EMISSIONS REDUCTION FUND

Methodology Determination Guidelines
January 2015

Table of Contents

1. Introduction

2. The Emissions Reduction Fund

3. Making methodology determinations

3.1 Emissions Reduction Assurance Committee

3.2 Decision by the Minister

4. Requirements for methodology determinations

4.1 Methodology determinations should be streamlined

4.2 Additionality

4.3 Baselines

4.4 Greenhouse gas assessment boundary

4.5 Crediting periods

4.6 Monitoring, reporting and record keeping

5. Offsets integrity standards

5.1 Eligible carbon abatement

5.2 Supporting evidence

5.3 Conservative estimates

6. Other technical issues

6.1 Accounting for variability

6.2 Materiality

6.3 Models and calculators

6.4 Forward crediting

6.5 Global Warming Potentials

6.6 Electricity grid factors

6.7 References to technology, equipment and products

6.8 Partial reporting

7. Review of methodology determinations

1. Introduction

Methodology determinations set out the rules for estimating emissions reductions from different activities. They ensure that emissions reductions are genuine—that they are both real and additional to business-as-usual operations.Methodology determinations will be made as legislative instruments by the Minister for the Environment.

Methodology determinations are developed by the Department of the Environment (the Department)through consultation with technical working groups that include business, technical experts and government representatives, including fromthe Clean Energy Regulator and other relevant agencies.

Methodology determinations are assessed by an independent expert committee, the Emissions Reduction Assurance Committee. The Emissions Reduction Assurance Committee will assess methodology determinations against the requirements set out in the Carbon Credits (Carbon Farming Initiative) Act 2011(the Act), including the offsets integrity standards in section 133 of the Act.

Under paragraph 123A(5)(b) of the Act, the Emissions Reduction Assurance Committee must also have regard to any relevant matters specified in a direction under section 123B of the Act. It is intended that by direction under section 123B of the Act the Emissions Reduction Assurance Committee will be asked to have regard to whether or not a proposed methodology determination, variation of a methodology determination or revocation of a methodology determination is consistent with this document.

Accordingly, the purpose of these guidelines is to:

  • include other matters that the Emissions Reduction Assurance Committee will take into account when assessing whether a methodology determination should be made, varied or revoked, and
  • serve as a useful guide to stakeholders and technical working groups in developing methodology determinations.

2. The Emissions Reduction Fund

The Emissions Reduction Fund provides an incentive to businesses across the economy to reduce emissions. Its aim is to reduce emissions at lowest cost and contribute towards Australia’s 2020 emissions reduction target of five per cent below 2000 levels by 2020.

The Emissions Reduction Fund allows businesses, state and local governments, community organisations and individuals to undertakeapproved emissions reduction projects and to compete for payment from the Government for those projects through a reverse auction or other purchasing process.

The Emissions Reduction Fund makes a positive difference to the environment and boosts productivity by supporting projects such as:

•upgrading commercial buildings

•improving the energy efficiency of homes and industrial facilities

•reducing electricity generator emissions

•capturing landfill gas

•reducing waste coal mine gas

•reforesting and revegetating marginal lands

•improving Australia’s agricultural soils

•reducing emissions from agriculture

•upgrading vehicles and improving transport logistics, and

•managing fires in savanna grasslands.

The Emissions Reduction Fund is administered by the Clean Energy Regulator.

The Clean Energy Regulator will issue Australian Carbon Credit Units for emissions reductions that are generated using approved methodology determinations. These credits can then be purchased through the Emissions Reduction Fund or used under voluntary carbon offsetting programmes.

Methodology determinations for crediting emissions reductions are under development for activities, such as capturing gas from landfills, as well as for large industrial facilities. To enable a wide range of businesses to participate in the Emissions Reduction Fund, a range of emissions reduction methodology determinations will be available.

The Clean Energy Regulator will purchase emissions reductions at the lowest available cost, primarily through reverse auctions.

The Clean Energy Regulator will enter into contracts with successful bidders, which will guarantee payment for the future delivery of emissions reductions. Emissions reductions will be purchased at the bid price. The contracts will be standardised, provide commercial terms and conditions, and provide for payment to be made on delivery of emissions reductions.

3. Making methodology determinations

The Minister will identify the priorities for methodology development, following consultation with business and advice from the Emissions Reduction Assurance Committee and the Department.

The Government will work collaboratively with business, through technical working groups, to develop priority methodology determinations. The Minister will also seek the advice of the Emissions Reduction Assurance Committee on the priorities for methodology development.

The Department will provide draft methodology determinations to the Emissions Reduction Assurance Committee for assessment. Where there are significant differences of viewwithin the technical working group about aspects of the draft methodology determination, these will be brought to the attention of the Emissions Reduction Assurance Committee for consideration.

3.1 Emissions Reduction Assurance Committee

The Emissions Reduction Assurance Committee provides advice to the Minister on the suitability of methodology determinations.

Methodology determinations will be released for apublic consultation period of 28 days unless the Emissions Reduction Assurance Committee considers that a shorter period of public consultation is appropriate, for example because the draft methodology determination is a relatively straightforward variation of an existing methodology determination.

Public submissions on methodology determinationswill be published on the Department’s website unless the author specifically requests that they remain confidential.

The Emissions Reduction Assurance Committee may request an external technical assessment of methodology determinationsduring the public consultation period.

Technical assessments of draft methodology determinations may also be undertaken by the Department in consultation with technical working groups during the methodology determination development process. These will also be provided to the Emissions Reduction Assurance Committee.

The draft methodology determination may be revised in light of the outcomes of public consultation and any technical assessment, and the views of the Emissions Reduction Assurance Committee.

The Emissions Reduction Assurance Committee will then consider the revised methodology determination, taking account of feedback from the Clean Energy Regulator, and advise the Minister on whether they consider thatthe determination meets the offsets integrity standards.

The advice of the Emissions Reduction Assurance Committeewill be published on the Department’s website as soon as practical after the Minister has decided whether to make a methodology determination.

The Emissions Reduction Assurance Committee will monitor and review methodology determinations on an ongoing basis to ensure that they are consistent with the offsets integrity standards.Members of the public can also request that the Emissions Reduction Assurance Committee review methodology determinations. The Emissions Reductions Assurance Committee can suspend a methodology determination for up to 12 months where there is reasonable evidence that it does not comply with the offsets integrity standards. This will not affect existing projects.

3.2 Decision by the Minister

The Minister will decide whether or not to make a methodology determination. The Minister may also vary or revoke a methodology determination. The Minister cannot make or vary a methodology determination if the Emissions Reduction Assurance Committee has advised that this would be inconsistent with the offsets integrity standards.

In making these decisions, the Minister will consider:

  • whether the methodology determination complies with the offsets integrity standards
  • the advice of the Emissions Reduction Assurance Committee
  • any adverse environment, economic or social impacts from projects applying the methodology determination identified through public consultation
  • any other matters (if any) as the Minister considers relevant, and
  • advice from the Department on the above.

3.2.1 Adverse impacts and project risks

When deciding to make a methodology determination, the Minister will consider whether the activity can be undertaken safely and without adverse impacts, and the regulatory frameworks already in place to encourage this to occur.

Some activities could have adverse social, environmental or economic consequences. It would be inconsistent with the Government’s broader policy objectives to provide incentives for activities that have significant adverse impacts through the Emissions Reduction Fund.

Some emissions reduction activities cannot be undertaken safely or are very likely to have significant adverse impacts. For example, feeding cattle nitrate supplements at low concentrations can reduce methane emissions and improve productivity. At higher concentrations these supplements can reduce the condition of the cattle and cause illness or death of the cattle. The Government has developed a methodology determination for the use of nitrate supplements for cattle, whichrestricts the amount that can be fed to the cattle to levels well below those that could be toxic. The Minister will not make a methodology determination for an activity that cannot be undertaken safely or is very likely to have significant adverse impacts, including where regulatory frameworks are still evolving.

In most cases there are existing regulatory frameworks in place to address these risks and potential impacts. The Act does not exempt or diminish any obligations a project participant may have under other government laws, including workplace health and safety laws. The Act also provides that credits will not be issued for projects until they have obtained all relevant environmental and planning approvals.Nonetheless, the relevant Commonwealth, State and Territory regulators are responsible for enforcing compliance with obligations imposed outside of the Act, not the Clean Energy Regulator.

In general, restrictions should not be included in a methodology determination to address potential, hypotheticalor indirect adverse impacts. For example, methodology determinations should not be used to indirectly regulate matters that are not directly related to the conduct of the project such as the downstream disposal of equipment related to a project. In exceptional circumstances this could be considered, where the benefits of doing so:

  • clearly outweigh the costs
  • relate directly to the emissions reductions that can be credited,and
  • are auditable.

The Department will issue further guidance on this issue, noting the ERAC’s role in providing advice to the Minister.

4. Requirements for methodology determinations

4.1 Methodology determinations should be streamlined

Reducing red tape is a key part of the Australian Government’s plan to build a strong, prosperous economy. Through the deregulation agenda, the Government is reducing the burden on businesswhile achieving better environmental outcomes.

Methodology determinations will ensure that the regulatory burden on Emissions Reduction Fund projects is minimised wherever possible. This means that methodology determinations will be as simple as possible and the resources required to apply them, including the proponent’s time, should be as low as possible.

4.2 Additionality

Under the Emissions Reduction Fund, additionality will be assessed at two stages - in developing and making methods, and when a project is registered with the Clean Energy Regulator (4.2.2).

The offsetsintegrity standards specify that a methodology determination should result in emissions reductions that are unlikely to occur in the absence of the incentive provided by the scheme.

For each type of activity there will be different factors that can have an impact on additionality. Each methodology determination will need to ensure that, to the maximum extent practical, business-as-usual emissions reductions are accounted for and not credited. Methodology determinations include a number of elements that can be used to ensure that emissions reductions are additional, including:

  • eligibility criteria
  • baselines, and
  • crediting periods.

These guidelines contain information about each of these elements, including how they can be used to ensure that emissions reductions are genuine and additional.

The Emissions Reduction Assurance Committee may advise the Minister that the methodology determination should be reviewed more frequently than every four years. For example, in the case of a broad based methodology determination where information becomes available about the range of projects applying a methodology determination over time, it will become easier to assess whether a baseline scenario is appropriate for all of the covered projects or only appropriate for some projects.

These early reviews will consider whether a methodology determination should be varied to include new eligibility criteria or whether new, activity-specific methodology determinations should be developed, with tailored baselines, for some types of projects. This will enable approaches to additionality to be monitored and refined over time.

4.2.1 Eligibility criteria

Eligibility criteria are used to define the types of projects that are permitted under a methodology determination and can include industry type, activity scope, and geographic location. They can be used to ensure that emissions reductions are additional. For example, a methodology determination for alternative waste treatment may be limited to advanced composting technologies that are not common practice and exclude traditional composting practices that are commonly undertaken.

Methodology determinations must specify the eligibility criteria. If a project ceases to meet these criteria, the Clean Energy Regulator is unable to issue Australian Carbon Credit Units for the project until the project complies with eligibility requirements, or alternatively the Regulator may revoke the project’s registration.

Eligibility thresholds can be used to identify additional activities. For example, a building energy efficiency methodology determination could require projects to gain a minimum number of energy rating stars under an energy rating system before they can begin to receive credits for further energy efficiency improvements.

The eligibility criteria will not place unnecessary restrictions on the way project proponents can undertake projects. Where possible, determinations will accommodate common events or differences in projects by including approaches for calculating their impact on emissions reductions.

4.2.2Other additionality requirements

Additionality will also be assessed when a project is registered with the Clean Energy Regulator. The Act requires theClean Energy Regulator to only register projects that are new, are not required by Commonwealth or state government regulations and would not occur as a result of funding from another government program.

Methodology determinations can, however, prescribe alternative additionality requirements in lieu of the newness and regulatory additionality requirements in the Act. The specific requirements relating to how the Emissions Reduction Fund interacts with support from other government programmes will be set in legislative rules.

Methodology determinations may establish an approach for regulatory additionality that, in some cases, utilises sectoral specific baselines.

4.3Baselines

Methodology determinationsshould provide rules for establishing project baselines. The project baseline is the alternative emissions scenario that would eventuate in the absence of the project. It reflects the activity, practice or level of emissions likely to occur in the normal course of events. Emissions reductions are measured relative to the project baseline.

4.3.1 Absolute or intensity baselines

Baselines can reflect absolute emissions (or levels of sequestration), emissions intensity per unit of production, or other factors.

Absolute baselines can be used where the project activity is the main variable (although not necessarily the only variable) that affects emissions from the project. For example, absolute baselines are often used in methane capture and flaring methodology determinations, which measure the amount of gas that would otherwise be released into the atmosphere. Absolute baselines are also used for sequestration projects, which typically compare carbon stocks before and after the project. Other variables, such as natural variation, can affect emissions and sequestration rates, and absolute baselines may need to account for this natural variability.

Emissions intensity baselines should be used where variables other than the project activity are the main variable that affects emissions from the project. For example, a smelter may increase or decrease its production in response to changes in global prices for its product. These changes are unrelated to the project activity but have a large affect on the project’s emissions. Emissions intensity baselines can be used to ensure that credits are not issued for business-as-usual emissions reductions that are the result of factors such as lower production, or changes to product mix or building occupancy or function.

Emissions intensity baselines also enable incentives to be provided for improvements in energy efficiency, irrespective of whether production increases with a resulting increase in the project’s net emissions.

4.3.2 Historical or projected data

Baselines can be based onsimple linear extrapolations from historical emissions trends or more complex forecasting techniques that rely on the identification of relationships with underlying variables.

In the absence of a project where activity and production methods are expected to remain relatively stable or change at a predictable rate,historical data can provide a good guide to the likely emissions.Where historical emissions data shows a trend, either upwards or downwards, this trend should be reflected in the baseline over the crediting period.This approach should be used where there is enough historical data to establish a statisticallysignificant trend over time.

Historical data does not, however, account well for circumstances where activities or emissions intensity is expected to change in the future in unpredictable ways. For example, historical data isnot a good indicator of future emissions from underground coal mines where emissions are a product of geological factors rather than regulatory, economic or technological trends.