EXPLANATORY STATEMENT

Carbon Credits (Carbon Farming Initiative) Act 2011

Carbon Credits (Carbon Farming Initiative - Land and Sea Transport) Methodology Determination 2016

EXPOSURE DRAFT

Background: Emissions Reduction Fund

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

In 2014, the Australian Parliament passed the Carbon Farming Initiative Amendment Act 2014, which established the Emissions Reduction Fund (ERF). The ERF has three elements: crediting emissions reductions, purchasing emissions reductions, and safeguarding emissions reductions.

Emissions reduction activities are undertaken as offsets projects. The processes involved in establishing an offsets project are set out in Part 3 of the Act. An offsets project must be covered by, and undertaken in accordance with, a methodology determination.

Subsection 106(1) of theAct empowers the Minister to make, by legislative instrument, a methodology determination. The purpose of a methodology determination is to establish procedures for estimating abatement (emissions reduction and sequestration) from eligible projects and rules for monitoring, record keeping and reporting. These methodologies will help ensure that emissions reductions are genuine—that they are both real and additional to business as usual.

In deciding to make a methodology determination, the Minister must have regard to the advice of the Emissions Reduction Assurance Committee (ERAC), an independent expert panel established to advise the Minister on proposals for methodology determinations. The Minister must not make or vary a methodology if the ERAC considers it inconsistent with the offsets integrity standards, which are set out in section 133 of the Act. The Minister will also consider any adverse environmental, economic or social impacts likely to arise as a result of projects to which the determination applies.

Offsets projects that are undertaken in accordance with the methodology determination and approved by the Clean Energy Regulator (the Regulator) can generate Australian Carbon Credit Units (ACCUs), representing emissions reductions from the project.

Project proponents can receive funding from the ERF by submitting their projects into a competitive auction run by the Regulator.The Government will enter into contracts with successful proponents, which will guarantee the price and payment for the future delivery of emissions reductions.

Further information on the ERF is available on the Department of the Environment and Energy website at:

Background: land and sea transportmethod

The Carbon Credits (Carbon Farming Initiative—Land and Sea Transport) Methodology Determination 2015 (the originalDetermination) was made on 13 February 2015. Itprovides for crediting emissions reductions from road, rail and sea transport, and mobile equipment such as mining and agricultural vehicles. It excludes air transport, as this is covered under a separate determination.Activities supported by the original Determination include:

  • replacing existing vehicles;
  • modifying existing vehicles;
  • changing energy sources (that is, fuel switching) or the mix of energy sources; and
  • changing operational practices.

The exposure draft Carbon Credits (Carbon Farming Initiative—Land and Sea Transport) Methodology Determination2016(the draft Determination)would replace the original Determination and extend its scope tomode shift activities. This would provide for crediting emissions reductions resulting from moving certain freight by rail instead of road, with rail transportation generally being less emissions intensive than road transportation. The draft Determination also includes minor amendments which clarify requirements in the original Determination, and adds vehicle hours as a service unit formobile equipment.

Public Consultation

The original Determination was developed by the Department of the Environment and Energy in collaboration with a technical working group of experts from the transport industry and the Regulator. The draft Determination has also been developed by the Department of the Environment and Energy in collaboration with a group of technical experts. Technical experts reviewed a version of the draft Determination prior to the release of this exposure draft for public consultation.

This exposure draft has been published on the Department’s website for public consultation from 25 October to 21 November 2016.Details for how to make a submission are provided on the Department of the Environment and Energy website,

Overview of the draft Determination

The transport sector generates direct (scope 1) emissions from fuel combustion and indirect (scope 2) emissions from electricity consumption by electric vehicles such as trains and cars. The draft Determination provides for crediting reductions in both scope 1 and scope 2 emissions by comparing the emissions intensity of transport service before and after the implementation of project activities. Emissions intensity is a measure of the level of emissions produced per unit of transport services provided, and can be measured using different service units which reflect the type of transport services offered. For example, the emissions intensity of passenger transport can be measured as emissions per passenger kilometre, whereas the intensity of freight transport can be measured as emissions per tonne kilometre. Crediting emissions reductions based on a reduction in emissions intensity provides for crediting emissions reductions when the level of service expands (and ensures credits are not provided for emissions reductions achieved when service levels contract) in response to normal market conditions.

This draft Determination incorporates three general activity types to provide flexible options for different transport businesses and proponents. These activity types are set out below.

A group of vehicles activitycredits emissions reductions from a group of vehicles. The group of vehicles can be made up of sub-groups, where each sub-group is made up of all vehicles in a vehicle categorywithin a business unit or transport operation, such as all light vehicles or all buses in a business unit or transport operation. Emissions reductions are credited against a historically derived emissions intensity baseline, which for some vehicle categories will decline over time. Emissions reductions from each sub-group are then aggregated. This type of activity is likely to be suitable for proponents who do not have data disaggregated to the level of individual vehicles, such aspublic or hire fleets and logistics companies.

An aggregated individual vehicles activitycredits emissions intensity reductions achieved by individual vehicles.The baseline emissions intensityis tailored to the vehicle and to the activity being undertaken and is generally based on historically-derived data. Emissions reductions from multiple individual vehicles are then aggregated. This type of activity is likely to be suitable for proponents with disaggregated, vehicle-specific data, such as rail and shipping operations.

For both the group of vehicles activity and the aggregated individual vehicles activity, the draft Determination is activity neutral, which allows it to support a broad range of activities to reduce emissions intensity within the transport sector,including:

  • replacing existing vehicles;
  • modifying existing vehicles;
  • changing energy sources (that is, fuel switching) or the mix of energy sources; and
  • changing operational practices.

A mode shift activity credits emissions reductions brought about by increasing the proportion of eligible freight moved by railinstead of road—as rail isgenerally a less emissions intensive transport mode. This new sub-method is likely to be most useful for transport logistics companies or companiesthat contract with transport logistics companies to move their goods.

Application of the draft Determination

The draft Determination sets out proposed rules for implementing and monitoring offsets projects that avoid emissions by reducing the emissions intensity of land and sea transport. These rules have been designed to reflect the requirements of the Act’s offsets integrity standards to help ensure emissions reductions are real and additional to business as usual. The offsets integrity standards require that an eligible project should result in carbon abatement that is unlikely to occur in the ordinary course of events, and is eligible carbon abatement under the Act. In summary, the offsets integrity standards also require that:

  • amounts are measurable and capable of being verified;
  • the methods used are supported by clear and convincing evidence;
  • material emissions which are a direct consequence of the project are deducted; and
  • estimates, assumptions or projections used in the determination be conservative.

Project proponents wishing to implement projects under the draft Determination,once it is made, must make an application to the Regulator under section22 of the Act. They must also meet the general eligibility requirements for an offsets project set out in subsection 27(4), which include compliance with the requirements set out in the draft Determination, and the additionality requirements in subsection 27(4A) of the Act. The additionality requirements are:

  • the newness requirement;
  • the regulatory additionality requirement; and
  • the government program requirement.

The government program requirement is provided for in the Carbon Credits (Carbon Farming Initiative) Rule 2015. Subsection 27(4A) of the Act provides that a methodology determination may specify requirements in lieu of any of the newness requirement or the regulatory additionality requirement. The draft Determination does not specify any requirements in lieu of the newness requirement or the regulatory additionality requirement, and so the general requirements would apply to land and sea transport projects.

Operation

If made, it is intended that the final version of the draft Determination—that is, the version produced following this public consultation process—wouldreplace the original Determination. This wouldbe achieved by revoking the original Determination and then making the final version of the draft Determination.

The revocation of the original Determination wouldnot affect projects that are already registered and using the original Determination. Even after a determination has been revoked, an eligible offsets project already registered can continue to use the determination in the form it was at the time the project was registered under section 127 of the Act. Once the draftDetermination comes into force, the project proponent may also choose to apply to the Clean Energy Regulator for approval to move to it under section 128 of the Act. All eligible offsets projects approved by the Regulator after the commencement of the final version of the draft Determination will need to comply with the final version of the draft Determination, even if the applications were submitted before the final version of the draft Determination commences.

Draft Determination details

The draft Determination will be a legislative instrument within the meaning of the Legislation Act 2003.

Details of the draft Determination are at Attachment A.

Note on this explanatory statement

Numbered sections in this explanatory statement align with the relevant sections of the draft Determination. Terms from the definition section of the draft Determination are highlighted in bold italicsthe first time they are used.

AttachmentA

DetailsoftheMethodologyDetermination

Part 1Preliminary

1Name

Thefullnameofthedraft DeterminationistheCarbonCredits(CarbonFarmingInitiative—Land and Sea Transport) Methodology Determination2016.

2Commencement

Section2 provides that thedraft Determinationwouldcommenceon thedayafteritis registered on the Federal Register of Legislation.

3Authority

Section3 providesthatthedaft Determinationwould bemadeundersubsection106(1)oftheAct.

4Duration

Under subparagraph 122(1)(b)(i) of the Act, a methodology determination remains in forcefor the period specified in the Determination. The draft Determination, once made, would remain in force for the duration set out in this section unless revoked in accordance with section 123 of the Act or section 42 of the Legislation Act 2003.

Section 4 provides that the draft Determination would be in force from its commencement (asprovided for in section 2) until the day before it would otherwise be repealed under subsection 50(1) of the Legislation Act 2003.

Instrumentsare repealed under that provision on the first 1 April or 1 October following the tenth anniversary of registration of an instrument on the Federal Register of Legislation. In accordance with subparagraph 122(1)(b)(i) of the Act, paragraph4(b) of the draft Determination sets out the time that the draft Determination would expire.

If the draft Determination expires in accordance with section 122 of the Act or is revoked under section 123 of the Act during a crediting period for a project to which the draft Determination applies, the draft Determination would continue to apply to the project during the remainder of the crediting period under subsections 125(2) and 127(2) of the Act. Project proponents may apply to the Regulator during a reporting period to have a different methodology determination apply to their projects from the start of that reporting period (see subsection 128(1) of the Act).

Under section 27A of the Act, the Emissions Reduction Assurance Committee may alsosuspend the processing of applications under a determination if there is reasonable evidencethat the methodology determination does not comply with one or more of the offsets integritystandards. This does not impact applications already received by the Regulatorbefore such a suspension, or declared eligible offset projects which apply the draft Determination.

5Definitions

Section5 definesanumberoftermsusedinthedraft Determination.

Generally,wheretermsarenotdefinedinthedraft Determination, but are defined in section 5 of the Act, they have the meaning given bytheAct.

Undersection23 oftheActsInterpretationAct1901, words inthedeterminationinthe singularnumberincludethepluraland words inthepluralnumberincludethesingular.

Keydefinitionsinsection5 ofthe draftDeterminationincludethosesetoutbelow.

Dutycycle,foravehicle, refers to the type of activity the vehicle is used for with respect to factors that materially affect the emissions intensity of the vehicle, including, where relevant:

  • the purposes for which the vehicle is used;
  • types of goods transported by the vehicle; and
  • areas or routes of operation for the vehicle.

Dutycycleisakeydriverof a vehicle’semissionsintensity.For example,atruck performinginterstatelinehaulis likelytohave aloweremissionsintensitythanthesametypeoftruckperforming regionallinehaul,becausethelatterislikelytoinvolvemorestops andmoreurban drivingthantheformer.

Dutycyclethusplaysan importantroleinthedraft Determinationto ensurethat emissionsintensityreductionsareachievedthroughthe application of projectactivities,ratherthan throughchangestoavehicle’sdutycycle.

Eligible freight descriptors,for a particular unit of eligible freight, means the consignor, the consignee, the container or consignment serial number, and the Transport Mode Shift (TMS) entity that is transporting the freight.

Emissionsintensitymeansemissionsproducedper unit ofserviceoutput(or work done).In thedraft Determination,emissionsreductionsarecalculatedbasedon reductionsin emissionsintensity,ratherthanreductionsin absoluteemissions.Thisistoallowa businessto expandor contractandstillbecreditedwith realemissionsreductions.Emissionsintensityis calculatedas the emissionsperquantityofservices,wherethe quantityofservicesismeasuredinserviceunits (seeserviceunitbelow), with the exception of the mode shift sub-method, where road and rail emissions intensities are specified in the draft Determination.

Eligible renewable electricity means renewable electricity generated from equipment installed as part of the project, but does not include renewable energy generated by equipment that is excluded by subparagraph27(4A)(c)(ii) of the Act.

There is an adjustment for eligible renewable electricity in the calculation of the net abatement amount. The adjustment is included so that credits may be issued for any renewable energy activities that may be included as part of an eligible offsets project under the legislative rules relating to the government programme requirement.

Serviceunitareunitsofmeasurefortheservicesperformedbyvehicles.Serviceunits areprescribedfor eachvehiclecategory,basedon thetypeofwork that vehiclecategorycommonlydoes.For example,theserviceunit forvehiclecategories thatprovidefreighttransportistonne-kilometre(tkm),whereastheserviceunitfor vehiclecategoriesprovidingpassengertransportispassenger-kilometre(pkm).

TMS entity (short for transport mode shift entity) means an entity that undertakes the eligible transport of eligible freight over eligible routes, or an entity that engages other entities to transport eligible freight over eligible routes.Such an entity could be a transport logistics companyor a goods ownerwho moves all of their freight themselves. TMS entities can also be entities that do not undertake the eligible transport of eligible freight over eligible routes themselves, but instead engage others to do so. Such TMS entities could include goods owners who engage others to transport their goods. Definitions for eligible freight and eligible routes are set out in section 6.

6 Meaning of eligible freight

Eligible freight means, for a transport mode shift activity, any freight that is packaged or containerised when transported, livestock, manufactured metal products, machinery, equipment and vehicles of any of the following categories:

  • articulated trucks;
  • light vehicles;
  • mobile equipment;
  • non-freight carrying trucks;
  • rigid trucks;and
  • tractors.

As an example, grain within bags would be considered eligible freight, however, loose unpackaged grain would not be eligiblefreight.

The intention of this definition is to limit eligible freight to items which can be readily transferred between trucks and trains, and to exclude bulk freight such as coal, iron ore and non-containerised grain that are typically moved by rail. Examples of packaging include grain in sealed bags, or strapped or plastic wrapped goods on a pallet.

For comment: definition of eligible freight
Views are sought on the definition of eligible freight. The intention of the definition is to be as inclusive as possible while excluding items that are predominately transported by train, such as coal. Is there a different way to describe eligible freight that would achieve this outcome?
Alternatively, are there any other forms of freight that are (a) not considered to be packaged or containerised, (b) that can be readily moved between road and rail, and (c) that are not currently predominately moved by rail, and should therefore be considered for coverage under the mode shift sub-method?

7 Meaning of eligible route andcatchment area

Eligible routesare defined in subsection 7(1) as routes listed in Table 1 of Schedule 3.The intermodal terminals for cities referred to in that table are set out in Table 2 of Schedule 3.

For comment: list of eligible routes
Schedule 3 includes a list of eligible routes on which mode shift activities can be credited. Routes were included where infrastructure supporting alternative modes of transport exits between two intermodal terminals. That is, where non-bulk freight can be moved either by road or by rail between two intermodal terminals, providing an opportunity to mode switch from road to rail.
Views are sought on the eligible routes as listed in Schedule 3. Are there other routes currently serviced by both rail and road infrastructure that hold a reasonable potential for mode shift activities that should be included in Schedule 3?

Catchment area is defined in subsection 7(2) as the area around a terminal of an eligible route bound by a circle that has its centre at the terminal and has a radius equal to the smaller of either 5 per cent of the length of the rail route given in Schedule 3, or 100 km.