‘Methodologically flawed’ (Part 2)—How the Emissions Reduction Fund handles climate risk

As the first substantive part of the series on flaws in the Emissions Reduction Fund, I’ll be looking at how the ERF manages climate risk to projects. If this is too long for you, the short version of the story is: it pretty much doesn’t.

If you’re new to the ERF, this is not the best starting point. If you need an overview of how the ERF works, I suggest that you read Part 1 of the series. That post talks through the basics of the scheme in a way that, hopefully, anyone with a passing interest in our climate policies could understand. If you are unfamiliar with the ERF and haven’t read that post yet, you probably should. I’ll wait.

The ERF is a climate scheme that is designed to reduce Australia’s impact on the climate. It does this by paying project proponents to sequester (i.e. draw out out the atmosphere) or avoid greenhouse gas emissions that would otherwise be released into or remain in the atmosphere and force the absorption of energy destabilising the climate in the process.

It’s kind of odd then that the calculations for the scheme do not include climate change risk as a factor in calculating abatement or even make any allowance for climatic change to enter into the calculations of how many ACCUs (carbon credits) credit a project will get.

There are many potential impacts of climate change that will affect Australia. The most certain are:

  • Increased frequency, duration and intensity of heatwaves as well as elevated annual temperatures;
  • Decreased annual rainfall but with a high likelihood of increased intensity behind the rain when it does fall; and
  • Sea level rise paired with a higher likelihood of damaging storm surges.

This is generalising significantly though. Making these predictions in a one size fits all manner for a country the size of Australia is quite unsound. The continent’s position at the interface of several oceans as well as its relative geographical isolation mean that the natural climate forces affecting the Australian continent are chaotic and difficult to predict even before climate change is taken into account. As such, the impact on any given region of Australia will differ significantly from place to place.

Because I am talking about a scheme that covers every inch of Australia though, I have to generalise.

You can examine local impacts through CSIRO and the Bureau of Meteorology’s Climate Analogues Explorer if you want to get a sense of the impacts in a given region. Though be cautious, because the data underpinning that site is now a few years old (2012), and this is a rapidly evolving area of research. I’m linking to it, rather than more recent published papers, because it is simple to use and free.

So, in general and remembering that local effects will vary, I n terms of the concrete effects on Australia climate change will likely mean a higher frequency and intensity of drought and bushfire weather in many regions as well as a higher frequency and intensity of flood (whether riverine, coastal or overland).

Among the ERF’s 37 approved methodologies, very many are vulnerable to these risks, not least because very many are vegetation- or agriculture-based. Emissions avoidance projects will be relatively unaffected. Sequestration projects, which is most whether you count number of projects, number of methods, or volume contracted, will feel the effects of climatic change. Some of the abatement will escape into the atmosphere. In the Act, this is referred to as a reversal.

Participants running a sequestration project have a choice of permanence period. A permanence period is the name for the amount of time that the proponent is compelled to preserve the store of carbon on their land. It is also the length of time that the penalty provisions I get to in a moment can apply. Participants may choose a 25 or a 100 year permanence period, but either way, the credited abatement is calculated against the amount of abatement that would be sequestered over 100 years. A standard discount is applied to the number of ACCUs received.

One hundred years is a damned long time. Long enough that virtually everywhere will see some kind of catastrophic event occur even if you only include fire, flood and drought and ignore the effect of climate change. It’s also far enough into the future for climate change to have really kicked in, with the majority of Australia being hotter, drier and more prone to flooding. There’s a reason that the Intergovernmental Panel on Climate Change (‘IPCC’ to most) uses 2100 as its main reference date. There’s a reason urban planning schemes refer to the risk of a 1-in-100-year flood when deciding whether you can build near a floodplain. It’s long enough for an extreme event to occur.

It’s long enough for a plantation to burn, or dry out, or be bowled over by flood.

So what do the ERF methods do about climate risk? To understand this, I need to explain a little about how credits are issued under the ERF.

The Crediting Structure under the ERF

I will use the avoided deforestation method as my example here, because it is the most straightforward with regard to calculation. A future post will discuss how even though this method is considered a sequestration method by most (including some with a hand in administering the Fund), many avoided deforestation projects are not in fact sequestration projects. That not uncontroversial distinction means that landholders receiving credit for not clearing their land can probably clear it anyway without penalty. They can probably also continue to be paid afterward.

Because all sequestration projects calculate their abatement by examining the storage potential over 100 years, even if the permanence period is only 25, for simplicity, I’ll just be referring to the 100 years here.

Another important term here is the crediting period. This is the period over which the projects can receive ACCUs in exchange for their abatement activities. For sequestration projects the crediting period is 15 years. This means that despite the legal obligation to preserve the carbon stores for 100 years and despite the fact that some of the abatement won’t be realised until later, all of the credit for running the project will be received in the first 15.

In very simplified form, the calculation in the case of avoided deforestation is essentially:

Equation showing the manner of calculating abatement each year where the full abatement predicted to be created over 100 years (in tonnes of carbon dioxide equivalent gases) is divided by the number of years in the crediting period. The outcome of this equation is the number of carbon credits (ACCUs) distributed each year.
tCO2-eq: tonnes of carbon dioxide equivalent gases avoided or captured by the project

This means that much of the credit for the project is received well before it occurs.

To this, a ‘risk of reversal buffer’ is added. This buffer is supposed to account for the impact of minor failures in the project. The risk of reversal buffer is currently set at 5%, so participants receive only 95% of the abatement credits they otherwise deserve each year. More on this later.

Penalty regime

The legislation for the ERF then pushes all risk of failure of the sequestration project off onto the participant. Remembering that over 100 years some kind of failure is virtually assured for every project, what happens then?

Sequestration projects have their own penalties in the CFI Act. These penalties do not apply to other projects and relate to what a project must do in case of a reversal.

There are two separate penalties that apply: one if the reversal is caused by a natural cause (disease, flood, fire, drought, etc., but this penalty also considers vandalism separately) and one through other causes (for instance, if the landholder or someone else decides to clear-fell the land). We’ll focus on natural causes because this is where the Act says climate risks fit.

It’s important to note here that the only other penalty that might be applied to a participant under the Act relates to misleading the regulator. If these penalties aren’t triggered, and a participant is honest, then no penalty can be applied.

In case of a significant reversal, which is defined as a reversal affecting more than 5% of the area of the project, the regulator can make an order that the proponent hand back a number of ACCUs that they have received up to an amount equivalent to the amount lost in the reversal. So if 100 tonnes of sequestration is lost, the using its discretion, the regulator can order the proponent to hand back up to 100 ACCUs.

However, the regulator can only do this if they are ‘not satisfied that the project proponent has, within a reasonable period, taken reasonable steps to mitigate the effect of the natural disturbance […] on the project.’ To labour the point, if the participant has taken reasonable steps to mitigate the effect of a project, no order to hand over ACCUs can be made.

This is a big problem.

The law is generally comfortable with the idea of reasonableness. Lawyers use it all of the time usually to mean ‘what would the average rational person do?’ That bit is clear.

However, the term ‘mitigate’ is problematic. Mitigating a loss does not necessarily even involve arresting the losses, merely slowing them. There is no legal definition of mitigate, whether in the Act or elsewhere. But the common use of that word means to make something that is bad less severe than it might have been. I don’t think any sensible use of the word ‘mitigate’ in this context could go so far as compelling the participant to restore the land to the state that they are being paid to have it in. ‘Mitigating’ an effect can only mean reducing the severity of the effect.

But the law doesn’t even demand that participants ‘mitigate’ the effect. It demands that they take ‘reasonable steps to mitigate’. ‘Reasonable steps to mitigate’ could include efforts to arrest the loss that were utterly unsuccessful so long as they were reasonable. It is also important that the Act does not demand that the proponent take ‘all reasonable steps’. Some Acts do. The Corporations Act does it in cases where a company trades while insolvent, and it is a large burden. All reasonable steps could involve efforts to restore the land. This is just some reasonable steps.

Imagine that a participant lives on the land where their project is located. Not a lot do. Most participants are consultancies paid to administer the project on behalf of a landholder, but there are some.

Now imagine a bushfire is rolling down the hill toward that person’s house and their project. The natural response would be to call the local fire service and flee, or if the fire is particularly severe, flee and then call the local fire service when you are safe. Indeed, it is probably the most reasonable approach if you value your personal safety. Bushfires is Australia are not to be messed with and no law could validly require that a person stay and fight where the risk is extreme.

In doing that, they are taking ‘reasonable steps to mitigate the effect’ of the fire. And the penalty therefore cannot be imposed on them. So long as they are honest with the regulator, no other penalty can be imposed either.

Readers of this post might think that my reading of the Act in this way is overly generous to the participant. Perhaps you might feel that I am reading down the words too far and giving them a meaning that is unreasonably small. Unfortunately, this is almost certainly how they will be read by a Court.

In the interpretation of laws, there is a rule for how laws that create penalties should be read. Essentially, it says if a law attempts to create a penalty enforced by the state, any ambiguity in the rule must be read in favour of the person being penalised. This rule is designed to protect our individual rights from arbitrary intervention by the government. This is how this penalty regime should be read by a Court when interpreting this statute.

Just wait for the first fire to affect an ERF project and we’ll see who is right.

The reader who is more familiar with the ERF might ask about carbon maintenance obligations under the Act. These obligations to restore land can only be used if a participant has been issued with a valid penalty and refused to hand over the ACCUs. Without a valid penalty, there is no possibility of a carbon maintenance obligation.

What’s the rub?

Remember the 5% risk of reversal buffer I talked about before? That’s it. The 5% that is docked from the number of ACCUs issued to a participant is all we have left to manage climate risk. These are risks where, even without climate change being a factor, one or more would be almost certain to occur in any given location within the next 100 years. With climate change? Oh boy. Things are gonna get rough.

So we have a climate change policy that takes no real account of climate change. One that barely manages to deal with Australia’s historic extremes let alone the fact that the climate here is going to become something that we have never seen before.

You may sympathise with the participant whose hard work has been swept away by a fire or a flood or killed off in a drought. You should. But our sympathy for the participant shouldn’t cloud the fact that we are spectacularly miscounting our emissions in Australia. Every ACCU the Government purchases through the ERF is used to sell the fact that we aren’t all that bad as a country when it comes to acting on climate change.

Even putting aside the heroic assumption that the CFI Act and its penalty regime will continue to be part of our law for 100 years, and even if everything else in this post proves incorrect, through the ERF, you have enough of an understanding to see that we are claiming credit on the international stage today for emissions reductions that might occur in 20, 50 or even out to 100 years. Do you know how much impact that trick of the law has on reducing the increase in global temperatures today?