Interim Rule will be repealed at the same time as the Carbon Credits (Carbon Farming Initiative) Rule 2015 commences.

Schedule 1– Documents required to establish applicant’s identity

Part 1 – DOCUMENTS FOR IDENTIFYING INDIVIDUALS WHO ARE AUSTRALIAN CITIZENS OR RESIDENTS

This Part is the equivalent of Schedule 2 in the Regulations. There are no changes to the requirements in the Interim Rule.

1 – Category A documents

The section lists category A documents for an individual who is an Australian citizen or ordinarily resident in Australia.

2 – Category B documents

The section lists category B documents for an individual who is an Australian citizen or ordinarily resident in Australia:

Part 2 – DOCUMENTS FOR IDENTIFYING INDIVIDUALS WHO ARE NOT RESIDENTS

This Part is the equivalent of Schedule 3 in the Regulations. There are no changes to the requirements in the Interim Rule.

3 – Category A documents

The section lists category A documents for an individual who is not ordinarily resident in Australia.

4 – Category B documents

The section lists category B documents for an individual who is not ordinarily resident in Australia.

Attachment B

Comparison of Rules to Regulations

Attachment C

Statement of Compatibility with Human Rights

Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011

Carbon Credits (Carbon Farming Initiative—Interim Measures) Rule 2014

The Carbon Credits (Carbon Farming Initiative—Interim Measures) Rule 2014 (the Interim Rule) is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.

Overview of the Legislative Instrument

The Carbon Credits (Carbon Farming Initiative) Act 2011 (CFI Act) enables the crediting of greenhouse gas abatement from emissions reduction activities across Australia. Greenhouse gas abatement is achieved either by reducing or avoiding emissions, or by removing carbon from the atmosphere and storing it.

The Interim Rules provides for important aspects of administration under the CFI Act, including requirements for audit reports provided to the Regulator, the content of the fit and proper person test for participants and proof of identity requirements to accompany applications for the declaration of an offsets project. The content of the Interim Rule is largely based on existing regulations under the CFI Act, which will be repealed when the CFI Act is amended by the Carbon Farming Initiative Amendment Act 2014.

Human rights implications

The Rules engage Article 17(1) of the International Covenant on Civil and Political Rights (ICCPR). Article 17(1) of the ICCPR provides for the right of every individual to be protected against arbitrary or unlawful interference with the individual’s privacy. The term ‘privacy’ has not been defined by international human rights law but it is generally accepted that it encompasses ‘information privacy’—the right to privacy of information about a particular individual. An interference with an individual’s privacy will not be considered ‘unlawful’ if it is authorised by a law that complies with the provisions, aims and objective of the ICCPR and specifies in detail the precise circumstances in which such interferences may be permitted. An interference with an individual’s privacy will not be considered ‘arbitrary’ if it is reasonable in the particular circumstances and the law is in accordance with the provisions, aims and objectives of the ICCPR.

The Interim Rule engages the right to privacy because Part 3 of the Interim Rule requires a person to provide a range of specified information when applying for a certificate of entitlement. This is primarily to establish the identity of each project proponent and allow the Regulator to determine whether or not that person is a fit and proper person in accordance with section 60 of the CFI Act and the tests in Part 4 of the Interim Rule.

The Interim Rule is consistent with current proof of identity requirements under the CFI Act and has been designed to limit identity information to that which is sufficient to enable the Regulator to carry out its statutory functions. In particular, where the Regulator already has access to this information or has registered the proponent under other legislation it administers, the detailed personal information is not collected again.

All these requirements are reasonable and the Rules are therefore not ‘arbitrary’ within the meaning of Article 17(1) of the ICCPR.

Furthermore, the Interim Rule does not authorise an unlawful interference with an individual’s privacy because the Interim Rule adequately specifies the circumstances in which information may be collected. Moreover, the Regulator is required to handle all personal information in accordance with the Privacy Act 1988 and is bound by the secrecy provisions in the Clean Energy Regulator Act 2011. In particular, Part 3 of the Clean Energy Regulator Act 2011 includes a number of significant restrictions on the use or disclosure of information collected by the Regulator.  The Interim Rule is therefore compatible with Article 17(1) of the ICCPR because it does not unlawfully or arbitrarily interfere with an individual’s privacy.

A detailed statement of compatibility of the provisions of the Emissions Reduction Fund is provided in the Explanatory Memorandum for the Carbon Farming Initiative Amendment Bill 2014: http://www.environment.gov.au/system/files/pages/7aef9f12-8ba1-4d9a-bf6a-1bc89a0bd6f5/files/cfi-amendment-bill-explanatory-memorandum.pdf.

Conclusion

The Interim Rule is compatible with human rights because it does not limit any human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.

Attachment D

Public consultation on Emission Reduction Fund policy framework

In finalising the design of the Emissions Reduction Fund, the Government sought the views of businesses and the community through an extensive consultation process.

Terms of Reference

• Consultation period: 16 October 2013 – 18 November 2013
• Submissions: over 290

Green Paper

• Consultation period: 20 December 2013 – 21 February 2014
• Submissions: over 340
• Information sessions
  • Face to face:
    •  Canberra – 3 February 2014 – around 150 RSVPs
  • By phone: 4 public teleconference sessions across 4 and 5 February 2014

White Paper

• Information sessions
  • Face to face:
    • Sydney – 14 May 2014 – 98 RSVPs
    • Canberra – 15 May 2014 – 51 RSVPs
    • Melbourne – 16 May 2014 – 101 RSVPs
  • By phone:  2 sessions – 21 and 22 May 2014 – 28 RSVPs in total

Exposure draft legislation

• Consultation period: 9 May 2014 – 23 May 2014

• Submissions: 49

• Also considered by phone by legal workshop on 20 May 2014

 Expert Reference Group

• Has met twice: 12 February 2014 and 28 February 2014

 Technical Working Groups

• Policy development as of December 2014
  • Contracts – 1 meeting, consultation on draft contract from 27 June 2014 – 18 July 2014
  • Auctions – 1 meeting

• Industrial sector method development as of December 2014
  • Facility method – 12 face-to-face; 5 teleconferences
  • Waste – 4 face-to-face
  • Transport  – 3 face-to-face; 1 teleconference
  • Energy Efficiency Industrial – 4 face-to-face; 1 teleconference
  • Energy Efficiency Building – 4 face-to-face; 1 teleconference  
  • Coal Mine Fugitives  – 5 face-to-face; 1 teleconference
• Land sector method development
  • Sequestering Carbon in Soils in Grazing Systems – 8 face-to-face since 2011 (3 in 2014)
  • Livestock – 10 face-to-face; 18 teleconferences
  • Savanna method – 4 face-to-face; 9 teleconferences
  • Reforestation - 2 teleconferences
  • Avoided deforestation – No meetings as yet

Exposure draft methodology consultation

• Alternative waste treatment, coal mining and landfill gas: 3 September – 1 October 2014.

• Commercial building energy efficiency and avoided clearing of native regrowth: 25 September – 23 October 2014.
• Facilities, wastewater treatment and transport: 15 October 2014 – 12 November 2014.
• Industrial fuel and energy efficiency, aggregated small energy users, sequestration of carbon in soil using modelled abatement estimates and fertiliser use efficiency in irrigated cotton: 14 November 2014 – 12 December 2014.

Market testing of contract duration

• The Government committed in the Emissions Reduction Fund White Paper to hire a consultant to test the commercial impacts of alternate contract lengths.
  • A market survey was held between 8 and 27 May 2014.
  • 107 organisations were surveyed, with 71 responses in total. The survey respondents’ identities are confidential.

Carbon Market Institute information sessions

• Information sessions on the Emissions Reduction Fund by the Carbon Market Institute were held on behalf of the Department on:
  • 21 July in Melbourne;
  • 22 July in Sydney;
  • 28 July in Perth;
  • 29 July in Adelaide;
  • 1 August in Brisbane;
  • 2 August in Townsville;
  • 11 August in Geelong;
  • 12 August in Newcastle; and
  • 26 August in Dubbo.
• Around 500 participants took part overall (including Government representatives).