‘Methodologically flawed’ (Part 1)—An Introduction to the Emissions Reduction Fund

Now that the Federal Government seems to be seriously considering topping up the Emissions Reduction Fund (‘ERF’), I figured it was time to kick off getting my research on its methodological issues out into the world. So I have decided to start a series of posts I have chosen to call ‘Methodologically flawed’. This series will investigate the various and varied issues in the ERF for a general audience so you can understand exactly why, when experts say that the ERF is deeply problematic, it is in fact deeply problematic.

To do this, though, I have to get everyone on to the same page with regard to what the ERF actually is, and how it works. That is the purpose of this piece.

The Emissions Reduction Fund (ERF) has huge potential. Despite valid criticisms of greenhouse gas offsetting, including that offsetting is often used to justify environmentally damaging behaviour, the problem is not the purchasing of greenhouse abatement itself.

The ERF itself is one of the strongest and most verifiable greenhouse gas offsetting regimes in the world. That sounds like it should be a good thing. It isn’t. As I will detail in later posts, the ERF has huge problems that go to the heart of our ability to trust whether the scheme is doing its job. The fact that it is among the strongest schemes in the world cannot be a source of praise for the architects of the scheme. Instead, it is a sign of just how rubbish the others are.

False equivalences and loopholes abound in the ERF. Tortured logic is frequently used in justifying choices made in the legal regime.

In this series, I will detail some of the methodological weaknesses that I have uncovered. The use of the word ‘methodologically’ is an intentional pun, though I recognise that it isn’t a particularly good one. The use of that word in the title to the series refers to both systemic problems in way the scheme verifies abatement before crediting it and the fact that most of these issues relate to the deeper architecture of the scheme, namely, the methodologies.

These weight of these issues twist the ERF from a scheme that could be brilliant into one that, quite frankly, is not.

For a more detailed description of the mechanism of the ERF than I can fit here, and one that has passed peer-review, readers can refer to parts 2 and 3 this open-access article in the Australian Journal of Environmental Law. That piece, which I wrote with George Gilligan (now at Monash University) discusses the specific problems with the Landfill Gas methodology, but the earlier sections speak to the scheme in general.

The Basic Structure of the ERF

The Emissions Reduction Fund contains three key mechanisms to deal with with the various aspects of the scheme.

  1. The crediting mechanism involves the registration of abatement projects and the crediting of abatement activities with the ERF’s unit of trade, the Australian Carbon Credit Unit (‘ACCU‘);
  2. The contracting and purchasing mechanism through which ACCUs are purchased from project proponents under contract; and
  3. The safeguard mechanism which is designed to control increases in emissions elsewhere in the economy.

All three aspects are administered by the Clean Energy Regulator, a Government body that is tasked with many federal government functions relating to Australia’s greenhouse gas emissions. Its key roles also include administering the Commonwealth Renewable Energy Target and the National Greenhouse and Energy Reporting Scheme. For those more familiar with the regulation of companies, it is essentially the greenhouse gas equivalent of the Australian Securities and Investments Commission, more commonly known as ASIC.

My work focuses on the crediting mechanism and, in particular, on the process of crediting abatement after projects have registered for the ERF. This website follows that pattern.

The credit received by projects is, as noted above, in the form of a tradable credit, the ACCU. On paper, the ACCU is equivalent to the abatement of greenhouse gases equivalent in their effect on the climate of one tonne of carbon dioxide. While abatement of other greenhouse gases is covered by the scheme, with methane being especially prominent, the bulk of the abatement credited and purchased under the scheme is carbon dioxide.

Abatement comes in two forms, avoiding emissions of greenhouse gases that would have been released (‘emissions avoidance‘) or drawing down greenhouse gas emissions (‘sequestration‘). If a project does both, as some avoided deforestation projects do, then it is deemed by the Act to be a sequestration project. this definition causes problems with the enforceability of obligations under the Avoided Deforestation methodology. I’ll get to that in a later post.

The legal architecture is contained in the Carbon Credits (Carbon Farming Initiative Act 2011. This Act predates the ERF significantly, and the first version of the Act was passed by the Gillard government as part of the legal regime for Australia’s short-lived carbon price.

This history is important. While the Australian Labor Party (currently in opposition), has frequently criticised the ERF, many of the issues in it were introduced in their version of the Act. The main difference was that they were planning to purchase the abatement directly. Instead, industry participants would have been buying the credit to offset their own increases in emissions. The Australian Government under the ALP would still have been claiming these were legitimate emissions reductions to the domestic and international criticism.

The problems with the ERF are not related to who buys the credit though.

If the ERF is a policy failure, it is one where responsibility is shared across the major (and minor) parties.

The life cycle of a project under the ERF

Emissions Reduction Fund project life-cycle new
The simplified life cycle for ERF projects that enter into contracts with the Clean Energy Regulator (source: Baxter and Gilligan (2017))

A project proposal needs to be linked to an existing method under the ERF. These methods are initiated in various ways, but usually either by the Department of Environment and Energy or from the prospective participants with an idea for how verifiable emissions abatement might occur.

The methods vary considerably with 37 different approved methods at the time of writing. Current activities counted as abatement under the scheme include tree planting, the capture and combustion of methane from landfill sites, agreements to not deforest lands scheduled to be cleared, commercial and industrial energy efficiency, and early-season burning of savanna grasses among others.

Methods are developed by the Department, in consultation with prospective participants and other consultants and reviewed the the Emissions Reduction Assurance Committee, a body which is separate to both the Regulator and the Department. That body is responsible for testing the method’s compliance with the Offsets Integrity Standards. These standards include tests for whether the proposed method will result in abatement that would not have occurred without the existence of the ERF and whether the proposed method is underpinning by clear and convincing scientific evidence.

The recommendation of the Committee is forwarded to the relevant Minister who must consider that advice when deciding to allow a methodology to take part in the scheme.

The methodologies take the form of subordinate legislation, meaning that they are laws passed by the Minister on the approval of Parliament without the need for Parliament to separately pass the specific law.

Once the Minister has approved and released a methodology, prospective participants can register for the ERF. That process involves various tests of of both the character of the participant (including determining whether the participant is a ‘fit and proper person’) and the integrity of the project (including various tests of whether the project has already started, is legally required, or would be more appropriately funded by another government program. Importantly, these tests can be circumvented by the rules in the methodology, and are, to spectacular effect, in the landfill gas methodology.

Once projects are registered for the fund, they can begin generating abatement credits immediately. They can usually generate credit for 7 or 15 years with the rules for this outlined in the methodology. The process of receiving ACCUs involves applying to the regulator, and the units being issued as a consequence.

After receiving their ACCUs, these can be sold as soon as they are received to the voluntary market (people or companies making the voluntary choice to offset their own climate impacts), to other ERF projects with a shortfall under their contracts (more below) or to facilities caught by the safeguard mechanism who have overshot their baseline. This secondary market is the smaller component of the ERF.

They cannot, however, sell their abatement to the Government. Selling to the Government requires a contract for delivery which to date has been available only to those projects that successfully bid into one of the Clean Energy Regulator’s ‘reverse auctions’.

Reverse auctions are held twice a year. To date, there have been seven such auctions, with the most recent being in June 2018. The next auction is scheduled for this coming December.

Reverse auctions involve fund participants making sealed bids to the Regulator to provide a specified amount of ACCUs at a set price per unit. The regulator selects from these bids with the joint priority of receiving the lowest available price and maintaining a diverse portfolio of abatement. The average price per ACCU contracted has been $11.92 over the life of the scheme, with the average price at individual auctions ranging between $10.23 (April 2016) and $13.95 (April 2015). It is not possible to find out the price offered or accepted for any individual project as the Regulator treats this information as commercially sensitive. Anecdotally, however, bid prices vary by an order of magnitude either side of the average at a given auction (from a few dollars per ACCU to more than one hundred). The Regulator will select a proportion of the very cheap abatement and a proportion of the more expensive to maintain its diversity.

These contracts will determine a set time period over which the contract must be fulfilled, ranging from one year to ten years, and a schedule over which partial completion must be achieved. The specifics of the schedule are also hidden from public view.

If a project fails to generate sufficient abatement credits to meet their contractual obligations to the regulator, then they must purchase them on the secondary market (see above) from other projects that are either not covered by a contract, or are over-performing.

The fund itself is worth $2.55 billion. At present approximately $200 million of that has not been allocated to specific contracts. $400 million has been paid out under contracts so far and existing contracts are expected to deliver roughly 190 million ACCUs, or 190 million tonnes of carbon dioxide equivalent greenhouse abatement.

There is talk within government of announcing a second round of funding for the ERF over the coming months. Given the federal Government’s relative lack of effective climate policy, it would seem very likely that some kind of announcement of this sort would be needed before the next election.

Whether or not this occurs, and I would be likely to put money on the fact that it will if I actually had any, the ERF architecture, if not in its current form, will likely continue under a future government regardless of whether the Prime Minister has a penchant for red or blue ties.

The Coalition will be unlikely to undo their own scheme, regardless of the kerfuffle currently under way in their ranks. The ALP will need some form of offsetting architecture beneath whatever emissions reduction policy they create should they win the next election. As the ERF is essentially their own scheme with a shifted function, it would seem very likely that it will continue with minor modifications.

Over the coming days and weeks, I am going to step through some of the issues with the ERF methodologies in a series of pieces I have chosen to call ‘Methodologically Flawed‘. When published, these pieces will be featured on my twitter account @timinmitcham, but I will also add them here.

EDIT: Part two in the series, which discusses how the ERF manages climate risk, is now available.

Part three of the series discusses how despite participants under the ERF’s Avoided Deforestation methodology being paid to protect their land for 25 or 100 years, there is probably nothing the Government can do if a participant chooses to clear their land.

Until then, if you’re excited to jump in, please feel free to review these two pieces published elsewhere:

Freelance journalist Adam Morton also wrote extensively about the ERF earlier this year:

And finally, see this piece from Sydney Morning Herald’s Peter Hannam:

Finally, for a summary of the status of the different methodologies (correct as at 19/10/2018), see below:

MethodologyACCUs IssuedACCUs Sold to Gov’tACCUs Committed
to Gov’t
Human-Induced Regeneration of a Permanent Even-Aged Native Forest (various versions)10,955,2469,701,00692,271,654165270
Avoided Deforestation (various versions)14,518,5499,670,34225,925,5635662
Landfill Gas (various versions)17,262,4208,185,50519,921,55543107
Sequestering Carbon in Soils in Grazing Systems Methodolgy 20140016,725,0001045
Savanna Burning (various versions)5,992,3502,172,76013,279,5894987
Coal Mine Waste Gas Methodolgy 2015418,66395,3033,942,302916
Alternative Waste Treatment Methodolgy 20151,385,424974,4343,619,9621119
Native Forest from Managed Regrowth Methodolgy 20132,132,5891,735,0283,260,3001837
Commercial and Public Lighting Methodolgy 201526,098280,2612,694,927413
Industrial Electricity and Fuel Efficiency Methodolgy 2015335,465143,1452,380,838839
Reforestation by Environmental or Mallee Plantings (various versions)204,767437,3881,718,662840
Land and Sea Transport Methodolgy 201512,468100,1041,220,00337
Destruction of Methane in Piggeries (various versions)458,926270,837892,6661015
Designated Verified Carbon Standard Projects Methodolgy 2015418,750357,725771,99513
Plantation Forestry Methodolgy 201700531,054510
Reforestation and Afforestation (various versions)1,276,428137,365527,399523
Measurement of Soil Carbon Sequestration in Agricultural Systems Methodolgy 201800300,00011
Domestic, Commercial and Industrial Wastewater Methodolgy 2015014,145280,00024
Beef Cattle Herd Management Methodology 201523,6530184,00015
Source Separated Organic Waste Methodolgy 201601,000147,00019
Commercial Buildings Methodolgy 201500004
Quantifying Carbon Sequestration by Permanent Environmental Plantings of Native Species using the CFI Reforestation Modelling Tool Methodolgy 201251,88500049
Destruction of Methane Generated from Dairy Manure in Covered Anaerobic Ponds Methodolgy 201200001
Aggregated Small Energy Users Methodolgy 201500002
Refrigeration and Ventilation Fans Methodolgy 201500001
High Efficiency Commercial Appliances Methodolgy 201500002
Aviation Methodolgy 201500001
Measurement Based Methods for New Farm Forestry Plantations Methodolgy 201400001
Facilities Methodolgy 201500002
Grand Total55,473,68134,276,348190,594,469410875

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