EMISSIONS REDUCTION FUND: PARTICIPATING IN AGGREGATED PROJECTS
Key issues to consider before entering an aggregation agreement
What is this guidance for?
An aggregation agreement is a commercial agreement (that will typically be a legal document) detailing the rights and responsibilities of parties in an aggregated project under the Emissions Reduction Fund (ERF). The Australian Government is not responsible for the terms or enforcement of an aggregation agreement, but the agreements are important because they embody significant business decisions.
This guidance has been developed in recognition of this. It seeks to assist an owner of land or asset (a ‘site owner’) who is considering participating in an aggregated ERF project to further understand the legal obligations involved. It sets out in detail the important questions that a site owner may want to consider before preparing and entering an aggregation agreement.
This guidance is intended to be read in conjunction with the Aggregation agreement fact sheet and aggregation case studies (available on the Department of the Environment’s aggregation webpage), which provide more basic information about aggregation under the ERF. In particular, this guidance document cross-references the case studies. Before reading this guidance, you should be familiar with how to participate in the ERF (see the Clean Energy Regulator’s website) and the basics of aggregation (see the Clean Energy Regulator’s Aggregation fact sheet).
This document is not an exhaustive summary of important matters. You should seek independent legal, financial, tax and technical advice with particular reference to your own requirements. Further, everyone’s risk appetite is different and whether or not you choose to participate in an aggregated project is an individual decision to be taken in the context of your own circumstances.
Table of Contents
Important questions for the aggregation agreement 3
1. Who are the parties, what is the project and where is the site? 3
Planning an aggregated project 4
2. Who will enter into the Carbon Abatement Contract with the Regulator? (Who is the proponent?) 4
3. What does the proponent need to do to get the legal right to do the project? 4
4. Who will obtain the consent of ‘eligible interest holders’? 4
5. Who will obtain the required regulatory approvals? How can the parties ensure that everyone complies with the regulatory approvals and laws? 5
6. What consultation will occur between the parties in making decisions? 5
7. What is required before the aggregation agreement will commence (known as ‘conditions precedent’)? 6
Undertaking an aggregated project 7
8. How long will the aggregation agreement be in place? 7
9. What access will the proponent need to the site? 7
10. Who will carry out the project activities? Who will measure the project’s outputs? 8
11. What is the permanence requirement for carbon sequestration projects? 8
12. What happens if the site owner wants to sell their site? 9
13. What would cause the aggregation agreement to end? What are each party’s rights and responsibilities when leaving an aggregation agreement? 9
14. What happens if there is an event or circumstance which is beyond the control of a party (known as a ‘force majeure’ event)? 10
15. What protection does each party have against loss? 10
16. Are there any additional requirements under Australian financial services laws on the proponent or aggregator? 10
Payment arrangements and dealing with ACCUs 12
17. What revenue will the site owner receive? 12
18. How can the site owner ensure they are paid? 12
19. Who owns the ACCUs? 12
20. What happens if there are insufficient ACCUs to deliver to the Regulator under the Carbon Abatement Contract? 13
21. What happens if there are more ACCUs created from the project than originally estimated? 13
Other matters to consider 14
22. Will work health and safety legislation need to be complied with? 14
23. Will the parties’ information be kept confidential? 14
24. Are there any special issues relating to native title land? 14
25. What happens if a dispute arises? 14
26. How should GST be addressed? 14
27. Who is required to obtain insurance? 15
Important questions for the aggregation agreement
1. Who are the parties, what is the project and where is the site?
Aggregation agreements will generally be between two parties – the proponent and the site owner.
· The proponent is the person who is responsible for undertaking the project and who will sign the Carbon Abatement Contract with the Clean Energy Regulator (Regulator) on behalf of the Australian Government to sell Australian Carbon Credit Units (ACCUs) generated by the project . The proponent must have the legal right to do the project.
· The site owner is the person who owns or has a legal interest in the land, building or facility which will be used for the project, for instance the site owner of a farm where trees will be planted to sequester carbon.
o For the purposes of this guidance, ‘site owner’ can refer to someone who is leasing an asset or site. This guidance will use the word ‘site’ to refer to the land, building or facility which the site owner brings to the project.
An aggregation agreement should set out the identities of the parties involved, the type of ERF project that is proposed to be undertaken, the site to be included in the project, and the ERF method that will relate to the proposed project.
An aggregator is a person or organisation who brings together emissions reduction activities on multiple sites into a single project. The aggregator may be the proponent, or may be employed by the proponent as a service provider.
Case study examples
For examples of draft aggregation agreement clauses which set out this information, see ‘Case studies in aggregation: environmental plantings project (example clause 1)’ and ‘Case studies in aggregation: industrial energy efficiency project (example clause 1)’.
Planning an aggregated project
2. Who will enter into the Carbon Abatement Contract with the Regulator? (Who is the proponent?)
The Carbon Abatement Contract is a contract between the project proponent and the Regulator on behalf of the Australian Government. It is an agreement that the Regulator will buy a certain number of ACCUs from the proponent at a pre-agreed price and time.
The Regulator will only enter into a Carbon Abatement Contract with a party who is the proponent for the ERF project. It is possible to have more than one person or entity as a proponent. Where there are multiple proponents, it is possible for one or all of the proponents to enter into a Carbon Abatement Contract with the Regulator.
Only the party who enters the Carbon Abatement Contract with the Regulator will be bound by its terms. That party must deliver ACCUs to the Regulator in accordance with the delivery schedule.
3. What does the proponent need to do to get the legal right to do the project?
The proponent for an aggregated ERF project needs to have the legal right to undertake the project and the exclusive right to be issued ACCUs earned by the project.
If the proponent is employing an aggregator as a service provider, the proponent can have the aggregator seek legal right from site owners on behalf of the proponent.
Where there is more than one proponent, it will need to be made clear through appropriate documentation (such as an agreement or letter) that all proponents have the necessary legal right and responsibility to undertake the project.
For more information, see the Legal Right section of the Regulator’s website.
Case study examples
For an example of a draft aggregation agreement clause transferring the legal right, see ‘Case studies in aggregation: environmental plantings project (example clause 5)’ and ‘Case studies in aggregation: industrial energy efficiency project (example clause 5)’.
4. Who will obtain the consent of ‘eligible interest holders’?
For all ‘area based’ projects[1], the consent of the ‘eligible interest holders’ must be obtained by the proponent in the way the Regulator requires.
Eligible interest holders may include:
· persons who hold an applicable carbon sequestration right,
· the lessor (if the site owner is renting or leasing the site or asset),
· banks holding a mortgage over the land,
· State or Territory Ministers (where the land is Crown Land), and
· registered native title holders (if the land is native title land).
The consent of the eligible interest holders can be obtained after the project has been registered but must be obtained before the end of the first reporting period for the project. The project cannot be fully approved (‘declared’) and ACCUs will not be issued until the consents are finalised. Parties may wish to get the consent of the eligible interest holders before the project is registered to make sure that the project can proceed as soon as registration has been achieved.
The parties to an aggregated ERF project need to decide who will get the consent of the eligible interest holders. If this obligation is placed on the proponent, it may be necessary for the site owner to provide assistance to the proponent to get these consents. For example, the site owner may need to approach their bank if there is a mortgage over the land.
Case study example
For an example of a draft aggregation agreement clause covering attainment of eligible interest holder consents, see ‘Case studies in aggregation: environmental plantings project (example clause 6.1)’.
5. Who will obtain the required regulatory approvals? How can the parties ensure that everyone complies with the regulatory approvals and laws?
All ERF projects will need to have the applicable regulatory approvals, such as planning or environmental permits, to carry out the project under Commonwealth, State or Territory laws.
Regulatory approvals can be obtained after the project has been registered but must be obtained before the end of the first reporting period for the project. The project cannot be issued with ACCUs until all approvals are obtained and the condition on the declaration is removed.
The parties to an aggregation arrangement will need to consider whether the regulatory approvals will be sought before or after project registration, who will be responsible for obtaining them, and who will be responsible for ensuring ongoing compliance.
Case study examples
For an example of a draft aggregation agreement clause about obtaining regulatory approvals or complying with laws, see ‘Case studies in aggregation: environmental plantings project (example clauses 6 and 7)’ and ‘Case studies in aggregation: industrial energy efficiency project (example clauses 6 and 7)’.
6. What consultation will occur between the parties in making decisions?
If there needs to be ongoing liaison between the parties, they may wish to include a ‘good faith clause’ in the aggregation agreement requiring them to consult with each other in relation to decisions that need to be made. Such a clause could be particularly beneficial for carbon sequestration projects, which cover a significant time frame (25 or 100 years).
There may also be situations where the proponent needs the site owner to notify them about changes in relation to the project. The parties may wish to include a clause in the aggregation agreement requiring the parties to notify each other of matters which might reasonably impact on the eligibility or operation of the project. For example, the proponent may seek to require that a site owner tell them if their site becomes part of another ERF project, or is operating under one of the government programmes excluded by the Carbon Credits (Carbon Farming Initiative) Rule 2015 . Further information on eligibility can be found on the Eligibility, additionality and newness section of the Regulator’s website.
Parties may also wish to include a dispute resolution clause in the aggregation agreement, which includes steps to follow if consultation and negotiation between the parties is not effective. Question 25 in this guidance document concerns dispute resolution provisions.
Case study examples
For an example of a draft aggregation agreement consultation clause, see ‘Case studies in aggregation: environmental plantings project (example clause 8)’ and ‘Case studies in aggregation: industrial energy efficiency project (example clause 8)’.
7. What is required before the aggregation agreement will commence (known as ‘conditions precedent’)?
The site owner may wish to have the proponent achieve certain milestones before the aggregation agreement takes effect, such as obtaining project registration or securing a Carbon Abatement Contract with the Regulator for instance. Parties should note that registering a project, even if it does not obtain a Carbon Abatement Contract, imposes the obligation to provide regular reports to the Regulator.
It is also possible that the proponent may wish the site owner to do something before the aggregation agreement takes effect. For example, the proponent may need information about the site owner’s building or facility so they can understand its current energy use and determine what energy efficiency opportunities may be available.
The parties will need to be careful, however, that the project does not ‘begin to be implemented’ before the Regulator has registered the project, as this may cause the project to fail the newness eligibility requirement. Further information on the newness requirement can be found on the Eligibility, additionality and newness section of the Regulator’s website.
Case study examples
For an example of a draft aggregation agreement condition precedent clause, see ‘Case studies in aggregation: environmental plantings project (example clause 3)’ and ‘Case studies in aggregation: industrial energy efficiency project (example clause 3)’.
Undertaking an aggregated project
8. How long will the aggregation agreement be in place?
The duration of an aggregation agreement will depend on a number of things.
An aggregation agreement will likely need to be in place for a period that matches the term of the crediting period for the project, where the crediting period represents the time during which ACCUs can be generated from a project. Additionally, the parties should consider if any additional time is required after the crediting period has finished to complete reporting and for auditors to check on the project.
An aggregation agreement may also commence before a project is registered or the crediting period starts. In these circumstances, the term of the agreement should cover this additional time. For example, it may be that a proponent enters into a short term Carbon Abatement Contract relating to an emissions avoidance project for a period of less than seven years, where seven years represents a standard crediting period. In these circumstances, the crediting period will be seven years, so the aggregation agreement will need to be in place for at least seven years.